Fairer construction payment terms on the horizon

  • Insight

25 February 2019

The Scottish Government has announced a reduction in the thresholds for mandatory use of project bank accounts (‘PBAs’) on public works projects, a welcome step in trying to ensure fairer payments practices within the construction industry. 

From March 2019 onwards, the Scottish Government require public bodies to make use of project bank accounts for any public works contracts that are valued at or above £2m previously the threshold was £4.1 million. Where the relevant construction works are civil engineering works, the threshold is now £5m and above reduction from £10m and above.

The reduction of the thresholds is a change to the Scottish Government policy introduced in 2016. It can be seen as a further step by the Scottish Government to try improve payment practices in the construction industry, an industry renown for poor payment practices. By reducing the thresholds, several more significant public works contracts will now have to use PBAs.

How does a PBA work?

A PBA is a ring-fenced bank account from which normally the payments are made directly by the client to members of his supply chain, normally being the contractor, consultants, sub-contractors and suppliers.  Payments are made by the client directly and simultaneously. Such a payment process avoids potential for delays in payment as money flows down the supply chain. PBAs have trust status which means that the payment can only be paid out to the relevant supply chain members providing further financial protection. In addition as PBAs have trust status and, in the event of insolvency of a supply chain member, the monies are ring-fenced from third party creditors.

All good then?

Although currently the likes of NEC4, JCT and SBCC contain PBA provisions, it is not common to see the use of a PBA and the contractual provisions broadly ignored. The lowering of the public works thresholds is likely to sharpen focus on the operative clauses on the underlying construction contract. This in turn is likely to lead to negotiation of how the contracting parties’ rights are protected within the PBA. 

Overall a welcome step

Notwithstanding that there will be the inevitable bump in the road going forward, the threshold reduction is a welcome step in trying to ensure fairer payments practices within the construction industry.

For more information on PBA’s or construction issues, please contact Pat Loftus.