Industry Context

Payment remains a key problem in the UK construction industry despite the impact of the Construction Act. Poor payment practices are all to common, both between contractors and their supply chain and also clients and contractors.

To address this problem the Government launched its Guide to Best Fair Payment Practices in September 2007. The guide concludes that poor payment practices give rise to substantial financing and transaction costs and that habitually poor payers often experience higher tenders.

It is estimated by OGC that increased payment certainty could initially save the public sector an estimated £200m, rising to £750m as fair payment practices become embedded. In addition, payment certainty builds supply chain trust and underpins collaborative working which in turn leads to improved efficiencies and better value for money for all parties.

All Public Sector departments are now required to publish how they intend to comply with the OGC Guide and our Project Bank Account (PBA) model is cited in the Guidelines as the most comprehensive single solution to the problem.

It is envisaged that forward thinking Private Sector Clients and major contractor groups will soon want to reap the benefits of PBAs by implementing them outside the public sector.

What is a PBA

A PBA is a ‘Fair Payment’ system which ensures the contractor and supply chain receives prompt payment of monies rightfully due through certified interim payments. The PBA is the medium through which payments are made. It is not a contractor’s account; it is set up jointly by the client and contractor and is linked to an Agreement similar to a Trust Deed, which provides insolvency protection for the whole supply chain.

PBAs bring certainty over how and when payments will be made and will help to deliver a much needed and demonstrable improvement to payment practices. However a contractors responsibility to manage his supply chain and undertake a due diligence exercise on the applications is unaltered.

PBAs can operate on most types of contracts and frameworks and have good alignment with open book forms. JCT, NEC and PPC2000 are all developing PBA versions.

How PBAs Operate

Certification Process: The process of preparing and certifying monthly valuations or milestones is unaltered by the PBA arrangement.

Transaction Security: All payment instructions are made under dual authority of client and contractor and by pre-registered representatives.

Payment Medium: Payments are made electronically and on average take between 3 and 5 days to reach the recipients’ accounts.

Visibility and Auditability: To ensure that the supply chain has confidence in the process PBAs provide a high level of visibility on the timing and amounts of payments. The account is transparent and open to scrutiny and audit.

Insolvency Security: The account is underpinned by an agreement similar to a trust deed, which provides protection for the whole supply chain in case of insolvency of client or contractor.

We have assisted both Barclays and Bank of Scotland in the development of their Project Bank account products.

Barclays Commercial

Barclays is a leading participant in the project finance markets as a financier and as a provider of operational banking to projects. Within their customer relationship teams, Barclays already supports many contractors with all aspects of their banking requirements. They also work closely with the Office of Government Commerce and numerous public sector bodies to provide banking support.

In response to recent moves within the construction industry to improve the payment process on projects for the whole supply chain Barclays has developed the “Barclays Project Bank Account” in association with Rider Levett Bucknall.

Bank of Scotland

Bank of Scotland Corporate specialise in the property industry and provide a wide range of innovative services to answer specific needs across the sector - including flexible finance for construction projects. These services are delivered by highly experienced Relationship Managers and specialist teams who have an in-depth understanding of both the public and private sectors.

Working with Rider Levett Bucknall, Bank of Scotland Corporate has developed “Project Bank Account” as an effective answer to the anomalies which have been evident in the payment process for project supply chains - helping to build a better future for the construction industry.

2001

The first ever Project Bank Account was set up and used by us on the £41m Andover North Site Prime Contract for Defence Estates where we were the appointed Prime Contractor.

The PBA used on Andover received critical acclaim from National Audit Office for “ensuring timely payment of all parties and mitigating the risk of contractors unfairly withholding payments from their supply chain”.

2006

We were appointed specialist adviser to the Office of Government Commerce in the development of their ‘Guide to Best Fair Payment Practices’.

We developed the trust agreement that sits alongside the PBA and provides insolvency protection for the supply chain. This is now adopted by OGC as the generic standard and included in their ‘Guide’

2007

We approached Barclays and Bank of Scotland and worked with them to develop their PBA products. Bank of Scotland’s PBA product was launched in January 2008 and Barclays will follow in April 2008.

Today

We are currently commissioned by the OGC to monitor the take up of fair payment practices and PBAs across the public sector over the next 3 years.

We are working with the authors of the main standard forms of contract, JCT, NEC3 and PPC2000 to develop Project Bank Account versions.

In Summary

Our specialist knowledge in all aspects of project banking ideally place us to provide support and training to clients and contractors who are proposing to use a Project Bank Account for the first time.

Our services

Training

Where a client uses a PBA for the first time the project team (client, consultants, contractor and supply chain) need to receive training to make sure that the potential benefits are to be realised.

Our training programme is not only designed to provide advice on how to set up and operate a PBA it also addresses all the associated issues. Such issues include:

• how to give the tendering supply chain the confidence that the PBA process will make a difference and provide payment certainty;
• changes to procurement documents to introduce the PBA arrangements to the tendering teams; and
• amendments to appointment terms and conditions to formalise the operation and use of the account.

Our training is designed to educate the entire project team in a collaborative way to explain in simple and memorable terms how to unlock the benefits that will flow from improved payment certainty including:

• Payment certainty with all payments made electronically by the bank
• Reduced tender prices, circa 2.5% in return for increased payment certainty
• Further savings in overheads associated with debt chasing and administration
• Improved trust & collaboration resulting in better projects and value for money
• Better productivity/fewer disputes, hard to quantify but likely to be substantial

Monitoring and Modelling

We can act as advisors to project teams throughout the implementation of PBAs on projects, services include providing on call support, periodic stand back reviews and progress monitoring. The actual requirement will be customised to suit the teams particular needs.

We can also carry out sensitivity modelling to demonstrate the cash flow benefits for projects utilising PBAs.

National Audit Office

“Departments need to provide specialist small and medium sized suppliers with greater certainty that they will be paid on time to reinforce the trust that should exist between all parties for collaborative working to operate effectively. If this does not exist in the supply chain then specialist suppliers, who can significantly influence the value for money obtained on a project, will have little incentive to innovate. Considerable losses can also be incurred over payment disputes which will ultimately feed their way back into the costs for the client.

Para 3.33 NAO Report

‘Improving Public Services through better Construction’

Constructing Excellence

Andover achieved Demonstration Project status with Constructing Excellence and scored the highest ever mark in the process for innovation and best practice.

CE’s case study said “Trade contractors liked the assurance of prompt payment via the Project Specific Bank Account where their entitlements are earmarked and paid by BACS. The Project Bank Account removed the concern of late payment.”

Office of Government Commerce

“There is very good alignment between the mechanism of Project Bank Accounts and the principles of ‘Fair Payment’ and it is recommended that public sector clients should progressively specify use of PBA where practical and cost effective”

‘Guide to Best Fair Payment Practices’

Tony Bingham, Building 2008 Issue 5 - A diamond among the coal

“The 48 pages of the Fair Payment Charter are largely made up of statements of the bleedin’ obvious worked up by some marketing wizard - but that project bank accounts idea is a real corker.

The construction industry’s biggest customer is to begin “project bank accounts”. This isn’t just aspirations and bull. Barclays and Bank of Scotland have already got the paperwork in place. Here is the new money payment machine. The client at the top of the heap pays all the interim payment sums due on a, say, monthly certificate into a trust account. Then, all those who are in the supply chain and registered as part of the subcontractor or supplier receive their cash direct from the trust. So does the main contractor.

The trust status of the account is essential in order to avoid potential problems if the contractor goes into receivership. The account, in effect, is held in trust on behalf of the whole of the supply chain, in a similar way to how a solicitor operates a client account. This prevents a receiver seizing the proceeds of the account.”

CIOB International Innovation and Research Awards 2007/2008

RLB won the Innovation category for our work on Project Bank Accounts. The judges comments were “At long last someone has taken forward a key point from Sir Michael Latham’s report, ‘Constructing the Team’ i.e. setting up project bank accounts. This piece of work clearly illustrates that not only can it be done, but that everyone benefits and nobody loses.”

Construction News Quality in Construction Awards 2008

RLB were highly commended in the innovation award in respect of Project Bank Accounts. The judges said “This has the potential to make the biggest impact of all these innovations” - we must wait and see.