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Project Bank Accounts – Will The Cash Flow?

Project Bank Accounts – Will The Cash Flow?

Gavin Paton

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On 17 April 2013 Deputy First Minister Nicola Sturgeon announced that the Scottish Government will trial Project Bank Accounts on public sector projects. This flows out of an early recommendation of the Review of Procurement in Construction being chaired by Robin Crawford ahead of his full report being published in the summer. The UK Government put its shoulder behind Project Bank Accounts some time ago and as a consequence they are already being used by bodies such as the Ministry of Defence and the Highways Agency. The main objective of Project Bank Accounts is to improve cash flow for contractors, consultants, sub-contractors and suppliers in the construction industry.

How do they work?

Project Bank Accounts are ring-fenced bank accounts into which the employer places funds for a construction project on a rolling basis.

Each month the contractor, consultants, sub-contractors and suppliers participating in the Project Bank Account arrangement submit their payment applications as usual. Agreement is then reached as regards what element of the total sum certified by the employer is due to each of the participating parties.

Those sums are then paid directly to the relevant member of the supply chain on the contractually agreed dates rather than cash cascading down the various steps in the supply chain.

Advantages

  1. Insolvency Risk: The risk of non payment as a consequence of the insolvency of a supply chain member further up the supply chain is reduced as payments do not pass through a number of hands down the supply chain. Project Bank Accounts have trust status and, in the event of insolvency of the main contractor for example, the monies are ring-fenced from third party creditors and payments can still be made to the supply chain. This also protects employers from the risk of ‘double payment’ to parties further down the supply chain if the main contractor fails to forward the first payment before becoming insolvent.
  2. Speed: Payments can be made simultaneously out of the Project Bank Account and straight to the relevant members of the supply chain rather than having to cascade down the supply chain over a period of time.
  3. Transparency: A Project Bank Account helps to increase the transparency of cash flow to the supply chain. The employer can observe exactly when and where payments go.
  4. Efficiency/Certainty: Less time and effort is spent pursuing payment up the supply chain thus reducing administration costs. Shorter payment periods should also reduce the extent to which supply chain members need to include financing costs in their pricing. The number and cost of payment disputes should also be reduced. However, these cost savings have to balance against the costs associated with setting up and operating Project Bank Accounts referred to below.
  5. Focus: Project Bank Accounts will assist the supply chain to focus on delivering the project and lead to greater collaboration and innovation.

Disadvantages/Limitations

  1. Cost: The establishment and operation of a Project Bank Account has an inherent cost. It is likely that it will only be possible to justify the cost on higher value projects.
  2. Loss of control: As monies are held independently of the employer/contractor this reduces their control over what is retained in the Project Bank Account. Provision has to be made in the Project Bank Account arrangements to include rights of set off and the like where appropriate. 
  3. Insolvency Risk:  The protection from insolvency risk is limited solely to the monies held in the Project Bank Account which will not be the full cost of the project. Additionally, a Project Bank Account only protects those signed up to the arrangement.
  4. Disputes:  A Project Bank Account will not wholly solve the problems of payment disputes.  These will still arise if payment is not made into the Project Bank Account or rights of set off and the like are exercised.  
    What can we expect?

Project Bank Accounts are already up and running as a consequence of earlier support from the UK Government. The reception to them has been mixed. Inevitably it will take the construction industry a while to become accustomed to their use and for business models to be adjusted to take account of their impact.

The Scottish Government’s commitment to a trial looks like a tentative step but the momentum behind the concept UK wide is perhaps likely hasten the Scottish Governments progress on this issue. Some of the standard form contract bodies have already published Project Bank Account options such as NEC, PPC 2000 and JCT. Differences in trust law between Scotland and England mean that a straight application of English law solutions may not be effective in Scotland. The SBCC is still working on its Scots law solution which they expect to publish later this year.

The concept can equally be applied to private sector projects and it seems likely that at least some of the big private sector institutions operating in Scotland will consider introducing Project Bank Accounts for their projects.

Gavin Paton
Partner

LChalmers