In a recent post, I shared with you that a special interest lobby group in the UK (Specialist Engineering Contractors’ (SEC) Group) took a position that Project Bank Accounts (PBA’s) should be mandated for certain projects. Today I want to share more detail on what is a PBA’s and discuss how these types of accounts could benefit all parties.
What are PBA’s
Project Bank Accounts (PBA) are a financial tool being promoted by some construction associations as a way to combat the problem of liquidity in construction.
PBA’s work like a Trust that holds funds from an Owner as payment to the general contractor. From the Trust, the general contractor distributes payments to his sub-contractors. The Trust can also hold disputed funds.
The Trust is administered by the general contractor and funded by the Owner. Regulations around how the Trust is managed are strict. Failure to comply with regulations carry hefty fines.
The general contractor is required to pay sub-contractors first before taking any payment for itself. If funding for the sub-contractors are insufficient, the general contractor is required to cover the shortfall.
Besides strict regulations, PBA’s are meant to offer protection for sub-contractors in the event of insolvency by the general. The concept works as protection for subs by establishing the PBA as a Trust against a specific project. If the general contractor become insolvent, funding for the project does not get intermixed with other projects. This ensures that funding for the project is not diluted by other projects the general contractor was working on.
PBA’s solve the very specific problem of securing payment for tier 1 suppliers from general contractors that go bankrupt, but the impact of insolvency is not limited to Tier 1 Suppliers. In an article in February 2018, the Guardian reported that Carillion (the second largest construction company in the UK that recently went bankrupt) held 57 projects worth 5.7B pounds. The collapse of this mammoth general contractor has had a massive impact on the entire construction supply chain in the UK. According to the Guardian, Carillion’s collapse impacted dozens of tier 2 and tier 3 suppliers.
Are PBA’s a Good Idea?
I love the concept of a PBA. The simple fact that you have a ready-made accounting tool where you can track payment history sounds like a great enhancement to the controls of a construction project. In countries like the US where financial controls are not as strict as they are in the UK (the US does not use Quantity Surveyors) , I bet Owner’s would welcome the added structure.
Creating a Trust for the project also protects both the Owner and the Contractor. The Trust could serve as a repository for the full funding of the project. This is not currently contemplated in the structure of PBA’s but I can imagine a scenario where the Owner funds the project in full at the outset of the project. This would give contractors the security of knowing that the project is fully funded. From there, instead of making payments to the GC, the Owner authorizes the release of funds as the work is completed. The contractor can then immediately distribute funds (including monies owed to him) without the delay of corporate invoicing processes. The portion of the funds that goes to sub-contractors can be issued directly from the Trust giving the Owner clear visibility of the amount paid.
Since the account is structured as a Trust, the Owner retains control of the funds and receives the added benefit of witnessing the distribution of funds relieving him of any concerns that the funds are being properly allocated.
For the contractor, knowing that the Trust is fully funded to the value of the contract relieves him of concerns of payment and the reduced time to pay further relieves him of having to carry debt in order to cover project costs.
Currently, the concept of PBA’s only contemplates a Trust that is funded by the Owner as payments are due. This approach will only extend the time for the contractor to get paid because instead of the Owner’s payment being issued to the contractor for distribution, it would now be issued to the Trust for distribution. This could add several days to a payment process that already has contractors and their subs waiting 60 to 180 days to be paid.
The complexities that have developed to manage construction payments have long been a point of contention between GC’s and Owners. Arguments about retainage amounts, percentage of work completed, lien waivers, and up-front payments are quite common. The use of PBA’s will not eliminate all of these concerns, but it certainly could help to mitigate some. I see these financial tools as a potentially useful method of transparent accounting. Under the right pricing and delivery models this transparency could pave the way for a smoother more efficient construction process.
What do you think? Are PBA’s the future? Have you used a PBA or similar approach on one of your projects? Tell me your stories.
Thanks for reading. If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe. This helps promote my content and is greatly appreciated.