The Queensland Government is holding community and industry consultation and inviting feedback on a series of proposed reforms for the Queensland building and construction industry. The wide-ranging proposals are set out in the Queensland Building Plan Discussion Paper released in November last year, as well as in a number of supporting fact sheets.
A key area of reform is Queensland's security of payment system, following on from issues raised and proposals made in the Security of Payment Discussion Paper released by the Government in late 2015.
On the security of payment front, the 'centrepiece' of the proposed suite of measures is project bank accounts (PBAs), with the Government announcing at the end of last year that it was in the process of preparing legislation to phase in PBAs across the State. Our comments below are based on some of the of the initial consultation documents that have been released on this issue.
What is a PBA?
According to the Government's fact sheet, a PBA will be a trust account set up and managed by the head contractor in relation to a particular project. Rather than a head contractor receiving payments for subcontractors from the principal and passing them down the contractual chain, payments are made simultaneously from the trust account to the head contractor and to subcontractors.
The PBA model is proposed to operate as follows:
- A trust bank account is set up and managed by the head contractor, under which the head contractor and subcontractors are beneficiaries.
- Subcontractors submit their payment claims to the head contractor. The head contractor then submits a progress payment claim to the principal.
- The principal's superintendent assesses the claim and notifies the head contractor of agreement or disagreement with the claim via a payment schedule.
- Following the issue of the payment schedule, the head contractor submits a progress payment instruction to the bank, setting out the amount to be paid from the PBA to each beneficiary to the trust.
- The principal deposits the payment (in accordance with the payment schedule) into the PBA's general account. This payment discharges the principal's obligation to pay the head contractor.
- The bank simultaneously distributes the funds in the PBA to the head contractor and the subcontractors in accordance with the progress payment instruction.
Other general features of the proposed mechanism are as follows:
- PBAs extend only to the 'first layer' of subcontractors, or those that contract directly with the head contractor and not beyond.
- The principal has no control over the PBA, or any viewing rights of the PBA.
- Two separate accounts will be required; one general account to process progress payments and the other for retention funds.
- The head contractor is entitled to any interest on the PBA and may withdraw interest when the final certificate is issued under the contract or on termination of the contract.
The above proposed PBA structure is designed to be a payment mechanism only and is not intended to resolve disputes about payment. Should such disputes exist, subcontractors will need to rely on their contract with the head contractor or other legal mechanisms, such as the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA) or the Subcontractors' Charges Act 1974 (Qld) (SCA).
Pros and cons
PBAs are designed to benefit subcontractors. The advantages of the proposed mechanism include as follows:
- Subcontractors will be paid faster, as a PBA will prevent the head contractor from holding onto money received from the principal instead of passing them down the contractual chain.
- Subcontractors are protected should the head contractor become insolvent. The PBA is a trust fund with the money paid into it held on trust for the head contractor and subcontractors as beneficiaries. This means that in the event of the head contractor's insolvency, the money in the PBA held on trust for the subcontractor is protected from entering the pool of assets available to creditors.
Some disadvantages to the proposed mechanism (primarily for head contractors) are as follows:
- Head contractors cannot access or use money that is ultimately payable to subcontractors (including retention money) on one project to meet cash flow requirements for other projects. This could mean that head contractors who rely on the ability to shift limited cash resources to where they are needed most will need to increase their cash on hand, ultimately leading to higher project construction costs or solvency issues.
- It may potentially increase red tape and administration costs in the industry. Depending on the agreement between the principal and the head contractor (and potentially the impending legislation), the head contractor may also have to bear the costs of establishing the PBA.
The Government proposes to roll out PBAs to both government and private sector projects over $1 million from January 2019, subject to successful outcomes from prior implementation on government projects between $1 million and $10 million.
It remains to be seen how any legislation in relation to PBAs will interact with existing security for payment provisions, particularly as another proposal outlined in the Queensland Building Plan is combining the various Acts that relate to security of payment into the one Act.
For those organisations involved in the building and construction industry, it will be important to monitor the ongoing progress of the proposed reforms, as they will require changes to contracts and contract administration processes.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.