As the Scottish Government consults the construction sector on current issues, including on the use of Project Bank Accounts, Chris Horsley considers the tricky balancing act they will need to perform to address the needs of the different levels of the supply chain in a post-Carillion market.

New PBA thresholds from 19 March 2019

In February, the Scottish Government announced a 50% reduction of thresholds for public sector building or civil engineering projects using a project bank account (“PBA”). The reduction in the thresholds to £2 million and £5 million respectively will apply to public works contracts which commenced procurement on or after 19 March 2019. What will be the impact?

Our experience of PBAs

In the last 12 months we have seen good examples of certain public authorities and their contractors taking the time to get to grips with PBAs to successfully incorporate them into a project.

However, we have also seen parties struggle with the PBA approach. One reason for this is that in already complex deals it can be hard to focus attention on new concepts perceived as being difficult to implement. PBAs can either be wholly resisted or remain a topic languishing in square brackets with ‘detail to be confirmed’.

We have been at the forefront of the drafting and negotiation of PBA contract clauses in recent years. We previously advised the Scottish Futures Trust on PBA incorporation into its standard form hub model documentation. More recently we have advised procuring authorities on adopting this approach in their projects. Any change in practices takes time to settle down and we have certainly observed that a range of amendments have been proposed by the various parties to the standard form PBA drafting introduced in the market to date, including to the banking mechanisms; the processes; and the risk positions. These are all significant and sometimes fundamental points which require attention.

Tier 1 Contractor concerns

For their part, many Tier 1 Contractors have voiced their support of the principles behind PBAs, but have identified a number of challenges which the mechanism introduces.

• Administrative costs - they are wary of the difficult administrative requirements and additional costs.
• Impact on cashflow - certain major contractors have fed back to the SFT that their margins would need to be increased, perhaps by 2 or 3%, directly as a result of being required to implement a PBA structure.
• Balance Sheet classification - one of the key benefits sought in the NPD and hub DBFM models, for example, is the ability of public bodies to classify their ongoing expenditure in relation to a project asset as being off-balance sheet. Scottish projects in particular have been wrestling with the relevant Accounting Rules over the last few years to try to ensure that concluded projects remain classified as being off-balance sheet. As a PBA involves funds being paid into an account held by the public sector, certain major contractors have suggested that the preferred balance sheet status is impacted. Whilst this may not prove to be the case, efforts will need to be taken to seek confirmation of the position.

Supply Chain concerns

There is no doubting the need for improvement of payment processes. Whilst uncommon, examples of delayed payments to suppliers to free up working capital are nothing new, and it was recently reported that some the largest of Tier 1 Contractors are still failing to pay members of their supply chain within timescales in excess of three months. This is despite measures such as the 2016 public sector procurement rules which require public bodies to ensure 30-day payments throughout the project supply chain.

What next?

The Scottish Government is currently consulting on issues affecting the construction industry including PBAs, amongst other topics.

The key question is how to balance the interests of the supply chain with the interests of the Tier 1 Contractors, both of whom have legitimate challenges in managing their cashflows. Unfortunately, we have all recently seen the high-profile consequences of imbalance on this topic, which ultimately benefit no-one.

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