Project Bank Accounts – New Project Accounting Contractor’s will Hate but Will Protect them from Insolvency!

In Last week’s article I continued the discussion about project bank accounts (PBA) by exploring the pros and cons of PBA’s for owners.  Today I want to flip the table and take a look at this from the General Contractor’s perspective.

For this discussion the rules of how the PBA may be used remains the same. Please flip back to last week’s article to review the regulations I’ve proposed for PBA’s.

Pros

Certainty that the project is full funded

For a GC the biggest risk is the financial exposure of incurring costs without guarantee of payment.

Purchasing materials, paying for labor, renting equipment, and contracting other trades without the certainty of compensation can be daunting and unsettling.

If the GC can verify that the project is fully funded this would alleviate these concerns.  This is one of the reasons why I advocate for PBA’s to be fully funded.

This would mean the Owner has deposited the full cost of the project into the PBA before the work begins.  The GC can see the funds are there, but the Owner retains control of how much the GC can utilize.

This works because the PBA is structured as a Trust and is managed by the Bank.  Allowing the GC to see the funds in the Trust but not access them without authority from the Owner.

Simply having the knowledge the the project has been fully funded will allow the GC to operate without the fear of not being paid.

Reduced time to pay

The time it takes for a GC to get paid is a major topic in construction Today.  Read my article on the failure of Carillion and how time to pay drove that firm to failure.

When considering time to pay in construction, most people fail to consider the additional time for approval of payment applications.

These approvals must be secured from the Architect before presenting an invoice to the owner.  This process can add 10 to 15 days to the total payment cycle.

Even when working with relatively swift payment terms (30 days) GC’s typically have to wait 40 to 45 days before being paid.

By using a fully funded PBA trust, the GC could be reimbursed immediately after the payment application is approved.

This could bring the time to pay down to a total of 10 days or less.  Having the ability to pay promptly relieves the GC of the financial burden of carrying costs on the project.  This relief benefits the GC because he does not have to incur substantial debt and it could also benefit the Owner because the GC does not need to add in the cost of carrying debt (in the form of interest) to his costs.

Delegated Accounting Responsibilities

Another pain point for GC’s comes from Owner’s who fail to manage their own project accounting.  This happens quite frequently and at some point the Owner may lean on the GC for payment tracking or other forms of project accounting.

Using a PBA, the accounting is taken care of by the banking institution and neither the GC nor the Owner need be burdened by this task.

Cons

Transparency in accounting

Transparency in accounting could be listed as a pro not a con because one of the pain points for GC’s can be when Owner’s audit or inquire about payments to sub-contractors.

With a PBA the Owner would receive an accounting of who the GC paid and how much they were paid.  This is certainly a positive for the Owner and can be seen as a positive for the GC too as this kind of transparency can foster good will and trust between the parties.

This form of transparency would be quite effective with Cost-Plus and Open Book pricing models.  There are however certain circumstances and payment models where the Owner should not have such transparency.

For example, under a Stipulated Sum or a Guaranteed Maximum Price contract, the GC accepts a certain level of risk for quoting a firm fixed price.  To account for this risk, the GC may add cost to his proposal.  If the GC is the successful low bidder and also manages to effectively manage the project, he could earn a win fall profit.  This scenario would almost certainly cause an Owner to come away feeling cheated.

The sentiment from the Owner can be understood, but so too should we understand that a GC that manages a project efficiently and manages to make a handsome profit deserves that profit.  The reality is that Owner’s will not appreciate this and this cost transparency coupled with a fixed price contract could actually be a bad thing for a GC.

Limited control over funds

Another negative for GC’s using PBA’s would be that they have limited control over the funds of the project.

Under our current standards (meaning without PBA’s) when a payment is issued to the GC, he simply receives a check which he then deposits into his business account.  The funds are either used to refund the GC for expenses he has incurred, or he distributes the funds out to sub-contractors and suppliers that are awaiting payment.

If the GC has multiple projects he may use the funds to address expenses associated with other projects.  He may use the money to cover any business expense including expenses from other projects.  This is the inherent problem that PBA’s were designed to address.

When the GC intermingles the funds from one project with another, there is no way to track the funds.  If a cash-flow problem arises on any one of the GC’s projects, all of the GC’s projects may be impacted.  PBA’s segregate the funds of one project from all other funds.  If the GC experiences financial issues on one project segregating the funds prevents that from impacting all of his projects.

PBA’s will essentially limit the GC’s cash-flow because he will be required to issue payments directly to subcontractors and suppliers from the Trust.  The GC will not be able to “make-up costs” from one project with another.  This will be an inherent issue for a GC.

Closing

Similar to what we saw with the Pros and cons for Owners, using PBA’s will require significant adjustments and all parties will need to rethink how they operate.  In the long run, I still see the pros overshadowing the cons.  Construction will be better served by operating this way and we will see less catastrophic failures like we saw with Carillion.

I really hope the industry embraces PBA’s and that we soon see these trusts fully developed in the US.  What about you?  Do you think PBA’s will help?  Or do you think the cons are more significant than I have described?  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.

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