Fair Payment and Project Bank Accounts

Document type: Micro-report
Author: Walter Macharg MA FCA
Publication Date: 09/07/2018

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  • Abstract

    This paper describes the use of Project Bank Accounts on the Crossrail project to encourage fair payment and protect subcontractors.
    It would be of interest to any project looking to ensure they set up processes to pay their contractors and sub-contractors fairly and in a timely manner, in line with best practice as recommended by Government guidance.

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    Introduction and industry context

    The use of project bank accounts (PBAs) on large government construction projects is recommended by the Cabinet Office and the Infrastructure and Projects Authority[1], and is required for Scottish Government procured contracts above specified financial thresholds[2].
    “ PBAs not only assure certainty and security of payment; they also ensure that payment is made promptly. “ [Ref:Cabinet Office Government Construction, Project Bank Accounts,Briefing Document 10 February 2012].
    At the start of major contract procurement, Crossrail mandated the adoption of PBAs as part of the published Key Policy Principles.(Section 3.3 of the Crossrail Procurement Policy )
    A PBA is a ring-fenced bank account. All payments due to the main contractor by Crossrail were paid into the PBA, from which subcontractors and suppliers were paid under the main contractor’s single authority.
    Main contractor failures over recent years have highlighted the importance and benefits of PBA’s to subcontractors and suppliers.

    CRL Approach

    In order to be quite clear and transparent, the following payment principles were published with the Crossrail Procurement Policy (Section 3.9 )

    KPP30 – CRL will implement fair payment practices across the supply chain in accordance with a CRL fair payment charter.

    3.9.1 CRL will implement fair payment practices in line with the OGC Guidance Note on Fair Payment[3] and, where appropriate, the TfL policy on the payment of SME’s.

    KPP31 – CRL will use project bank accounts to support fair payment objectives where appropriate.

    3.9.2 In line with OGC guidance and with the approach adopted on the Channel Tunnel Rail Link, CRL will use project bank accounts to support its approach to fair payment across the supply chain.

    KPP32 – CRL will normally adopt 4 weeks as an appropriate forecast period for payment purposes on NEC3 target contracts to maintain the Contractor in a cash neutral position.

    3.9.3 Under NEC Option C contracts, the Contractor is paid Defined Cost which the Project Manager forecasts will have been paid by the Contractor before the next assessment date plus the Fee. The proposed approach will support fair payment principles by seeking to keep the Contractor in a cash neutral position.

    KPP33 – CRL will adopt a contractual payment cycle for its main works contracts that enables compliance with the fair payment commitment of a 30 day payment period for Subcontractors.

    3.9.4 The proposed payment cycle reflects the requirements of the Housing Grants
    Construction and Regeneration Act 1996[4] and the principles set out in OGC’s Guidance Note on Fair Payment[3].

    A PBA was opened by Crossrail for each major contract. All amounts due to the contractor (defined cost and fee), and to its subcontractors and suppliers, were paid into this account.
    The main contractor’s staff had full access to the account and processed payments to the contractor and subcontractors. Payments were made under the main contractor’s single authority. No further authority was required by Crossrail once the amount due had been paid in to the account.
    The PBA provides transparency of the contractor’s payment transactions and provides an audit trail. Prompt payment of subcontractors and suppliers is encouraged by this visibility, and by the negation of any incentive for the main contractor to delay subcontractor payment. Interest due on the account was due to Crossrail. Overdrafts were not permitted.
    The PBA did not require any changes to the NEC3 contract arrangements for calculation and payment of amounts due. The amounts due to the main contractor were established under the contractual processes each four-week period, and a payment certificate was issued by Crossrail. The amount due under the certificate was paid into the PBA.
    The accounts were set up by Crossrail, under a trust deed which provided that monies which have been paid into the account were held by Crossrail and the contractor, on trust, for the benefit of the contractor and subcontractors in the amounts owing to them. The advantages of this trust status are that in case of insolvency, the monies in the account due for payment to members of the supply chain are secure and can only be paid to them.
    The balances on the PBAs were monitored by the Crossrail finance team, and warnings raised when large balances built up – such balances being a possible indicator that payment applications had been inflated, or subcontract payments were being delayed. The main contractor’s operation of the PBA and compliance with the Fair Payment Charter[5] was subject to audit by the Crossrail Cost Verification Team. [ ref to micro report on cost verification].

    Lessons Learned

    The initial proposal was for the accounts to be held jointly by Crossrail and the main contractor. It was difficult for the banks to open accounts in the name of non-clients. Opening the accounts in the name of Crossrail under trust for the contractors was an effective arrangement.

    Crossrail did not adopt a model of PBA that requires joint sign off of payments from the PBA by the Project Manager as this was seen as too much of an administrative burden and too intrusive. In retrospect this is considered an effective approach.

    Some initial reluctance by main contractors was overcome by Crossrail’s undertaking not to remove funds from the accounts.

    On some occasions contractors needed to be reminded of the requirement to pay subcontractors directly from the account, rather than transferring the full balance to their own accounts.

    Contractors were given full on-line access to the accounts to make payments, and this did not cause any administrative difficulty to payment processes.

    Subcontractors may not have been aware that the funds were held in trust for them. This could have been made clearer to them.

    Crossrail’s policy of pro-active verification of Defined Cost is reliant on the use of PBAs. The new NEC 4 contract defines timescales by which the Project Manager is to complete the review of Defined Cost, which will make the visibility provided by a PBA even more necessary.

    Recommendations for Future Projects

    PBAs are recommended for major projects with a main contract and subcontract procurement structure, especially where the subcontractor supply chain includes SMEs.
    The benefit should be a reduction in the overall costs of construction projects by increased process efficiency, improved compliance with contract terms, and reduction in the incentive for subcontractors to increase tender prices in the expectation of payment delay and solvency risk.

    References

    [1] Government Guidance (15 May 2012); Cabinet Office and Infrastructure and Projects Authority; “Project bank accounts” [online], available at: https://www.gov.uk/government/publications/project-bank-accounts.  Accessed 6 June 2018
    [2] Scottish Government Guidance (20Dec 2016); “Implementing Project Bank Accounts in construction projects” [online], available at: http://www.gov.scot/Topics/Government/Procurement/policy/ReviewProcConst/projectbankaccounts/PBAPolicyGuidance/PBAImplementationGuidance.  Accessed on 6 June 2018
    [3] Government Charter (10 Aug 2016); Department for Business, Energy and Industrial Strategy; ”Construction supply chain payment charter” [online], available at: https://www.gov.uk/government/publications/construction-supply-chain-payment-charter.  Accessed 6 June 2018
    [4] Government Legislation (24 July 1996); “Housing Grants, Construction and Regeneration Act 1996”; [online], available at: http://www.legislation.gov.uk/ukpga/1996/53/contents.  Accessed 6 June 2018
    [5] Office of Government Commerce (2007); “Guide to best ‘Fair Payment’ practices” [online], available at: http://webarchive.nationalarchives.gov.uk/20110802154934/http://www.ogc.gov.uk/documents/Guide_to_Fair_Payment_Practices.pdf.  Accessed 6 June 2018

  • Authors

    Walter Macharg MA FCA

    Responsible for managing the Programme Change Control process for Crossrail, which controls the high level scope and requirements documents and delivery budgets.  A Chartered Accountant, formerly a PLC Group Financial Controller, followed by ten years in financial roles in Network Rail.  Previously Crossrail’s Head of Financial Control, he moved into Programme Controls in 2012, where he established the cost verification function under the NEC3 contracts, and leads the Programme change process.

    https://uk.linkedin.com/in/walter-macharg-40b344