The Queensland Government has recently tabled the Building Industry Fairness (Security of Payment) and other Legislation Amendment Bill 2020 (Qld) (Bill), which aims to streamline the project bank accounts regime and improve other key aspects of Queensland's security of payment laws.
Under the Bill, changes proposed to the existing project bank accounts regime will commence for Government Department and Health and Hospital Service (HHS) eligible building contracts worth $1M+ (ex GST) from 1 July 2020. However, they are not due to come into force until 1 July 2021 for the private sector, local government and State authorities (e.g. statutory bodies and 'Government Owned Corporations' (GOCs)). From there, the requirements will be rolled out in a phased approach to a progressively broader range of private sector, local government and State authority building contracts (first, those with a contract price of greater than $10 million, then greater than $3 million and finally greater than $1 million, all excluding GST).
Given that the administrative and cost burden of complying with the trust accounts framework may be significant and there are heavy penalties for non-compliance, particularly for head contractors, parties should ensure that they are prepared well before the relevant date for commencement.
Current regime (Phase 1)
Since 1 March 2018, project bank accounts have been mandatory on building contracts awarded by Queensland Government Departments valued at between $1 million and $10 million. These trust accounts are intended to protect subcontractors if a head contractor becomes insolvent. They are managed by the head contractor and 'first tier' subcontractors are directly paid from the account.
Going forward, project bank accounts will be renamed 'project trust accounts' and 'retention trust accounts' (together, 'statutory trusts') to better reflect the purpose of the accounts (i.e. holding money on trust for the benefit of subcontractors).
Following consultation and industry feedback, the Government has adopted a phased approach, which progressively rolls out the new regime to a broader range of building contracts to allow the Government and industry to manage the financial transition.
The proposed dates for the new phases as set out in the explanatory notes are as follows:
- From 1 July 2020, trust accounts will be required for Government Department and HHS eligible building contracts valued at greater than $1 million (ex GST). In this phase, there will no longer be the option for State authorities to 'opt in'; and
- There will then be a much broader rollout of trust accounts to private, local government and State authority eligible building contracts. This will begin on 1 July 2021 with eligible building contracts valued at greater than $10 million (ex GST). This threshold will drop to greater than $3 million (ex GST) on 1 January 2022 and greater than $1 million (ex GST) on 1 July 2022.
This means that from 1 July 2022, trust account requirements will apply to all eligible building contracts valued at $1 million (ex GST). According to the explanatory notes, at this final stage of the rollout, the Government proposes to extend the requirement for retention trust accounts to all parties holding cash retentions in the contractual chain where the head contract requires a project trust account.
Eligible building contracts
As with the current requirements, the regime will still only apply to contracts where over 50% of the contract price is for 'project trust work', which includes work such as the erection or construction, renovation, alteration, extension, improvement or repair of a 'building', along with related work such as site work. A 'building' is defined to include a fixed structure (e.g. a fence). The current requirement that the fixed structure be wholly or partly enclosed by walls and a roof will fall away under the proposed changes, to align more closely with the Queensland Building and Construction Commission Act 1999 (Qld) definition of 'building'.
Simplifying the framework
The Bill aims to simplify the trust account framework in response to stakeholder and industry feedback, with amendments to:
- Require only one project trust account is required for each eligible contract;
- Require a contracting party to hold only one retention trust account for cash retentions across all of its eligible projects, instead of requiring a retention trust account for each contract; and
- Abolish the concept of a 'disputed trust account'.
These proposed amendments seek to address criticism of the administrative and cost burden of maintaining several trust accounts per project under the current framework.
Improved protections and oversight
New and improved trust account oversight functions and penalties
Currently, a principal is allowed oversight over all payments made through a project bank account. The Bill removes the principal's viewing rights in response to industry feedback that this oversight is unsustainable and inappropriate for implementation in the private sector. Instead, the oversight functions and powers of the Queensland Building and Construction Commission are increased, including the ability to audit trust accounts and impose significant penalties for non-compliance. For example, a failure of a trustee to engage an auditor to review a trust account can result in a fine of up to $26,690 or one year's imprisonment for an individual and a fine of up to $133,450 for a corporation. The Bill also maintains penalties for the failure of a trustee (usually the head contractor for a project trust account) to maintain the trust account in accordance with the prescribed requirements.
In addition, the Bill says that a trustee or other nominated person must undertake compulsory training before opening and operating a retention trust to ensure that they understand their obligations. A failure to comply will attract a penalty of up to $13,345.
Alternative protections for amounts payable following an adjudication
As an alternative to the protection disputed trust accounts were intended to provide, where a respondent to an adjudication owes an adjudicated amount to a party, that party may serve a 'payment withholding request' on a party above the respondent in the contractual chain. The request creates a charge over any monies payable to the respondent that the higher up party holds (up to the value of the adjudicated amount). While it is not yet clear how effective this mechanism will be, it would allow parties who would not have otherwise been beneficiaries to a disputed trust account under the current project bank accounts regime recourse to enforce payment of adjudicated amounts.
The Bill also says that where a respondent owes an adjudicated amount to the head contractor, the head contractor may lodge a statutory charge over the property owned by the respondent (or a related entity of the respondent) where the construction work was carried out.
The next phase proposed to commence 1 July 2020 will not apply to a Government Department or HHS contract if the tender process (which is undefined) has started, or the contract has been entered into, before that date. Instead, the current regime will continue to apply, however, parties may elect to transition to the new trust accounts regime within six months.
The Bill says that a contract entered into before commencement of subsequent phases that would otherwise be eligible will not be subject to the new requirements.
The Government intends for the Bill to provide a model for project trust accounts that other jurisdictions can draw upon to advance security of payment reform nationally. According to the explanatory notes, while contractual conditions on government projects require project trust accounts in other Australian jurisdictions, Queensland is the only Australian jurisdiction to have legislated project trust accounts for the building and construction industry. Queensland's reforms are in line with the approach internationally, such as in Canada, New Zealand, the United States and United Kingdom where security of payment legislation requires some monies to be held in trust.
Submissions on the Bill have now closed. Public hearings were held on 3 and 4 March 2020 and a report to parliament is due by 20 March 2020. This will be followed by a detailed consideration of the clauses of the Bill where amendments may be made. Given the proposed commencement date of the next phase is 1 July 2020, the Bill will likely be passed in the next few months. Future phases of the regime might be further revised following the upcoming Queensland elections.
If implemented, the new project and retention trust requirements will introduce an increased administrative and cost burden to projects. We recommend that parties consider how these arrangements should be reflected in their tender and contract arrangements well in advance. For example, principals may wish to check that their contracts will give them the right to terminate if a builder they engage fails to maintain project trust accounts as required by the new laws.