The Queensland Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) commenced in November 2017 and introduced reforms to several aspects of security of payment in the construction industry in Queensland, some of which are still being phased in.
This article looks in particular at the phase in of project bank accounts for construction projects which already apply to some Government projects and will apply to private sector construction projects, likely later this year – and also summarises the key changes to the payment process.
The obligations under the project bank accounts regime are required to be performed by head contractors primarily and, to a lesser extent, by principals, while subcontractors are the main beneficiaries. However, the security of payment changes, which came into effect on 17 December 2018, made it easier for claimants to secure payment so all industry participants should consider their internal processes for managing and responding to payment claims when operating in Queensland.
Importantly, penalties may apply for non-compliance with particular provisions of the new and updated regimes.
Project bank accounts
Phase 1 of the project bank accounts (PBA) regime applies to Government contracts released for tender after 1 March 2018 for ‘building work’:
- with a value between $1 million and $10 million
- where more than 50% of the price relates to building work
- where the head contractor enters into at least one subcontract for all or part of the contracted work.
Phase 2 will expand the scope of PBAs to the private sector to cover most building and construction projects over $1 million, and is expected to commence later in 2019.
Where a PBA is required, a head contractor must establish three separate trust accounts within 20 business days after the head contractor enters into the first subcontract for the project (or earlier if specified in the head contract). These are:
- a general trust account
- a retention funds trust account
- a disputed funds trust account.
Head contractors also have a range of other obligations, including (amongst other things):
- controlling deposits and withdrawals for approved purposes
- covering any shortfall
- adhering to the prescribed order of priority for payment out of a PBA (for the benefit of subcontractors), and not providing preferential treatment to any particular subcontractor
- ensuring that any retentions are held in the retention trust account identify the relevant subcontractor for whom they are being held.
Principals must pay funds owing to the head contractor into the general trust account. There are only limited exceptions for not doing so. Payment into the general trust account discharges the principal’s liability to pay under the head contract.
Retention funds are now required to be quarantined, so that upon that party becoming insolvent the retention funds can be allocated to the subcontractor to which the funds should have been paid contractually.
The disputed funds trust account becomes relevant where a payment dispute arises after a subcontractor has given a head contractor a payment claim for a progress payment if:
- a head contractor gives a payment schedule to the subcontractor in response, then prepares a payment instruction to pay a lesser amount than certified in the payment schedule
- the head contractor fails to issue a payment schedule in response a payment claim from a subcontractor and becomes liable to pay the amount claimed.
Where this occurs, the head contractor must transfer the payment claim amount into the disputed funds trust account and immediately inform the subcontractor in writing of the transfer.
Any funds remaining in the disputed funds trust account after the dispute resolution process has been exhausted must be either transferred back to the general funds trust account (if applicable) or withdrawn for payment to the head contractor.
A PBA can only be dissolved when:
- all subcontractors have been paid all amounts the head contractor is liable to pay, including any retention amount and any amounts the subject of a payment dispute
- the only remaining building work is maintenance work.
Security of payment reforms
The BIF Act provided for the repeal of the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA) and the Subcontractors’ Charges Act 1974 (Qld) (SCA), Qld’s previous key security of payment legislation. To a large extent, the BIF Act replicates the provisions of the BCIPA and the SCA (and joins the provisions into a single Act) – subject to a number of important changes, including:
- payment claims no longer need to include the ‘endorsement’ that they are made under legislation in order to be treated as claims made under the BIF Act
- written documents bearing the word ‘invoice’ are taken to amount to a request for payment under the BIF Act
- payment schedules must be issued within 15 business days after receipt of a payment claim (or an earlier time if specified in the building contract), otherwise, unless the amount claimed is paid in full by the due date for payment, the party responding to a payment claim is liable to receive a penalty, face disciplinary action, and pay the amount claimed
- where the amount owed is not paid in full to a party by the due date, the claimant may recover the unpaid portion as a debt due in court, commence an adjudication of the payment claim, or suspend work where it has given notice of an intention to do so at least two business days beforehand
- payment schedules will need to be ‘complete responses’ which capture all reasons a party may have for withholding payment, as there is a bar on introducing new reasons in an adjudication response where those reasons are not derived from the original payment schedule (which removes the scope for respondents to use the adjudication response as a ‘second chance’)
- the time period for claimants to make an adjudication application is extended from 10 business days to 30 business days (in most cases)
- where a building contract is terminated without a reference date arising after termination, an additional reference date automatically arises on the date of termination, which preserves a right for parties to submit a payment claim in such circumstances
- in relation to subcontractor charges, the contractor receiving a notice of subcontractors’ claim charge must now respond to the subcontractor within 10 days (and give relevant notice to the principal or contractor higher in the procurement chain) regardless of whether the claim is disputed note. Failing to provide a response within the required time frame is an offence to which a maximum of 20 penalty units applies.
Developers and head contractors operating in Queensland should familiarise themselves with the PBA regime and reforms to security of payment legislation under the BIF Act, given the risk of a non-compliance may now result in a statutory penalty.