WHO SHOULD READ THIS
- Government agencies, developers, head contractors, subcontractors, suppliers and consultants operating in the Queensland building and construction industry.
THINGS YOU NEED TO KNOW
- If the proposed reforms are enacted, you will need to understand your rights and obligations in respect of the establishment, maintenance and use of Project Bank Accounts on your projects, along with any changes made to BCIPA.
WHAT YOU NEED TO DO
- Watch this space – with more details as to the introduction of PBAs and reforms to BCIPA likely to be released by prior to Christmas 2016.
- Also, you can have your say on the proposed reforms outlined in the Queensland Building Plan – submissions close 31 March 2017.
In a joint statement released on 30 November 2016, Premier Palaszczuk and the Minister for Housing and Public Works, Mick de Brenni, announced historic reforms to the Queensland building and construction industry, said to be aimed at ensuring security of payment for subcontractors.
Proposed reforms The announcement follows the release of a report by Deloitte about security of payment reform for the building and construction industry. A link to the report can be found here. This report considered four potential reforms:
- the introduction of Project Bank Accounts (PBAs)
- the introduction of Retention Trust Funds (RTFs)
- changes to the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA), with the most significant proposed change being the removal of the need to expressly endorse payment claims as being made under BCIPA, and
- an education program for any PBA or RTF scheme which may be introduced, BCIPA reforms and the licensing requirements in Queensland.
Deloitte concluded that while the benefits of an RTF scheme are likely to be outweighed by its costs, their analysis suggested that, overall, a PBA scheme will have a positive affect on securing payment for subcontractors. On the back of this analysis, the Government is preparing legislation for PBAs, which is anticipated to be introduced into parliament in early 2017. The use of PBAs has been trialled by the New South Wales Government on selected government sector construction projects in recent years, and from 1 May 2015, the New South Wales Parliament enlivened a retention money trust scheme for non-residential construction work for projects valued over $20 million. These reforms, along with amendments to the NSW Security of Payment legislation in 2014, were introduced following the release of the Collins Report, which highlighted the high number of insolvency events in the construction industry.
The Government has also released a discussion paper – the Queensland Building Plan, which addresses 10 areas, including security of payment. It is open for industry comment until 31 March 2017, with public consultation sessions to be conducted in February and March 2017. A link to the paper can be found here.
What are PBAs? A PBA is a trust account which will need to be established and maintained by head contractors for projects over a certain value (likely to be over $1 million). The principal (or owner) will deposit progress payments ordinarily payable directly to the head contractor into the account, with the funds to be distributed to the head contractor and subcontractor at the same time. PBAs will effectively ‘quarantine’ progress payments to secure payment for subcontractors.
It is envisaged that PBAs will have two accounts – one for the processing of progress payments and the other for retention monies.
Potential BCIPA reforms The report also considered two key potential amendments to BCIPA:
- claimants would no longer be required to endorse their payment claims with the ‘magic words’ – ‘this is a payment claim made under BCIPA’, and instead any invoice/payment or progress claim would automatically be a payment claim under BCIPA, and
- the timeframes for adjudication applications would be extended, with claimants having 30 business days to lodge an application for standard claims (under $750,000) and 40 business days for complex claims (over $750,000).
These proposed amendments have been picked up in the Queensland Building Plan discussion paper, along with suggested changes to the adjudicator’s powers, limitations on adjudicator’s fees, the creation of a reference date upon termination of a contract for convenience – to name but a few of the proposed changes.
What does this mean for you? PBAs The Government has advised that it intends for every private sector construction project with a value over $1 million to operate a PBA from 1 January 2019, and that the State Government will introduce PBAs on all of its construction projects with values between $1 million and $10 million (excluding engineering projects) from 1 January 2018. It remains to be seen whether Local Government Authorities or Government Owned Corporations would also be introducing PBAs on each of their projects that exceed $1 million.
If PBAs are introduced, head contractors will lose control over the progress payments paid to it by the principal (or owner) because the trust status of the PBA means that these monies cannot be used by the head contractor for purposes other than payment of its subcontractors. Head contractors are likely to be responsible for the costs associated with creating and maintaining the PBAs (including regular audits of the PBA). The head contractor will be entitled to any interest on the account, but may only withdraw interest after the final certificate has been issued under the contract or following termination of the contract.
The objective of PBAs is said to be to secure progress payments from the head contractor to its subcontractors, and to protect subcontractors in the event that the head contractor becomes insolvent. Given that the introduction of PBAs will increase administrative costs for head contractors, reduce their cash flow and ability to use funds for other purposes, it remains to be seen whether PBAs may contribute head contractor insolvency, and/or result in higher project costs as head contractors price such risks into their bids.
BCIPA changes If claimants are no longer required to state that their payment claims are made under BCIPA in order to instigate the adjudication process (or other statutory rights under BCIPA), then respondents will need to be extra vigilant to ensure that they issue timely payment schedules in respect of any claim it wants to dispute – bearing in mind that for standard claims, respondents are limited to the reasons raised in their payment schedules.
The proposed extended timeframes for adjudication applications are likely to create longer periods of uncertainty as to whether or not a disputed claim will proceed to adjudication. However, the benefit to subcontractors will be to afford them more time to escalate a disputed payment claim to adjudication, if other means of resolving the dispute cannot first be commercially achieved, rather than having to re-start the process by serving a fresh payment claim.