Project bank accounts
Late payment to lower tiers of the supply chain has been recognised as a longstanding issue in the construction sector. This damages supply chain cash flow and in the worst case scenario leads to an increased risk of insolvency. Such inefficiencies present additional risk to the lead client and result in additional costs that flow up the supply chain in the form of additional financing requirements and credit risk insurance. Since the 1990s the UK government has recognised the need to tackle the issue and various initiatives have been introduced, each having varying degrees of success although none were found to be the panacea.
Following a number of studies recognising that poor payment practices were still endemic, the Government Construction Board decided in 2009 to introduce Project Bank Accounts (PBAs) across public sector infrastructure projects ‘unless there are compelling reasons not to do so’. Rather than make payments in a traditional linear fashion (i.e. the client pays tier 1, who pays tier 2, etc.), PBAs are designed to make simultaneous payments to all levels of the supply chain through a specific ring-fenced bank account set up for a given scheme. This ensures security and certainty of payment, and helps drive efficiencies that can ultimately be passed to the client as a result of reduced financing requirements.
In 2019 the UK government policy remains that PBAs must be used across infrastructure projects unless there are compelling reasons not to do so. Interpretation of this policy varies between devolved administrations, government departments and local authorities. For instance, many bodies apply a de-minimis contract value, differing policies in relation to tiers of the supply chain that can benefit from a PBA, as well as whether to apply what is known as the single or joint authority approach.
As a result of the COVID-19 pandemic, there have been sporadic reports of suppliers across all sectors - including infrastructure - hoarding cash to meet their immediate needs. Several large firms are doing the right thing and paying their subcontractors promptly, while others are not, and many small firms now find themselves in a perilous position.
Project Bank Accounts continue to operate normally, and the evidence to date is that payment timeframes are largely unchanged (typically <21 days). Suppliers are encouraged to sign up to a PBA where the opportunity exists, which also provides protection in the event of lead contractor insolvency.