Australia: Project bank accounts and local government

Last Updated: 30 November 2016
Article by Lex Orange

The Queensland Government is contemplating introducing a trial of 'project bank accounts' to ensure security of payments to subcontractors. This proposal has been trialled in New South Wales, the Northern Territory, Victoria and Western Australia, typically for government projects.

Before project bank accounts are rolled out, local governments should consider the appropriateness of PBAs for their projects. As discussed below, there are significant questions to be answered before PBAs can be considered viable to secure payment for sub-contractors. Councils should assess the risks and benefits of PBAS prior to tendering government construction projects if this proposal is carried forward.

In December 2015 the Queensland Department of Housing and Public Works released a discussion paper into Security of Payments. This paper sought public feedback on various proposals to protect subcontractors from underpayment in the provision of goods or services. It included a series of options for the public to consider, with the most likely proposal being for the introduction of a project bank account regime.

  1. What is a project bank account?

A PBA is a bank account which secures the transfer of progress payments to subcontractors. At the start of each project the head contractor and principal enter into a Project Bank Account Agreement and open a project bank account.

The Agreement sets up a trust under which the head contractor and its subcontractors are beneficiaries of money deposited in the account. Both the principal and the head contractor are required signatories for withdrawals from the account.

  1. Relevance to local government

Understandably, Councils have an interest in ensuring the financial security of subcontractors. Typically, subcontractors on a Council project have ties to the region; eg. being part of the local community, contributing to the region's economic well-being and either being or employing ratepayers. If a contractor fails to pay its (local) subcontractors, the impact (economically and socially) can be significant. If a PBA does assist to ensure subcontractors are paid, there is a clear benefit to the community which the local government represents and to the local economy.

  1. How do PBAs work?

Traditionally, a principal pays a contractor and does not interfere in relationships lower in the contractual chain. However, with a project bank account, the principal will deposit the money into the account and that money is held on trust.

The process of payment under a PBA (extracted from the discussion paper) is as follows:

  1. For each reference date under the contract, the head contractor will submit a payment claim to the principal. The claim will include work done by the head contractor and its sub-contractors. The head contractor will also be required to certify the amount payable to each subcontractor in the claim.
  2. If the principal agrees with the amount certified, they will counter-sign the payment claim and pay the certified amount into the PBA.
  3. A copy of the signed payment claim must be forwarded to the bank holding the PBA. The bank will then disburse the bank account funds in accordance with the payment claim.
  4. If the payment claim is reduced or delayed, the BCIPA can be used.

The discussion paper states that this means there is no longer a contractual chain where the head contractor receives the payment for a subcontractor, and passes it down. In the event of a head contractor insolvency, the money paid into the account is held on trust for the subcontractor.

  1. Questions to be answered

The discussion paper leaves a number of questions unanswered, some of which have arisen in PBA regimes in other jurisdictions. Hopefully these issues will be addressed if these schemes are implemented in Queensland. For example:

  1. There is no identified solution to a difference between the principal and the contractor if the total payment is agreed but the subcontractors' various entitlements (as compared with the contractor's entitlement) are not.
  2. These regimes come at a cost. There is the direct cost of managing the regime. More importantly, is that head contractors will no longer have access to retention money withheld from subcontractor payments (these being held in PBA). Without that cashflow, industry stakeholders have warned either prices for projects will increase or head contractor margins will be further squeezed (creating solvency issues – something which the PBAs were intended to protect against).
  3. Further, the principal is potentially exposed by its responsibility to approve the money to be paid to each subcontractor. This may present complications where the work of a subcontractor is later determined to be worth more than originally assessed by the contractor. [Principals might need to draft the PBA Agreement in a way that the principal is released from liability when conducting the regime.]
  1. Where to from here

The Queensland Government is currently considering feedback on the proposals raised in the Security of Payment discussion paper. Kaden Boriss Legal will keep abreast of the status of this review and can advise on Council's position in due course.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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