Burness Paull partner, Gavin Paton, on why the imminent introduction of Project Bank Accounts could provide more certainty and stability.

The Scottish Government’s announcement on the mandatory use of Project Bank Accounts (“PBAs”) has probably not come as a surprise. The reception to them has been mixed. Inevitably it will take a period of 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 2016 PBAs will be a mandatory requirement for Scottish Government building contracts with a value of approximately £4.1 million and above and civil engineering contracts of £10m and above.

The main objective is to improve cash flow for contractors, consultants, sub-contractors and suppliers in the construction industry – something our industry has arguably never really gotten to grips with. 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 the introduction 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 out of the PBA straight to the relevant members of the supply chain, rather than having to cascade down the supply chain over a period of time - an enormous boon to suppliers at the bottom of the traditional supply chain, where more than anywhere, cash is king.

This is matched with greater transparency of payment and a considerable improvement in efficiency and certainty, with less time and effort spent pursuing payment thus reducing administration costs. Ultimately, this should mean that the supply chain can maintain focus where it really matters, on the successful delivery of the project.

Many believe that PBAs, when used in appropriate circumstances, are likely to benefit all parties involved. However, care must be taken that the arrangements put in place are clearly set out, understood by all parties and implemented in accordance with their terms.

Some of the disadvantages or limitations include the initial costs of establishment and on-going operation of the 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 their mandatory use.

As monies are held independently of the client or contractor this reduces their control over what is retained in the PBA, which is potentially a disadvantage to their commercial position. It is also important to note that 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. These can and will still arise if, for example, the client’s payments are not made into the PBA on schedule, or if rights of set off and the like are exercised.

The reaction to the Scottish Government’s announcement has been mixed. Many of the larger contractors have some experience of using PBAs already, either in England and Wales or as part of the Scottish Government’s trial projects. However, many others who do not have the benefit of that experience are likely to find their introduction challenging.

The main standard form building and engineering contracts have PBA options. However, they all take varying approaches. It is important that those signing up to and operating PBAs understand the terms of the particular arrangement being used on their project. As a consequence some careful thought and expert advice is likely to be required by clients, contractors and sub-contractors at least initially.

There are some exemptions from the new requirements. 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) then 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 such as local authorities who are not bound by the Scottish Government’s recent announcement. There may also be a PR benefit that will encourage both clients and contractors to promote the use of PBAs.

And what of the private sector? Could we see it 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 changed environment from the days pre-recession, where there is ever more focus on cash flow and solvency risk across the whole supply chain. PBAs are by no means a silver bullet, but their mandatory adoption on eligible Scottish Government contracts will hopefully provide more certainty and stability.