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New interest in project bank accounts?

05/07/2012

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United Kingdom

New interest in project bank accounts?

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Where payment for construction is concerned, negotiation often goes no further than the price and the payment period.  Increasingly, though, clients are recognising that using a project bank account to make payments can drive cost savings. What's more, if set up correctly, it can help stop payments destined for the supply chain falling into the insolvency "black hole" if the contractor becomes insolvent, making it easier and cheaper to pick up the pieces and finish the project. 

What is a project bank account?

In simple terms, it is a dedicated account set up by a contractor for the project.  It provides a conduit for payments.  Rather than paying sums directly to the contractor for the contractor to then distribute amongst the supply chain, an employer makes the payment into the project bank account where it is held on trust and distributed directly to the named suppliers.

How does it work?

There are two main requirements:

  • provisions in the contracts setting up and regulating the use of the account
  • a trust deed signed by all of the parties to create the "trust" through which payments are passed.

Trust deeds can take a variety of forms, but standard forms are becoming more common, such as those published for use with NEC3, or that provided by the Office of Government Commerce.  At an operational level, you need a bank mandate setting up the account and giving details of those authorised to administer it.  It must also be established as a trust account. What are the benefits?

  1. Cost saving

    Because named suppliers generally get paid more quickly, there is a cashflow advantage that often translates into a discount on the price.  Some suppliers have quoted a 2% saving for this reason alone.
  2. Insolvency protection

    Under traditional payment structures, if the contractor becomes insolvent whilst holding payments due for the supply chain, that money becomes part of the assets distributed to creditors and often is lost.  Suppliers left out of pocket often demand direct payment before they will finish the project, often leaving employers to pay twice for the same work to avoid the disruption.

    With a project bank account, because payments are held on trust, then in many cases it will be possible to distribute the payments to suppliers from the account, even if the contractor has become insolvent keeping the money away from the liquidator.  

What are the downsides?

A project bank account is not going to be suitable for every project. 

Contractors who previously enjoyed the benefit of holding money between staggered payment terms may be reluctant to give up that position.  In addition, transparent tendering processes are required to ensure that the savings are actually passed on. 

Perhaps the most obvious territory for project bank accounts is when striving for a long-term relationship through which both parties are incentivised to drive best value, or where there is reason to seek a little additional comfort because of a contractor's financial standing.  Used correctly, it can be a useful tool in effective procurement.

Please do get in touch if you would like to know more.

Alan Woolston is a partner in the Construction team at Field Fisher Waterhouse LLP

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