The Queensland Government has announced it is in the process of drafting legislation 'to introduce a suite of measures to ensure security of payment for subcontractors'.
The announcement follows the release of 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 potential changes which the Government has since indicated its intention to implement:
- the introduction of Project Bank Accounts (PBAs); and
- amendments to the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA).
The benefit 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 introduction of PBAs will be the 'centrepiece' of the new legislation. According to the Minister for the Department of Housing and Public Works:
- from the start of 2018, all Queensland Government projects between $1m and $10m will be required to operate a PBA; and
- from 1 January 2019, all construction projects over $1m will be required to operate a PBA.
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.
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?
The Government is now seeking public consultation on the implementation of PBAs and the amendments to BCIPA as well as a raft of other measures relevant to the building and construction industry.
While details of the proposed legislation are yet to be released, the announcement that PBAs will eventually apply to all construction projects over $1m suggests the Government intends to implement the broadest option recommended in the report. Whilst this option is projected to yield the greatest net benefit for principals and subcontractors, it will produce the greatest cost to head contractors.
As discussed in our As discussed in our Queensland Building Plan which outlines further additional proposed reforms to the building and construction industry. We will publish our analysis of the Queensland Building Plan in the coming days.
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