Guide To Project Bank Accounts

1. Background And Overview Of PBA

This guide is to help you to understand what a Project Bank Account (‘PBA’) is, what significance it has and how it is merged into the framework of the construction industry.

The Cabinet Office is working together with public sector construction procurers in pioneering an innovative way of paying supply chain members in construction projects through PBAs, which should see construction SMEs receiving payment in 5 days or less from the due date. PBAs assure security and speed of payment; they ensure that payment is made promptly

The FSB estimates 10% of SME collapses are due to late or non-payment. Whereas, PBAs are ring-fenced bank accounts (similar to escrow accounts) and could be part of the solution to late payments and it is estimated that PBAs deliver an overall 1% saving in the cost of projects.

2. HOW PBAs WORK

Payments are made directly and simultaneously by a client to the various supply chain levels. On public contracts this would include the contractor, sub-contractor, sub-sub-contractor, sub-sub-sub-contractor and supplier. This offers supply chain security if a contractor goes insolvent as seen with Carillion.

PBAs have trust status which secure funds so they can only be paid to named beneficiaries. A clear advantage of trust status is that, in an insolvency case, monies due to the supply chain are protected from insolvency as they exist outside of contractors’ accounts. This mitigates a key risk to the stability and longer-term security of the sector and those employed therein.

There are a number of bodies currently offering PBA facilities, including:

• Barclays Bank
• Bank of Scotland

A further advantage of the PBA system is that it removes the commercial conflict of interest and opportunity to abuse the system. With monies due to the supply chain no longer in the tier 1 contractors’ accounts, the key motivation for late payments, abusing payments and delaying tactics, is gone. However, unscrupulous contractors could try to undervalue payments downstream to ensure a proportion of funds are preserved to the detriment of the lower tiers.

Payments are made simultaneously to everyone and cash flow management is quicker as suppliers are paid on time. This reduces unnecessary overheads for SMEs that have to chase overdue or underpayment. This reduction in administration and finance cost means SMEs don’t have to borrow money to forward fund projects amid risk of non-payment. This can create a much-needed atmosphere of trust and better collaboration, quality, confidence and productivity. Compared to other sectors, construction has the highest rate of insolvencies as businesses struggle to fund ongoing projects due to delayed and late payment. PBAs reduce impacts of insolvency on supply chains, causing less disruption to projects, while also aligning with the Government and Opposition commitment to SMEs to safeguard them from non-payment.

3. Cash Flow Disbursement Models

4. How Is A PBA Implemented Into Construction Contracts?

The requirement to utilise a PBA can be written into your contract. Standard form PBA documentation to enable the use of PBAs has been published by PPC2000, JCT and NEC. Incorporating such documents into your contracts require a modification to the conventional contractual arrangement due to the changes to the payment process. The two most common contractual options are detailed below:

PBA Option 1 - JCT

• PBA is in the joint names of client and main contractor
• expressed as a deed to reinforce the trust status.
• A PBA provides security and transparency to the supply chain.

PBA Option 2 - NEC3 & NEC 4

• Includes Z clauses and the added Y(UK)1 Option.
• Option Y (UK) 1 of PBA has been added to the contracts, which requires that the tier 1 main contractor sets up a PBA but the banking arrangements must be approved by the client.
• The NEC PBA option has a trust deed.
• Under NEC, the lead contractor is sole trustee meaning the tier 1 main contractor cannot release funds unilaterally.
• PBAs are a quantum leap forward in terms of speed and security of payment in construction, but they are simply a cash- flow disbursement model and are therefore not the panacea answer to payment abuse in construction, but instead a major piece in the puzzle to the overall solution to payment abuse.

5. Benefits Of Using PBAS

Best suited to larger projects where there are a number of sub-contractors involved as it can have the most profound benefit in terms of stabilising the financial model of the project.

6. Issues & Flags

While the idea behind PBAs, particularly post-Carillion, appears solid, there is one key counter-argument. The main criticism is that PBAs simply shift the fragmentation of the cost of administering the supply chain’s valuation and payment functions from each of the supply chain participants, to a centralised tier 1 contractor function which increases the tier 1 contractor’s costs, overheads and consequent price – as a result any supply chain savings should be off-set by the increased cost to the tier 1 contractors.

The answer to this is that the tier 1 carries out a management function which to an extent already carries out the exercise and, with existing technologies, can easily integrate payment across the supply chain in order to minimise any negative cost impact, whilst harnessing the savings and long term rewards from stability within the supply chain.

A secondary argument is that PBAs alone are not the panacea, as in order to introduce transparency for the supply chain, as a cash-flow disbursement model they have to be underpinned by a supply chain digital payment platform in order to automate the application/valuation/statutory payment process – many agnostic solution already exist which can accommodate PBA structures and provide real-time project transparency of cash-flow. A third argument is that PBAs do not solve the problem of insolvency, since the amount in the PBA is only the amount that is certified as due to the contractor and supply chain already.

As such, a PBA only constitutes a payment disbursement mechanism, not full security. To resolve this, many question why clients cannot place entire contract sums in PBAs at the start (offering much better security). The problem here is that clients are reluctant to tie up cash for a long period, but if a client is agreeable to this it is possible to agree a bespoke escrow arrangement between the parties.

PBAs face criticism because they are designed to protect parties who are signatories. There is a wide belief that PBAs should be more inclusive of other parties (for example, sub-contractors with small value work packages) as well as the main parties.

There are also additional costs of setting up and maintaining the bank account (which need further research), fear over the financial solvency of the bank holding the money (a relatively new problem) and the fact that contractors simply do not want to relinquish control over the payment mechanisms.

Each tier of the supply chain is still responsible for valuing, on an interim basis the amount due to the tiers below. Therefore, an unscrupulous contractor at any level of the supply chain may still seek to undervalue payments downstream in order to ensure its proportion of the funds within the PBA are preserved at the detriment of the lower tiers.

7. Retention And PBAs

Retention is a percentage of the contract sum (typically 3-5%) that is withheld by the paying party to ensure that defects identified during the defect’s liability period are rectified. While PBAs improve payment security and efficiency by ensuring that payments flow promptly down the supply chain, they do not automatically safeguard retention funds. Even where a PBA is used, if the main contractor collapses, any unpaid retention becomes part of the general insolvency estate, with no guarantee of recovery for subcontractors.

Comparative Example: Scotland & Wales

In Scotland and Wales, public sector projects operate a PBA regime where government payments to the main contractor are placed in a PBA. This mechanism ensures that once the government has paid the main contractor, subcontractors receive their payment simultaneously, ensuring timely distribution and reducing the risk of delayed or missing payments due to cash flow issues within the main contractor’s business.

However, retention funds are explicitly excluded from PBAs in both jurisdictions. This is because the retention sum held under the main contract includes amounts retained from subcontractors as well. If the government (as trustee of the PBA) were to hold retention funds within the PBA, it could become liable for repayment in cases where the main contractor fails to release the retention to subcontractors.

To avoid this potential liability, retention is kept outside the PBA system, meaning subcontractors have no automatic protection for their retention funds.

This example illustrates that even in jurisdictions where PBAs are well established, there remains a critical gap with the mechanism provided by PBAs. While payments are safeguarded, retention remains wholly dependent on the main contractor’s financial health and willingness to release it.

Can PBAs Be Adapted To Include Retention Funds?

Even if PBAs were adapted to hold retention, two key issues remain:

• If the main contractor becomes insolvent, subcontractors are still at risk. This is because while adapting PBAs to include retention would ensure that retention funds are at least held within a separate account, this does not necessarily mean subcontractors have a secure right to those funds in the event of insolvency. The key issue is as the PBA is still controlled by the main contractor; the retention sum may still be considered part of the main contractor’s assets.
• Who has the right to withdraw from the retention account, and under what conditions? Retention is intended as a protection mechanism for the employer to ensure rectification of defective work. A key question arises as to whether the main contractor can withdraw funds from a retention PBA to correct defects itself. This issue is particularly relevant in jurisdictions such as Australia, where PBAs have been introduced.

Comparative Example: A Look At The Australian Model

The Australian model permits a main contractor to withdraw from the retention specific PBA to make payment to itself “of an amount to correct defects in the building work, or otherwise to secure, wholly or partly, the performance of the subcontract”.

This has raised questions as to what “to secure, wholly or partly, the performance of the subcontract” means? One interpretation suggests that main contractors could deduct damages from retention funds, as damages ultimately act to “secure performance” of a contract. This effectively uses the subcontractors’ own retention to fund remedial work. However, another interpretation argues that retention should only be used for securing future performance and not as a means for main contractors to recover damages for past non-performance by subcontractors.

Summary

While PBAs undoubtedly improve payment flow in the construction industry, they do not inherently provide protection against insolvency when it comes to retention funds. In addition, even if retention funds were included in PBAs, the risk surrounding insolvency remains and disputes could arise over when and how funds can be withdrawn. However, with ongoing legal and industry developments expected this year, there may be opportunities to refine PBAs or introduce complementary mechanisms, including potential reforms to retention practices – or even their abolition. This remains an area to watch in 2025.

8. Conclusion

There is little doubt that the theory behind the use of PBAs is good in terms of trying to improve payment problems in the industry. The introduction of standard forms will make access to project bank accounts easier. PBAs would ensure:

(a) Certainty of payment
(b) Security of payment
(c) Speed of payment
(d) Reduced SME borrowing
(e) Reduced credit control administrative cost
(f) Less commercial disputes
(g) Supply chain money is protected from insolvency
(h) Reduced cost for clients and public bodies
(i) Long term stability and growth prosperity

Further Information

• The SEC Group has come up with the guide in “12 easy steps” to set up a PBA which can be found here: SEC Group - PBA
• Northern Ireland guidance can be found here: NI- guidance note on PBA. The Procurement Guidance Note (PGN 03/14) on Project Bank Accounts may also be helpful.
• The article and the report on PBA in Scotland can be found here: Scotland moves to PBA, Scotland - key questions

Please note: this factsheet was last updated in June 2025, is aimed for general information purposes only and does not constitute legal or other professional advice. The information is considered to be correct at the date of publication however any changes and further developments may impact the accuracy and validity of the information provided here. For further advice or assistance with a contract review please contact Legal & Commercial team on legal@thebesa.com.