Group of contractors pouring conrete on construction site

Imagine a world where subcontractors received payments for their projects within five days of the due date. “A pipe dream,” you might say. “How would this ever be possible in the construction industry?!” After all, payment speed in construction is abysmal. Well, hold onto your hard hats: It’s already happening in the UK, Australia, and other countries, where some in the industry are using Project Bank Accounts to help speed up construction payments, reduce payment disputes, and improve cash flow for everyone.

If you’re not familiar with Project Bank Accounts, it’s probably because they aren’t popular in the United States yet. They are starting to catch on in other parts of the world. The UK Government has adopted them on certain public projects. Australia uses them as well. Here’s how Project Bank Accounts work on construction jobs, and the benefits and challenges that they bring.

What is a project bank account?

A Project Bank Account (PBA) is a ring-fenced account that allows simultaneous payments to be made directly to the GC, subcontractors, suppliers and others. Each party’s invoices get paid at once and from the same account.

On a typical construction project, payment moves slowly from the property owner to the GC, to their subcontractors, to the sub-subs, and so on. Project Bank Accounts essentially cut the middlemen out of the payment process, delivering payments directly to each contractor and supplier separately. When used correctly, they eliminate the inefficiencies of the usual payment waterfall.

PBA-controlled job sites involve several parties in the account, as either a beneficiary or administration. They include:

  • Head Contractor (or GC in the states)
  • The Subcontractors
  • The Superintendent’s Representative
  • The Bank
  • The Owner

Throughout the project, these parties work together to ensure that everyone gets paid the right amount and on time.

Project Bank Accounts are most popular on public projects in the UK, but there is interest from the private sector to use them to secure and speed up the payment process.

How Project Bank Accounts work

On a project that uses PBAs, it’s the Head Contractor’s responsibility to establish a project bank account within a few weeks of being awarded the construction contract.

They may have to establish several accounts, which often include:

  • The main project fund
  • A retainage account
  • A disputed funds account

Each month, the subcontractors will submit payment applications to the project’s Head Contractor. The Head Contractor submits the payment applications, along with their own, to the Owner’s Representative. Once the representative reviews the apps, they issue certificates for payments to the Head Contractor and the Bank.

With a Project Bank Account, payments are sent directly to the subcontractors. There’s no more waiting for your money to make it through the payment chain.

At this point, subcontractors receive notice of how much they can expect and when they can expect it. Imagine that! 

The Head Contractor then sends payment instructions to the bank, along with any other requested documents. The payment instructions will include the names of contractors and suppliers, the amount and destination of any retainage money, and other relevant information. The bank then disburses the payments.

Here’s the critical element that makes PBAs so effective: The bank sends payments directly to the subcontractors. There’s no waiting for your money to make it through the payment chain. The Head Contractor (GC), subs, and suppliers all receive their payments at the same time.

The benefit to contractors

When a PBA is working effectively, there are significant benefits for contractors and subs, especially the further you move down the typical payment chain. They get paid faster, and it gives them the opportunity to check their payments ahead of time.

The PBA creates a form of checks and balances that removes any benefit any contractor could reap from not paying their subcontractors or vendors. It creates a more transparent and straightforward process.

Suppose payment applications are due on the 25th of each month, and payments come within five days of the due date. This gives subcontractors the ability to plan their accounts receivables with far more consistency. Contractors are able to better plan out their cash flow, pay bills on time, and dramatically reduce the carrying costs that slow-payed contractors typically incur.  

Payment disputes are potentially more cut-and-dry. While owners and Head Contractors do have the right to retain money, at least the sub will know where the payment issue stands, instead of wondering where in the chain their check got “lost.”

There are only a few reasons why a sub wouldn’t get paid on a PBA job. Therefore, it’s easier to pinpoint the problem, address it, and fix the issue before a dispute arises. 

The benefit to property owners

There are some undeniable benefits to a well-oiled Project Bank Account. Most PBAs fund public projects, but there are reasons to consider one for large-scale private projects.

When a subcontractor is bidding on a PBA project, they’re less likely to inflate their bids. They know they’re less likely to have to defend their payments. The consistent pay also means they’ll save money on interest. This translates to lower bids, saving the owners money.  

Also, a project bank account can help reduce the risk of payment disputes against the property that construction project owners dread. The Head Contractor on a PBA project cannot withhold payments from subs and suppliers the way a contractor typically can.

What would inevitably lead to a payment dispute in the states, and possibly a mechanics lien, is altogether avoidable.

The downsides

While PBAs sound great for the construction industry on the surface, there are potential downsides that make them less desirable.

To date, PBA’s are mostly a public-project payment arrangement in countries that have adopted them. Even at that, not all UK projects require them. Projects under a particular value, depending on the region, may not qualify for them. Also, PBAs can be tricky to set up, so they require a Head Contractor that’s particularly comfortable working with banks. 

The requirements that a project had to meet to qualify for a PBA are very stringent in some areas. However, this does seem to be changing as the merits of a PBA seem to outweigh the risks involved.

PBAs aren’t foolproof. There are still areas that are susceptible to human error, such as the Head Contractor delaying submission of payment applications, and errors within the Owner’s Representative’s review. 

Also, owner payment practices are still an issue. PBAs aren’t escrow accounts, where the owner deposits an agreed-upon amount of money at the project’s onset. Those funds sit in the account until the goods or services are complete.

Generally, PBAs don’t require that type of initial funding. Owners can make deposits each month to cover the payments. If the owner can’t fund the PBA prior to the pay period, payment delays would still result.

Are PBAs in the future for the US construction industry?

Any process that makes payments faster in construction is worth deep consideration. While PBAs seem efficient, they are still relatively new. Even in the countries that have adopted them for certain project types, Project Bank Accounts haven’t yet taken strong hold. Top-tier parties, who benefit from holding payments and collecting interest, are not necessarily willing participants.

Whether or not PBAs do become more common on this side of the pond, contractors do well to focus on practices that will help speed up and protect their payments.