The Queensland Government has released a report on the economic and social benefits of reforming the Queensland security of payment regime for the construction industry.
The report, prepared by Deloitte, considers four potential changes:
the introduction of Project Bank Accounts (PBAs);
the introduction of Retention Trust Funds (RTFs) scheme;
amendments to the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA); and
the rollout of an education program.
The benefits to subcontractors created through PBAs is largely at the expense of head contractors, who will have reduced working capital and increased administrative costs. The report considers this reasonable on the basis that head contractors can better manage the risk.
How head contractors will react to this shift in risk (and how it will impact their pricing assumptions) remains to be seen.
If implemented, the amendments to BCIPA would see Queensland adopt the New South Wales approach of treating all payment claims as a claim under BCIPA. Whilst this provides greater security for subcontractors, it requires head contractors (and principals) to apply resources to administer each payment claim as if it were a claim under BCIPA (even if the contractor/subcontractor has no actual intention of pursuing a BCIPA claim).
PROJECT BANK ACCOUNTS
Our previous article on PBAs covers the practical implications of a PBA scheme.
In summary, a PBA is a trust account into which a principal pays progress payments due to its head contractor which are disbursed to the head contractor and subcontractors at the same time.
The report found that implementing a PBA scheme would produce a net benefit of up to $3.3bn if the scheme applies to all Government and private construction projects over $1m (excluding infrastructure projects and residential building and construction). The benefit of the PBA scheme reduces as the scope of its application narrows.
The assumption made in the report is that a PBA scheme will reduce project costs by 2.5% because a PBA scheme decreases the risk of non-payment to subcontractors by quarantining the funds in a trust account. This means that subcontractors will (theoretically) be able to reduce the risk premium they include in their pricing.
Conversely, head contractors lose the ability to access (and use) funds as working capital and would need to operate on a reduced cash flow. The report found that implementing a PBA scheme could produce a cost to head contractors of up to $1.5bn.
The 2.5% reduction in project costs was at the high range (based on available supporting evidence) and the report notes that decreasing this percentage significantly reduces the economic benefit of implementing PBAs.
RETENTION TRUST FUNDS
A RTF is a trust account (with an authorised deposit-taking institution) in which a head contractor holds retention moneys and may only withdraw funds in accordance with the contract terms. Because the funds are held in a trust account, they are protected from head contractor insolvency.
The report considers that implementing a RTF scheme would produce an overall cost to the industry rather than a benefit. This is largely because the scheme would impose:
significant operating costs on head contractors (reduced working capital and increased administrative costs); and
additional administrative costs for subcontractors (e.g. reviewing and signing trust documentation).
AMENDMENTS TO BCIPA
The report considers two proposed amendments to BCIPA:
removing the requirement to state that a payment claim is made under BCIPA (meaning that any invoice/payment claim is a claim under BCIPA); and
extending the timeframes for an application for adjudication.
According to the report, these amendments could reduce subcontractor payment times by 30 days. This is based on the assumption that some subcontractors currently wait 60 days after issuing an invoice to commence a BCIPA claim, and that the amendments would cause subcontractors to make claims earlier (within 30 days).
The benefit of reduced payment times is that it increases subcontractors’ working capital. However, as noted in the report, this is achieved by decreasing head contractors’ working capital.
WHAT HAPPENS NEXT?
Since the report was published, the Minister for Housing and Public Works has issued a press release stating that a new security payment system is being finalised and details should be released before Christmas 2016.
Whilst the implementation of a PBA scheme seems likely (given it was the option which projected the most significant cost benefit), the significant changes that PBAs will have on the industry means detailed legislation will be required. This will presumably take some time to draft.
As discussed in our previous article, there are a number of challenges with implementing a PBA scheme that will need to be overcome.
The proposed amendments to BCIPA, however, are simpler and could be implemented more easily. The fact that the report considers ‘proposed changes’ to the legislation suggests that these amendments may be forthcoming sooner.