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Project bank accounts for the FM sector

Author : Professor Rudi Klein, SEC Group chief executive

15 November 2016

Project bank accounts (PBAs) have now been operating in the UK’s construction sector for almost 10 years. In fact the first PBA was put in place over 16 years ago for the construction of the Defence Logistics Headquarters at Andover.

Take-up of PBAs has spread, with the Northern Ireland Executive making PBAs mandatory for public sector projects valued at over £2m at the beginning of this year.

Wales and Scotland have been trialling them with a view to making them de rigueur across the public sector.

The UK government requires all departments and agencies to use PBAs “unless there are compelling reasons not to do so”.

Government FM contracts are now beginning to insist on the use of PBAs. By 2020 it is anticipated that over £25m worth of government contracts will have been paid for using PBAs.

The largest user of PBAs is Highways England (HE). By using PBAs on all its contracts HE is able to ensure that tier three contractors are paid within 19 days of the valuation/assessment date under the main contract.

PBAs have yet to make inroads in the private sector although many clients have expressed interest.

What is a PBA?

The concept is very simple. The client makes due payments into a bank account. Once the bank receives the payment it makes payment simultaneously to firms in the supply chain designated as beneficiaries.

The client doesn’t pre-fund the account and the account is ring-fenced by a trust arrangement, ensuring monies will be paid to the supply chain if the tier one supplier goes into insolvency.

The usual arrangement is that the account is held in the names of the client and tier one supplier as trustees. The tier one supplier will apply for payment or invoice the client (as usual) and indicate the amounts that are applied for on behalf of the supply chain firms.

Once the client agrees the applied for/invoiced amount it is then paid into the PBA for distribution to the supply chain.

Why PBAs?

Over the years there have been many initiatives aimed at improving cashflow along the supply chain but these have not helped to better payment performance.

It has been calculated that the value of late or outstanding payments in UK commerce amounts to almost £40bn!

PBAs are acknowledged as the most effective mechanism for improving payment performance as they ensure that payments are regular and payment periods are shorter.

Moreover, the insolvency of an upstream supplier does not disrupt delivery of the contract; firms will still receive their monies from the PBA.

Criticisms

Unsurprisingly there has been criticism of PBAs from certain quarters such as the large UK construction firms, most of whom are severely under-capitalised. One common criticism is that PBAs are costly.

The average cost imposed by the bank for setting up and operating a PBA is £500. Interest paid on the monies held in the account will more than offset the cost.

Another common criticism is that PBAs are bureaucratic, but there is little administration involved and it is much easier to have the monies in one secure pot out of which everyone is paid.

PBAs and the FM Sector

A great deal of interest in PBAs has been expressed by clients in FM and the IT sector has also shown interest.

PBAs are relevant to all sectors where there are supply chains.

Further information about PBAs can be found by visiting www.secgroup.org.uk and downloading 12 Easy Steps in Setting up PBAs.


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