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Across Australia various state and federal governments are rolling out Projects Bank Accounts on major projects above $1m+. Whilst this form of contract payment structure has been running in WA for some years now, momentum is gathering to roll out Project Bank Accounts across the Nation at state and federal levels. Forming a similar payments matrix that underpins the UK and USA downstream payment cycles to subcontractors and suppliers. The introduction in Australia of this structure is not uniform and vary considerably between jurisdictions and clients, if we follow the oversees models it will present some challengers to in our current industry context.

The Project Bank Account (PBA) ring-fences funds for subcontractors when the Builder receives money from the project owner/client. A Builder holds in trust any funds received from an owner to pay subcontractors and suppliers. Significantly, a Builder does not “own” that portion of the money it receives under the contract that is owed to subcontractors. Subsequently, this means that a Builder is not entitled to keep the full amount of a receivable under a contract. The Builder may only retain the difference between the amount paid by the project client and the amount owed to the subcontractors and suppliers. Example:

The Project Bank Account can present challenges to secured lenders seeking to enforce security interests on the Builder’s debtors or invoices. The Builder may only use funds that are not subject to the trust, which might be a percentage (usually around 20%) of its total progress claims, to pay lenders.

A PBA claimant (subcontractors) has priority claims to collect from funds generated on the project, at arm’s length from the lender’s security interest. A builder may not use those funds to pay turnaround professionals if the project was distressed. A lender who receives an improper payment from a Builder risks facing a disgorgement claims from a PBA claimants.

From the example above, if the lender received $500,000 of the project client’s $1,000,000 payment to the builder and applied that money to the builder’s debt, the lender may have to repay $300,000 to the PBA claimants because the Builder had a right to only $200,000 from the total payment. Raising the possibility of disgorgement claims resulting in a lender having greater exposure than its original facility to the Builder. Lenders can mitigate this risk by demanding certified progress claims and validation that PBA claimants (subcontractors) have been paid, and by installing a structure that provides for payments to the financiers in amounts that would not include amounts allocated to PBA claimants.

Another aspect that is yet to be tested, Unconditional Bank Guarantees as security for the builder’s contract, in the event of a project client calls on the guarantee following a builders default. What avenues does the bank have to recover? Banks typically enter into a general agreement of indemnity with the owners of the building company, which may create security interests in the receivables (debtors) of the builder. Obviously, these issues have an impact on the rights of a secured lender in such assets.

In an industry renowned for delayed payment and disputes, PBA’s provide security of payment to the subcontracts and suppliers. It’s uncertain how lender will provide cash flow to builders and head contractors and maintain security in this matrix.