Pay-up or Pack-up in Scottish Construction

30 September 2016 | Updated 01 January 1970

Following the completion of the trial programme recommended by the Review of Scottish Public Sector Procurement in Construction, the Scottish government has published guidance on the implementation of Project Bank Accounts (PBAs) in construction contracts.

Scottish Government bodies must include a PBA in tender documents for contracts commencing procurement procedures from 31 October 2016 with an estimated award value of at least £4,104,394 for building projects; and £10,000,000 for civil engineering projects.

Prompt payment between firms involved in public contract supply chains is at the heart of the Scottish Government’s co-ordinated drive to maximise the impact of ongoing investment in the national infrastructure. Prompt payment is included in the Scottish Business Pledge and Procurement Reform (Scotland) Act 2014, as well being a long-standing procedural and legal requirement. PBAs improve sub-contractors’ cashflow and ring-fence it from upstream insolvency.

Cabinet Secretary for Finance and the Constitution, Derek Mackay MSP, said: “This is an important milestone in the government’s commitment to improving cashflow for smaller firms. The PBA guidance translates trial programme experience into a simplified common approach with practical resources for implementation in Scottish Government projects. We urge all other organisations involved in commissioning work on Scotland’s infrastructure to use PBAs.”

12 steps in setting up a PBA

Step 1

UNDERSTAND THE REASONS FOR INTRODUCING PBAS AND THEIR BENEFITS

The reasons for introducing PBAs are two-fold:

To provide regular and secure payments to the supply chain;

To ensure that monies payable to the supply chain are protected from upstream insolvencies.

The benefits include:

facilitation of compliance with fair payment requirements (e.g. the Public Contracts Regulations);1

Reduces risk of failure of supply chain firms and consequent disruption caused to projects;

Reduces the bureaucracy, cost and disputes associated with having multiple layers of payment systems on projects;

Automatic visibility and auditability of the timing and amounts of all transactions via the electronic banking process.

STEP 2

CONSIDER WHO WILL SET UP THE PBA.

If the client has a longstanding bank agreement it is likely to be easier and quicker to stipulate that the client’s bank will provide the PBA facility. Also if a client has an on-going programme of work utilising PBAs it is easier for them if they select the PBA bank as it will enable them to standardise the set-up and operation process. The PBA option in NEC 3 [option Y(UK)1] requires that the tier 1 contractor sets up the PBA but the banking arrangements must be approved by the client.

STEP 3

MAKE CLEAR THE FOLLOWING IN THE INVITATION TENDER TO (ITT)2

All payments certified or authorised by the client will be deposited in a PBA;

The PBA assets (i.e. the sums deposited by the client) will be held in trust for the benefit of the project participants (beneficiaries) listed in the ITT;

Payments out of the PBA will be made to the beneficiaries listed in the ITT;

All matters relating to the PBA set-up are completed by the successful tenderer prior to award.

STEP 4

THE ITT SHOULD STATE THAT THE CLIENT WILL BE A TRUSTEE OF THE PBA ALONGSIDE THE LEAD CONTRACTOR.

It is recommended that clients adopt one form of trust deed for all their projects and include a copy in the ITT (see step 6).

STEP 5

THE ITT SHOULD LIST THE PBA BENEFICIARIES

These will include the lead contractor and sub-contractors. Since the names of the supply chain firms will not be known the ITT could simply list the beneficiaries by reference to their trades (e.g. cladding, steel, mechanical, electrical and plumbing, plastering/drylining, ductwork etc). If other beneficiaries are to be added subsequently they can be added to the beneficiaries list in any PBA agreement or supplement or added to any trust deed by virtue of a joining deed.

STEP 6

CONSIDER WHICH CONTRACT TO USE

All the standard form contracts have PBA options or supplements but there are a few significant differences between them. The NEC PBA option has a trust deed but the JCT supplement doesn’t; however the supplement does make clear that the parties have agreed that the PBA assets will be held in trust.

However a client does not need to use the trust deed offered by any standard form. It is recommended that their legal advisor develops a form of deed that best suits their requirements; this is particularly relevant where clients have an on-going programme of work as it again helps to standardise the PBA process.

STEP 7

CONSIDER HOW YOU WOULD WISH TO OPERATE THE PBA

The key document is the bank mandate which will identify the account holders and which party(s) has authority to authorise payments out.

Clients with an on-going programme of work should consider appointing an internal administrator and naming this person on the bank mandate. They will make the set-up of any future PBA much simpler as the administrator will already be cleared by the bank.

STEP 8

IDEALLY YOUR ITT SHOULD STATE THAT THE PBA ACCOUNT HOLDERS WILL BE THE CLIENT AND LEAD CONTRACTOR

You may also wish to add that the client has step-in rights in the event that, for whatever reason, the lead contractor fails to provide any necessary authorisation (see next step). On this matter the standard contract PBA options are different. The NEC option Y(UK)1 – which places the responsibility on the tier 1 contractor to open the account – states that the tier 1 contractor is the sole signatory. If joint authorisation is preferred it may be necessary to amend this using a Z clause. The JCT option provides for joint authorisation.

STEP 9

ITT SHOULD STATE THAT THE BANK MANDATE WILL REQUIRE THAT PAYMENTS OUT OF THE ACCOUNT WILL BE JOINTLY AUTHORISED BY THE CLIENT AND MAIN CONTRACTOR

For the NEC PBA option – which provides that the lead contractor will be the sole signatory – a Z clause will need to stipulate that joint authorisation will be required.

STEP 10

ONCE TENDERS HAVE BEEN RETURNED CHECK THAT THERE HAS BEEN UNQUALIFIED ASSENT TO THE PBA REQUIREMENTS.

This is to forestall, following award, any attempt at whittling down the requirements.

STEP 11

ENSURE THAT THE BENEFICIARY SUB-CONTRACTS HAVE THE FOLLOWING PBA PROVISIONS

They name the PBA bank;

They name the trustees;

They confirm that the sub-contractor is a beneficiary under the PBA trust;

They require that the sub-contractor is notified of the amounts to be paid into the PBA in respect of its works and/or services, and

They align their payment cycles with those in the head contract.

STEP 12

BEFORE CONTRACTS ARE SIGNED DOUBLE-CHECK TO ENSURE THAT ALL THE MATTERS SET OUT IN STEPS 2 TO 11 HAVE BEEN ADDRESSED IN THE CONTRACTUAL PACKAGE

This guidance is provided by the Specialist Engineering Contractors’ (SEC) Group for the benefit of client organisations wishing to set up a PBA. PBAs will help contracting authorities to meet their statutory responsibilities under the Public Contracts Regulation 2015. These require contracting authorities to ensure 30 day payments along the supply chain to tier 3 contractors.

Article written by Brian Shillibeer | Published 30 September 2016