A new approach to funding big Government projects could pay dividends

The Scottish Government's announcement on the mandatory use of Project Bank Accounts (PBAs) has probably not come as a surprise. The reception has been mixed. It will take time for the Scottish construction industry to become accustomed to their use and for business models to be adjusted to take account of their impact.

From 31 October, PBAs will be mandatory for Scottish Government building contracts with a value of approximately £4.1 million and above and civil engineering contracts of £10m-plus. The main objective is to improve cash flow for contractors, consultants, sub-contractors and suppliers in the construction industry. At their most basic, PBAs are ring-fenced bank accounts into which the client places funds for a construction project on a rolling basis. There are a number of advantages of PBAs including reducing the risk of non-payment to a supplier as a consequence of the insolvency of another supply chain member. Payments can be made simultaneously from the PBA straight to relevant members of the supply chain, rather than having to cascade down the supply chain over time – an enormous boon to suppliers at the bottom, where cash is king.

There is greater transparency of payment and improvements in efficiency and certainty, with less time and effort spent pursuing payment, reducing administration costs. Ultimately, this should mean the supply chain can maintain focus where it matters, on the successful delivery of the project.

Some disadvantages or limitations include the initial cost of establishment and ongoing operation of a PBA. For most, this cost will be worthwhile on larger projects only, perhaps why the Scottish Government has now specified a relatively high threshold for mandatory use.

As monies are held independently of the client or contractor, this reduces their control over what is retained in the PBA, potentially a disadvantage to their commercial position. Also, protection from insolvency risk is limited solely to the monies held in the account at that time, which will not be the full cost of the project. Additionally, a PBA only protects those signed up to the arrangement, so it cannot in itself eliminate all solvency risk in a project nor does it preclude payment disputes.

Reaction to the announcement has been mixed. Many larger contractors have some experience of using PBAs, either in England and Wales or as part of Scottish Government trial projects. However, others without experience are likely to find their introduction challenging.

There are some exemptions. For example, if a contractor bidding for an eligible project will be carrying out at least 75 per cent of the work “in house” or by using associated firms (perhaps within their own group of companies), an opt-out is available.

It remains to be seen whether PBAs will be more widely and voluntarily embraced by public sector bodies outside the Scottish Government not bound by the recent announcement, like local authorities. And could we see the private sector adopt PBAs voluntarily? Perhaps a culture of keener pricing will evolve from suppliers, in exchange for the solvency protection and speed of payment PBAs can offer.

We operate in a world with ever-more focus on cashflow and solvency risk across the supply chain. PBAs are by no means a silver bullet, but their mandatory adoption on eligible Government contracts will hopefully provide more certainty and stability.

Gavin Paton is a Partner, Burness Paull