The government is under increasing pressure from the construction industry to deal with poor payment practices. One English MP learned from her constituents of the hardship caused by such practices following the Carillion insolvency: she went on to propose the more widespread use of project bank accounts (PBAs) as part of the solution. Read more about The Public Sector Supply Chains (Project Bank Accounts) Bill 2017-2019 and how Scotland has extended the reach of PBAs on Scottish public contracts below.
How PBAs operate in the UK
A PBA is a tool designed to implement fair payment practices on a project. It protects payment money against upstream insolvency risks and enables project money to flow down from the client through the supply chain at a rate quicker than the industry's average (lengthy) payment cycle.
You can read more about how PBAs are used in the UK and a broad outline of how they work here: Project bank accounts: making payment fair.
Legislative proposals to implement PBAs in public sector supply chains
Debbie Abrahams, Labour MP for Oldham East and Saddleworth, has introduced a Private Member's Bill into Parliament championing the use of PBAs. The Public Sector Supply Chains (Project Bank Accounts) Bill 2017-2019 (the Bill) will require clients to pay money due under the project contract into a trust account. Such money is then available to make timely payments to the contractor and subcontractors and is protected in the event of insolvency further up the supply chain.
Spurred on to take action by the experiences of constituents left out of pocket after Carillion's insolvency, Ms Abrahams believes PBAs have the potential to create fairer payment processes. In launching the Bill, Ms Abrahams argued that recently-introduced statutory requirements for listed companies to publish payment practices are not improving payment times. These and other recent measures to tackle late payment have had limited effect and legislation is needed.
The Bill sets the threshold value for using PBAs on public sector projects at £500,000. This is relatively low – projects on which PBAs are currently used tend to be those of a higher value to justify the costs involved in setting up and maintaining these accounts.
The Bill focuses on public sector projects. Parties contracting privately generally avoid PBAs, regarding the costs to be prohibitive. However, with contracts bodies such as the JCT publishing standard forms which simplify the set-up process of PBAs, those negotiating contracts on larger private contracts might now consider the wider benefits of PBAs early in the contracting process.
The Bill had its first reading in the House of Commons on 15 January 2019; its second reading is scheduled for early March. It has plenty of support but, as we write, its greatest enemy is Parliament's preoccupation with Brexit, which could well edge it out of this year's parliamentary schedule.
This commentary first appeared in Construction Law on 1 March 2019.
Project bank account threshold removed in Scotland from March 2019
PBAs were introduced for Scottish government projects in 2016 after a three-year trial period. As part of its commitment to increase the number of subcontractors able to access PBAs, the Scottish government has issued a new policy which has reduced the thresholds over which public works projects must use a PBA. Parties must include a PBA in the procurement documents for public works contracts (where procurement procedures start on or after 19 March 2019) with an estimated award value of at least £2 million for building projects (previously just over £4 million) and £5 million for civil engineering projects (previously £10 million).
Parties should note that some exemptions from using PBAs are no longer available, including where the main contractor has agreed to deliver a significant amount of the contract themselves. (See CPN 1/2019: Project Bank Accounts – Revised Thresholds and Procedures (19 February 2019).)
Guidance for the public sector in setting up PBAs on Scottish projects can be found here.