Management

The no-brainer option that nobody wants

11 January 2010

Illustration: Robert Hanson

Project bank accounts reduce financial risk and late payment, so why are they proving so unpopular in practice, asks Stephen Cousins.

First floated by Sir Michael Latham in his 1994 report, and more recently recommended by the Office for Government Commerce as part of its 2008 Fair Payment Guide, project bank accounts (PBAs) can provide payment security to designated subcontractors and suppliers along the construction supply chain.

So why have they made such little impact on the way the industry conducts its business?

In an attempt to shed some light on the situation, the Joint Contracts Tribunal (JCT) has completed an industry-wide consultation on the use of PBAs and how they could be improved. Respondents were also asked to evaluate a new JCT draft document that would allow PBAs to be incorporated into any standard form of contract.

PBAs, also known as trust acounts, involve setting up an arrangement between the bank, the client, main contractor and named subcontractors.

The client pays money into a ringfenced account in advance of project milestones, and the bank authorises payment to contractors once valuation certificates have been received.

According to the consultation, only 5% of respondents had been involved in projects that used a PBA. However, 90% thought the new JCT provisions were suitable for purpose. Positive comments included “more ethical procurement practices” and “increased trust”, while the percieved disadvanatges included “set up costs” and “client/contractor not wishing to relinquish control”.

Professor Peter Hibberd, chairman of the JCT, helped compile the results. “We know the government is behind PBAs, but we wanted to assess whether they are something the industry really wants,” he says. “The biggest obstacle to their use seems to be clients and main contractors who don’t see anything wrong with the current forms of payment because late payment doesn’t affect them directly.

They’re not necessarily against PBAs, they’re just not yet supportive of them.” 

Brian Kilgallon, partner at property and construction practice Rider Levett Bucknall, used a PBA in 2000 when working on a £48m military accommodation project for Defence estates.

He says PBAs can provide benefits for every member of the supply chain, not just subcontractors. “The model worked extremely well, it removed concerns in the supply chain over delayed payments, and it resulted in a very strong sense of teamwork on the project. We worked together better than on any project I’ve completed since,” he says.

And there were fi nancial benefi ts for the client and main contractor too: “In my experience, suppliers that know a PBA is being used may lower their contract prices as they don’t need to factor in costs associated with late payment. Ultimately the savings that fl ow up the supply chain are much greater than the costs for the main contractor, although it is difficult to quantify the savings exactly.”

Kevin Forsyth, partner at law firm Reynolds Porter Chamberlain agrees: “Anecdotal evidence suggests that where PBAs are used, suppliers are prepared to tender better prices,” he says.

But main contractors responding to the consultation were put off by the idea of extra paperwork associated with setting up a PBA, while others questioned the level of payment protection that PBAs actually provide to subcontractors.

“Suppliers might be content at receiving several months of regular payments on time, but if the client suddenly becomes insolvent, they still won’t get their money,” concedes Hibberd.

A JCT working party will now analyse the consultation responses and feed the results to the JCT council. “We will be considering the comments in detail, and whether any changes might lead to PBAs becoming more attractive to the industry,” says Hibberd.

Forsyth says it’s unlikely that commercial clients will adopt PBAs in the current economic climate, but feels they shouldn’t be written off. “The fact that the government is obviously in favour of them increases pressure to introduce PBAs as a standard contract provision [on public sector projects]. As the public sector takes the lead, we will see more finding their way into projects,” he concludes.

The results of the consultation coincide with new evidence that late payment of subcontractors is becoming more prevalent. A survey published last month by the Federation of Small Businesses found that over half of its members had seen an increase in the number of employers paying late.

Back to basics: Collateral warranties

Collateral warranties are the contractual route by which third parties (such as employers, tenants and funders) can directly sue parties they are not in contract with.

Contractors and subcontractors are constantly being asked to sign collateral warranties and often do so without much thought. In fact, these documents can contain elephant traps for the unwary. It is very important that you understand the obligations you are entering into and the ways that you can negotiate and reduce those obligations.

Typically, the main obligation is a promise to carry out the works in accordance with the terms of the main contract (or subcontract). This clause cannot usually be changed. However, there are other clauses you can negotiate over, including:

Trying to have the warranty executed “under hand” rather than as a deed, because in that way you are limiting the time of your liability to six years rather than 12.

By Stephen Clarke, head of construction at solicitor Clarke Willmott T: 0845 209 1303

Anna Wright FCIOB

Ann Wright's Case notes

Take notice of the small print...

Education 4 Ayrshire Ltd v South Ayrshire Council.

Scottish Outer House Court of Session 4 Nov 2009

Delays are inevitable if unknown asbestos is found during works.

So it was when Education 4 Ayrshire (E4A) undertook the refurbishment of Prestwick Academy for South Ayrshire council. E4A subcontracted the works to Carillion.

Clauses 8a and 17 of the project agreement allowed E4A to claim for extensions of time and to payment as a direct result of a works compensation event.

The agreement contained a week for known asbestos removal, but additional asbestos was discovered on 6 April 2007. E4A sought 16 weeks extension for this delay and £815,792.

But E4A got tangled up in the agreement’s provisions on giving notice to the client. Clause 17.1 for the extension of time required that E4A give notice to the council “as soon as reasonably practicable” and “in any event within 20 business days of becoming aware that there was a delay”. The notice had to specify the reason and give an estimate of the likely effect of the delay.

Clause 17.6.1 required that if E4A were to make a financial claim, it had to give the council notice of the claim for extension of time and make its claim for compensation. As with 17.1 this had to be done as soon as reasonably practicable and in any event within 20 business days.

Within a further 15 business days E4A had to give full details of the works compensation event, the extension of time and substantiation of any estimated change in the project costs.

If E4A did not comply with the timescales in clause 17.6, then clause 17.8 stated it would not be entitled to the extension of time or any compensation.

Under clause 72.1, E4A had to send the notices by first-class post, fax or by hand to the chief executive of the council.

On 3 May 2007 E4A gave the authority’s chief executive written notice of a delay of 19 weeks (later reduced to 16 weeks) due to the newly

discovered asbestos.

The letter referred to an email of 18 April sent by E4A to thecouncil’s general manager, Roddy Macdonald, suggesting a contingency planning meeting and enclosing Carillion’s claim letter about the new asbestos to E4A dated 30 April.

In court, the parties agreed that compliance with clauses 17.1 and 17.6 was a condition precedent, which is a formal requirement that a party must fulfil before it can gain a benefit.

The court held that as the email was not a letter, not addressed to the chief executive and did not invoke clause 17, it was not a notice. Similarly, Carillion’s claim letter of 30 April had been addressed to E4A, not the council, and referred to the Carillion/E4A building contract, not the E4A/authority agreement. As E4A was obliged to send the notice in a particular way, to a particular person by a particular time, it did not get the 16 weeks extension or the compensation.

Analysis

With construction projects being so complex, there are often many people involved working for both contractor and employers. Titular contractual personnel, such as architects, engineers, or quantity surveyors, are often represented by assistants.

Mostly, this works without serious problems. But certain matters within a contract must be handled formally in accordance with the conditions.

One of these is often the manner of giving formal notices. Besides having to give the notice in a particular way, such as to a particular person at a particular address, the notice must contain, or be quickly followed by, a request for the time or money, with full details of the event, delay and loss.

If, as in E4A’s case, the notice itself or its contents are deficient, that can be enough for the claim to be rejected, even though the events causing the claim are known on site.

Ann Wright FCIOB is an adjudicator and quantity surveyor.

T: 01675 466009

Comments

So we see that the claim is rejected solely on the basis of the legalese of the requirements for notices, without any regard for the merits of the claim, which looks fairly straightforward and valid. The system works? Hardly a triumph for justice and good sense, this is more an example of the typically dysfunctional processes and outcomes which, although bizarre, no longer surprise anyone. Sure, the contractor should meet the notice requirements, but what about the merits? What were the results? Did the liquidated damages kick in and the whole mess send the contractor broke, while the client was able to get something for nothing? Is this right?

Trevor Rabey, 2 February 2010

Leave a comment