Project Bank Account Awareness

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1 Project Bank Account Awareness Background of Fair Payment and PBAs PBAs explained Business Case Perceptions v reality HA forecast take up Impact on HA & the extended the supply chain Responsibilities KPIs Process maps

2 Fair Payment History 2007 Non contractual Fair Payment Charter Created Growing evidence of non compliance 2010 Fair Payment provisions to be a contractual requirement in all central government construction contracts going forward (not retrospective). Last date for payment (calendar days)-measured from due date: Employer to tier 1-14 days Employer to tier 2 (via Tier1) 19 days Employer to tier 3 (via Tier 1 and 2) -23 days Assessment dates to be aligned with Head contract Tier 1 to ensure that tiers 2 and 3 employ same provisions. Exception reporting of non compliance via whistle blower process Project Bank Accounts to be the default position.

3 PBA Policy and Business Case The Construction Clients Board has agreed that central Government departments, their agencies and Non Departmental Public Bodies move to a position where PBAs are adopted unless there are compelling reasons not to do so. Ensuring compliance with Fair Payment Charter Effective mitigation to the risk of delay and cost associated with avoidable supply chain failure Visibility of supply chain spend to tier three Reduced cost of construction

4 What is a Project Bank account? Internet based account set up with a bank which can satisfy specific PBA requirements for paying the contractor and named tier 2/3 suppliers Legally protected by a Deed of Trust which ring fences funds in the event of supplier failure Facilitates accelerated simultaneous net payment to each tier of the amount that is contractually due This is normally 3-5 days from the due date There are two recognised PBA models (developed by OGC and NEC) The Highways Agency uses the NEC model because it is more flexible and simpler to operate

5 Project Bank Account: Money Route Map Traditional Project Bank Account Client Client Main Contractor 10m Project Bank Account Tier2 8m Typically 60+ days Typically 3-5 days Tier3 6m Main Contractor 2m Tier2 2m Tier3 6m UNCLASSIFIED

6 Perception 1 Complicated and time consuming to set up 2 Expensive and only viable on large schemes 3 Impacts tier 1 turnover and shareholder value 4 Cuts across contractual provisions re valuation and certification of assessments 5 Undermines lead contractors responsibility for managing the supply chain so that work is performed in accordance with the contract 6 Difficult for tiers 2/3 to implement 7 Creates CIS and VAT problems 8 Complications with pay less notices 9 Difficult to demonstrate financial benefits 10 Impacts factored debts 11 PBA costs will increase as banks become involved with contractual issues 12 Client has to physically authorise each payment on the banking system 13 Client has to be a trustee to ensure protection/continuity in the event of liquidation Reality 1 No different to a conventional account 2 Costs are modest (< 1000 ) 3 UK GAAP PS application note G para G60-72 confirms no change 4 PBA s do not impact contractual provisions 5 No change to tier 1-3 contractual and statutory responsibilities 6 Welcomed by SEC and NSCC 7 HMRC confirms no impact 8 No impact 9 Agreed but see CO impact assessment 10 PBAs should reduce need 11 Banks not involved-pba is purely a payment conduit 12 Under NEC contractor instructs bank after agreeing detail with client 13 Under NEC lead contractor is sole trustee

7 Contractor PBA responsibilities Notify MP Commercial of preferred PBA bank supplier Set up PBA (after HA has confirmed bank supplier acceptability) and notify details to HA Prepare and sign Deed of Trust and Joining Deeds and forward to HA Notify bank of agreed named supplier details Propose PBA named supplier exceptions for HA consideration Prepare monthly assessments and supporting breakdown Instruct bank to pay in accordance with detail agreed with HA Facilitate HA having view only access to PBA Provide PBA management information required by HA Ensure,as far as possible, that 80% of sub contract value paid directly via PBA Comply with agreed PBA processes

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9 PBA KPIs PBA to be operational for tier one by XXX and two by end YYY Named suppliers to exceed 80% of spend (excluding ancillary charges) Tier three named suppliers to be fully operational by ZZZ All named suppliers to be paid within 3 working days of receipt of PBA funding Suppliers outside via PBA to be paid within Fair Payment timescales

10 Start Z3.1 (1) The Authorisation is a document authorising the project bank to make payments to the Contractor and Named Suppliers Project bank is identified in the CD Z3.1 (2) Named Suppliers are named suppliers unless later changed in accordance with this contract. named suppliers are identified in the CD CHARGES & INTEREST? PROJECT BANK ACCOUNT Z3.3 The E pays any charges and is paid any interest made by the project bank YES Z3.3 Does the CD state the E pays charges and is paid any interest made by the project bank? Z3.2 The Contractor establishes the Project Bank Account with the project bank within one week of the Contract Date. Z3.1 (3) Project Bank Account is the account used to receive payment from the Employer and make payments to the Contractor and Named Suppliers. Z3.14 The Employer, the Contractor and named supplier sign the Trust Deed before the first assessment date TRUST DEED NO Z3.3 The C pays any charges and is paid any interest made by the project bank Z3.1 (4) A Supplier is a person or organisation who has a contract to * Construct or install part of the woks * Provide a service necessary to Provide the Works or * Supply Plant and Materials for the works. SUPPLIERS Z3.4 The Contractor submits to the Project Manager for acceptance details of the banking arrangements for the Project Bank Account Z3.4 A reason for not accepting the banking arrangements in that they do not provide for payments to be made in accordance with this contract. Does the PM accept the C's submission? YES Z3.4 The Contractor provides the Project Manager copies of communications with the project bank in connection with the Project Bank Account. A Sheet 2 NO

11 A Sheet 1 Z3.5 The Contractor includes in his contracts with Named Suppliers the arrangements in this contract for the Project Bank Account and Trust Deed. Z3.5 The Contractor notifies the Named Suppliers of the details of the Project Bank Account and the arrangements for payment of amounts due under their contracts. Z3.6 The Contractor submits proposals for adding a Supplier to the Named Suppliers to the Project Manager for acceptance. Z3.6 A reason for not accepting is that the addition of the Supplier does not comply with the Works Information. Does the C submit proposals for adding a Supplier to the Named Suppliers? Does the PM accept the C's submission? Z3.8 No later than one week before the final date for payment, the Employer makes payment to the Project Bank Account of the amount which is due to be paid to the Contactor Z3.7 On or before each assessment date, the Contractor submits to the Project Manager an application for payment, and shows in the application the amounts due to Named Suppliers in accordance with their contracts. Z3.9 Does the C need to make payment to the PBA? Z3.9 The Contractor makes payment to the PBA of * Any amount not paid by the Employer and * Any amount required to make payment n full to Named Suppliers. ECC FC 51 Payment Is payment due from the E to the C? X Sheet 3 Z3.10 The Contractor prepares the Authorisation, setting out the sums due to Named Suppliers as assessed by the Contractor and to the Contractor for the balance of the certified payment. Z3.10 After signing the Authorisation, the Contractor submits it to the Project Manager for signature by the Employer and submission to the project bank. B Sheet 3

12 PAYMENT B Sheet 3 Z3.11 The Contractor and Named Supplier receive payment from the Project Bank Account of the sums set in the Authorisation as soon as practicable after the Project Bank Account receives payment. EFFECT OF PAYMENT PAYMENT DUE FROM CONTRACTOR TO EMPLOYER Z3.13 Payments made from the Project Bank Account are treated as payments from the Employer to the Contractor in accordance with this contract or from the Contractor or Subcontractor to Named Suppliers in accordance with their contracts as applicable. Z3.12 A payment which is due from the Contractor to the Employer is not made through the Project Bank Account. YES Is payment due from the C to the E? X Sheet 2 NO TERMINATION Has a termination certificate been issued by the PM? YES Z3.15 If the Project Manager issues a termination certificate, no further payments are made into the Project Bank Account. Finish NO

13 Defined terms Z3.1 (1) The Authorisation is a document authorising the project bank to make payments to the Contractor and Named Suppliers. (2) Named Suppliers are named suppliers unless later changed in accordance with this contract. (3) Project Bank Account is the account used to receive payments from the Employer and make payments to the Contractor and Named Suppliers. (4) A Supplier is a person or organisation who has a contract to construct or install part of the works,. provide a service necessary to Provide the Works or. supply Plant and Materials for the works. (5) Trust Deed is an agreement between the Employer, the Contractor and Named Suppliers which contains provisions for administering the Project Bank

14 Project Bank Account Z3.2 The Contractor establishes the Project Bank Account with the project bank within one week of the Contract Date. Z3.3 Unless stated otherwise in the Contract Data, the Contractor pays any charges and is paid any interest made by the project bank. Z3.4 The Contractor submits to the Project Manager for acceptance details of the banking arrangements for the Project Bank Account. A reason for not accepting the banking arrangements is that they do not provide for payments to be made in accordance with this contract. The Contractor provides to the Project Manager copies of communications with the project bank in connection with the Project Bank Account. Named Suppliers Z3.5 The Contractor includes in his contracts with Named Suppliers the arrangements in this contract for the operation of the Project Bank Account and Trust Deed. The Contractor notifies the Named Suppliers of the details of the Project Bank Account and the arrangements for payment of amounts due under their contracts. Z3.6 The Contractor submits proposals for adding a Supplier to the Named Suppliers to the Project Manager for acceptance. A reason for not accepting is that the addition of the Supplier does not comply with the Works Information.

15 Payments Z3.7 On or before each assessment date, the Contractor submits to the Project Manager an application for payment, and shows in the application the amounts due to Named Suppliers in accordance with their contracts. Z3.8 No later than one week before the final date for payment, the Employer makes payment to the Project Bank Account of the amount which is due to be paid to the Contractor. Z3.9 The Contractor makes payment to the Project Bank Account of any amount not paid by the Employer and any amount required to make payment in full to Named Suppliers. Z3.10 The Contractor prepares the Authorisation, setting out the sums due to Named Suppliers as assessed by the Contractor and to the Contractor for the balance of the certified payment. After signing the Authorisation, the Contractor submits it to the Project Manager for signature by the Employer and submission to the project bank. Z3.11 The Contractor and Named Suppliers receive payment from the Project Bank Account of the sums set out in the Authorisation as soon as practicable after the Project Bank Account receives payment. Z3.12 A payment which is due from the Contractor to the Employer is not made through the Project Bank Account.

16 Effect of payment Z3.13 Payments made from the Project Bank Account are treated as payments from the Employer to the Contractor in accordance with this contract or from the Contractor or Subcontractor to Named Suppliers in accordance with their contracts as applicable. Trust Deed Z3.14 The Employer, the Contractor and named suppliers sign the Trust Deed before the first assessment date. Termination Z3.15 If the Project Manager issues a termination certificate, no further payment are made into the Project Bank Account.

17 PBA FAQs What is a PBA? A PBA is a Cabinet Office initiative. It is an electronic bank account which accelerates payment of amounts due to tiers 1-3 of the HA supply chain. They are all paid simultaneously, normally within 3 days from HA paying the certified value of the monthly assessment into the PBA. What is HA policy on PBAs? HA policy is that they will be used on future contracts unless there is a compelling reason not to do so. Procurement has produced a guideline of circumstances where a PBA may not be appropriate but exceptions for NEC contracts exceeding 5m will be extremely unusual and will need to be supported by a business case. What is the benefit to HA? HA has far more visibility and control over the supply chain payment cycle beyond the tier 1 and this provides four key benefits: Increasing compliance with the Government Fair Payment Policy designed to protect tiers 2 and 3 of the supply chain by accelerating payments due. Reducing the disruption, delay and additional cost of avoidable supply chain failure caused by cash flow shortage. Reducing the overall cost of project delivery as tier 2 and 3 suppliers reflect accelerated payment in their price structure. Visibility of the tier 2/3 supply chain identity, including a structured monthly analysis of the nature of goods/services provided and the financial position for each supplier

18 How does it impact on the supply chain? All suppliers need to complete the legal documentation (Deed of Trust and/or Deed of Adherence). Tier 1 contractors are paid from the account at the same time as tiers 2 and 3.All tiers receive net payment for the value of work undertaken and agreed to be due. The impact on each tier depends on current compliance with the Fair Payment Code of Practice but generally tier 1s will be disadvantaged and tiers 2/3 will benefit from earlier payment. Tiers 1 and 2 will need to modify their accounting systems to reflect PBAs. Why are PBAs necessary? In 2008 OGC issued a Fair Payment Charter (FPC) which was accepted by all major contractors. It set out the principles for payment across the supply chain and was intended to ensure that larger contractors did not take unfair advantage of their procurement position by requiring extended credit across their supply chains. Whilst the FPC has been included in HA contract documentation for the past three years, it is not contractually binding and there is evidence of the non compliance of some contractors. The Cabinet Office undertook an analysis of the published financial accounts of large Government suppliers which revealed an average credit period exceeding 60 days for their tier 2s, implying credit exceeding 90 days for tier 3s.The maximum credit period in the FPC was 30 days. It was therefore concluded that further enforcement action was required. What Changes have been made to increase FPC compliance? Future contracts awarded by Government departments will specify the following contractual last dates for payment (from the due date) across the supply chain: Employer to tier 1-14 days Employer to tier 2 (via Tier1) 19 days Employer to tier 3 (via Tier 1 and 2) -23 days It is the lead contractor s responsibility to ensure that this is reflected in contracts across their supply chain and assessment periods are all aligned with that of the head (client) contract. A non compliance (whistle blowing) reporting process has been set up by the Cabinet Office. PBAs are recommended by the Cabinet Office as a means of payment but are not compulsory.

19 How Does a PBA work? The contractor nominates a bank to host the PBA.HA has to agree that this complies with PBA requirements. A Deed of Trust is set up and each nominated supplier to be paid directly from the PBA signs a Deed of Adherance. This creates the legal framework. The contractor sets up the account and arranges for HA to have direct view only access. The contractor submits their monthly assessment which is certified and paid (into the PBA) in the normal way. At the same time, the contractor provides a breakdown of the assessment showing the amount due to be paid to each supplier. Once agreed by HA the contractor instructs the bank to pay. HA Finance view the account monthly to confirm that suppliers have been paid promptly and in accordance with the breakdown agreed with HA. How does a PBA differ from a normal bank account? The main difference is that funds in the PBA are legally protected. This ensures that money in the account is held in trust for nominated suppliers and cannot be accessed by a receiver or liquidator in the event that the tier one runs into financial difficulty.

20 Does a PBA change the monthly assessment process? No. The processes for main contractors submitting monthly assessments and HA certification and payment remain unchanged. The key change is that the main contractor also submits a breakdown of the assessment to HA showing the amounts due to themselves and each named supplier. Once agreed by HA, this is the main contractor s bank instruction which initiates payment from the PBA to each named supplier and the contractor s normal bank account. Where can I find more information? View WwW or contact the PBA process owner for each directorate. For MP and NDD, ownership sits within the commercial teams.