Payment remains a key problem in the UK construction industry despite the impact of the Construction Act. Poor payment practices are all to common, both between contractors and their supply chain and also clients and contractors.
To address this problem the Government launched its Guide to Best Fair Payment Practices in September 2007. The guide concludes that poor payment practices give rise to substantial financing and transaction costs and that habitually poor payers often experience higher tenders.
It is estimated by OGC that increased payment certainty could initially save the public sector an estimated £200m, rising to £750m as fair payment practices become embedded. In addition, payment certainty builds supply chain trust and underpins collaborative working which in turn leads to improved efficiencies and better value for money for all parties.
All Public Sector departments are now required to publish how they intend to comply with the OGC Guide and our Project Bank Account (PBA) model is cited in the Guidelines as the most comprehensive single solution to the problem.
It is envisaged that forward thinking Private Sector Clients and major contractor groups will soon want to reap the benefits of PBAs by implementing them outside the public sector.
A PBA is a 'Fair Payment' system which ensures the contractor and supply chain receives prompt payment of monies rightfully due through certified interim payments. The PBA is the medium through which payments are made. It is not a contractor's account; it is set up jointly by the client and contractor and is linked to an Agreement similar to a Trust Deed, which provides insolvency protection for the whole supply chain.
PBAs bring certainty over how and when payments will be made and will help to deliver a much needed and demonstrable improvement to payment practices. However a contractors responsibility to manage his supply chain and undertake a due diligence exercise on the applications is unaltered.
PBAs can operate on most types of contracts and frameworks and have good alignment with open book forms. JCT, NEC and PPC2000 are all developing PBA versions.
Certification Process: The process of preparing and certifying monthly valuations or milestones is unaltered by the PBA arrangement.
Transaction Security: All payment instructions are made under dual authority of client and contractor and by pre-registered representatives.
Payment Medium: Payments are made electronically and on average take between 3 and 5 days to reach the recipients' accounts.
Visibility and Auditability: To ensure that the supply chain has confidence in the process PBAs provide a high level of visibility on the timing and amounts of payments. The account is transparent and open to scrutiny and audit.
Insolvency Security: The account is underpinned by an agreement similar to a trust deed, which provides protection for the whole supply chain in case of insolvency of client or contractor.