Project Bank Account vs Escrow vs Bonds: Which are right for your construction business?
Across the UK construction sector, ensuring that money flows securely and correctly is critical - more so than ever. With complex supply chains, increased insolvency risk, and growing regulatory scrutiny, employers, main contractors, and subcontractors all need clarity on how funds are held, released, and protected.
This insight article covers the three main payment-security mechanisms you’ll encounter: a project based account (PBA), an escrow account, and a bond (typically a performance or payment bond). We’ll explain what each is, how they differ, when they’re used, and the key commercial and contractual implications for UK construction projects.
What is a Project Based Business Account (PBA)?
A project based account is a ring-fenced account set up specifically for a construction project. The funds provided by the employer (or funder) are held in trust. Payments are made directly from that account to the main contractor and to supply chain parties (sub-contractors/suppliers), rather than flowing through the contractor’s general account.
Key features of a PBA
The account is held in trust (often by trustees), and funds cannot easily be diverted for other use. It supports simultaneous or direct payment to sub-contractors, reducing the risk of delay in the supply chain or insolvency of the main contractor. It enhances transparency in the payment chain: supply chain parties can see the money is there and earmarked for them.
Typically used on larger projects, especially those with complex or layered supply chains.
Pros and cons of a PBA
A project bank account offers strong protection for all parties within the supply chain by reducing dependence on the main contractor’s cash flow. This structure helps improve payment times, minimising the risk of subcontractor insolvency or non-payment. As a result, it can enhance the overall project risk profile, making it more appealing to potential funders and lenders.
However, PBAs also come with certain drawbacks. They introduce additional administrative requirements, such as setting up the account, managing trustees, and maintaining multiple payee lists. The process may also increase costs and contract complexity, particularly if the main contractor needs to adjust existing systems to accommodate the PBA.
Moreover, PBAs may not be suitable for very small or straightforward projects, where the administrative burden could outweigh the potential benefits.
When might you use a PBA?
Public sector or large private projects where supply-chain vulnerability is high.
Projects with multiple tiers of subcontractors.
Where the employer or funder demands enhanced payment security.
What is an escrow account for construction payments?
An escrow account in a construction contract is an arrangement where an independent third-party (the escrow agent) holds funds, which are released upon pre-agreed conditions being met (for example, interim payment certificates or milestones).
Key features of an escrow account
Funds are deposited into a separate, segregated account held by the escrow agent and not subject to the operating bank of the contractor. The escrow agent follows release instructions according to the escrow agreement – when the contractor has achieved the certified stage, the funds are released.
Can be used to protect subcontractors, suppliers, or employers from non-payment or non-performance. Lower cost than a full bond, and might be more flexible in terms of duration and conditions.
Pros and cons of an escrow account
An escrow account provides a practical mechanism to reassure contractors and suppliers that project funds are both available and protected. It often offers a lower-cost alternative to surety bonds and can be tailored to suit specific project needs, for example, through retention or milestone-based escrow arrangements. This flexibility makes it a valuable tool for managing payments and maintaining trust across the supply chain.
However, the effectiveness of an escrow arrangement depends heavily on the clarity of its terms. The conditions for fund release, as well as any dispute resolution process, must be precisely defined to avoid payment delays.
When might you use an escrow account?
On construction projects where you want to protect cash flow to subcontractors, but where a full PBA might be too heavy. In projects where a milestone-based payment release is appropriate, or where parties seek a compromise between free cash flow and protection.
What are performance bonds?
In the UK construction industry, a bond - commonly a performance bond or payment bond - is a financial instrument, issued by a bank, insurer or surety provider, which guarantees that the contractor will perform its obligations – or that funds will be available if the contractor defaults.
Key types of bonds
A performance bond protects the employer from risk that the contractor fails to complete the works or deliver to the specification. A payment bond can protect subcontractors and suppliers by guaranteeing that the contractor will pay them (or that the employer will pay) under certain circumstances.
Typically, in the UK, the bond value is around 10% of the contract value (but this varies).
Key features of bonds
The bond is a guarantee, a separate contract, between the surety provider and the employer (beneficiary) with the contractor as principal.
On-demand vs conditional claims
some bonds allow the employer to claim simply by presenting a valid demand (on-demand bond), others require proof of contractor default (conditional bond).
Duration
The bond usually runs until practical completion (the point in a construction project where the building is finished for all practical purposes) and sometimes into the defects liability period.
Pros and cons of bonds
A performance bond provides strong protection for the employer, offering financial recourse if the contractor fails to meet their obligations. It is a standard and widely understood mechanism within the construction industry and is often a requirement from project funders. Importantly, it does not necessarily tie up the employer’s cash, although the contractor may factor the cost of obtaining the bond into their overall pricing.
However, performance bonds also have limitations. They can be expensive, and any claim made against the bond must be valid - a process that can involve legal procedures and take time to resolve. Additionally, a performance bond does not ensure smooth cash flow throughout the project; it serves more as a financial safety net than an active payment mechanism.
When you might use a bond
Where the employer wants a strong guarantee of delivery, especially in high-value projects, public sector work or for lender security.
When the contractor or supplier is judged less financially robust, you want extra protection.
Where the contract requires it by the funder or procurement rules.
Which to choose and when?
If the primary objective is to improve payment speed and strengthen supply chain security, a PBA offers a compelling solution. It ensures that funds flow quickly and transparently through the project, reducing the risk of non-payment and supporting financial stability across all parties.
For projects where the priority is to link payments to specific milestones, such as pre-financing materials or mobilising works, an escrow arrangement may be more suitable. It provides a flexible and cost-efficient mechanism to hold and release funds once agreed conditions are met.
In recent years, escrow arrangements have gained appeal over traditional performance bonds. This shift reflects growing pressure for faster, fairer, and more transparent payment practices in the construction and infrastructure sectors. Escrow accounts offer greater flexibility, are often more affordable, and can be structured to align directly with project progress, advantages that bonds, which act primarily as a financial backstop, do not provide.
Can you use them together?
Yes, in many cases, multiple mechanisms can be used in combination to provide a more comprehensive risk management structure. For example, PBA may be used to manage the main payment flow, ensuring prompt and secure payments through the supply chain, while the employer still requires a performance bond as an added layer of protection against contractor default.
Similarly, an escrow arrangement might be established specifically for retention monies, ensuring these funds are held securely and released only when agreed conditions are met, while a performance bond provides assurance over the overall completion of the project.
Each mechanism targets a different category of risk; payment flow, performance, or retention, so adopting a layered approach can offer stronger financial protection and greater confidence for all parties involved.
Choosing the right payment product to protect your construction project
Securing payment and performance in UK construction projects is no longer optional; it is essential for protecting all parties within the supply chain. Whether your priority is maintaining payment flow, linking payments to milestones, or safeguarding against contractor default, it is crucial to choose the mechanism, or combination of mechanisms, that best aligns with your project’s risk profile and procurement strategy.
By understanding these differences and selecting the right approach for your project’s size, complexity, and risk, you can enhance supply chain resilience, reduce payment delays, and build greater confidence across the entire project ecosystem.
Interpolitan Money provides accessible, compliant escrow, TPMA and multi-currency IBAN accounts tailored for the construction and engineering industry. We partner every client with a hand-picked sector payment specialist who provides personalised service for your business.
With your escrow account, you also receive:
50+ currency wallets with live rates & forward contracts
Access to payment rails in 160+ countries
Legal document drafting
Holding accounts safeguarded by Tier-1 banking partners
Book a call with our dedicated London-based escrow team to discover how we can help protect, guarantee and elevate your cross-border payments.