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• Procurement

We are significantly changing the way we pay our suppliers which will accelerate their cash flow, give certainty of payment timing and provide the opportunity for increased competitiveness through reduced costs.

This is through the implementation of project bank accounts (PBAs) which is a key part of the government's fair payment agenda. It is an electronic bank account which holds the money in trust for the supply chain. This protects the money in the event of liquidation or receivership and accelerates payment of amounts due to tiers one to three of our extended supply chain. All suppliers are paid simultaneously, normally within three to five days from us paying the agreed value of the amount due to the main contractor into the account.

Policy

In future PBAs will be the normal payment mechanism for government departments. The Agency policy is that they will be used on all contracts awarded post October 2011 across all directorates 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.

How does it impact on the supply chain?

The majority of tier two and three suppliers will benefit from a significant acceleration in payment of their monthly invoices. This will also provide a high degree of certainty of when payment will be received.

As a result, their costs will be reduced and this should provide an opportunity for increased competitiveness through reduced costs.
All participating suppliers need to complete the legal documentation (deed of trust for tier one and joining deeds for tiers two and three). This requires only a signature-it provides the benefits after it has been signed and sealed by the Agency.

Tier one contractors are paid from the account at the same time as tiers two and three. 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 tiers two and three will benefit significantly.

How does it benefit the Agency?

We have far more visibility and control over the supply chain payment cycle beyond the tier one and this provides four key benefits:

• Increasing compliance with the government's fair payment policy designed to protect  tiers two and three 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 two and three suppliers reflect accelerated payment in their price structure.
• Visibility of the tier two and three supply chain identity, including a structured monthly analysis of the nature of goods/services provided and the financial position for each supplier.

What other changes have been made to increase compliance with fair payment principles?

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 one - 14 days.
• Employer to tier two (via tier one)  -  19 days.
• Employer to tier three (via tier one and two) - 23 days.

It is the main 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.

How does a project bank account 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.

How does a project bank account work?

The contractor nominates a bank to host the PBA. The Agency 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 joining deed. This creates the legal framework. The contractor sets up the account and arranges for us to have direct view only access. 

The main contractor submits their monthly assessment to us which is certified and paid (into the PBA) in the normal way. At the same time, the main contractor provides a breakdown of the assessment showing the amount due to be paid to each of their participating suppliers. Once agreed by us, the main contractor instructs the bank to pay. We view the account monthly to confirm that suppliers have been paid promptly and in accordance with the breakdown agreed.

Does a project bank account change the monthly assessment process?

No. The processes for main contractors submitting monthly assessments and Agency certification and  payment remain unchanged. The key change is that the main contractor also submits a breakdown of the assessment to us showing the amounts due to themselves and each named supplier. Once  agreed by us, 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.