The Queensland Government has recently passed legislation which, among a suite of reforms to the construction industry, will introduce Project Bank Accounts (PBAs) to certain construction projects from the beginning of next year.
The introduction of PBAs is aimed at providing more security to subcontractors, ensuring that they are paid promptly and reliably, and preventing money owed to subcontractors from being caught while flowing down the contractual chain. While the new regime will have significant implications for head contractors' cash flow, it will also have a knock-on effect for banks and financial institutions providing finance for construction projects in Queensland.
Application of PBAs
Under the Bill, PBAs will be implemented in two phases:
- the first phase requires PBAs on all government building and construction projects valued between $1 million and $10 million, excluding engineering projects (infrastructure projects such as bridges, roads and ports), and is intended to start in January 2018; and
- the second phase will roll out PBAs to the private sector for all building and construction projects over $1 million, again excluding engineering projects, and is intended to start in January 2019.
The explanatory notes do not explain the rationale behind excluding engineering projects, and we note that the Subcontractors Alliance is pushing hard to extend PBAs to all engineering and infrastructure projects.
What will a Project Bank Account look like?
Head contractors will be required to establish PBAs within 20 business days of entering into the first subcontract for the building contract.
A PBA is required to consist of three trust accounts:
- a general trust account for the management of progress payments;
- a retention account for amounts held as retention, and
- a disputed funds account for amounts that are the subject of a payment dispute.
Only first tier subcontractors and head contractors are entitled to be beneficiaries of the funds in the PBA.
Payments from PBAs
All progress payments due from the principal to the head contractor under the head contract are required to be paid into the general PBA. The money in the general PBA is then disbursed to first tier subcontractors and the head contractor in accordance with a payment instruction that is to be prepared by the head contractor.
Importantly, subcontractors are required to be paid out of the PBA first, and will have priority to the amounts that they are entitled to under the subcontract. Head contractors will only be entitled to payment out of the PBA once subcontractors have been fully paid. If there is a shortfall in the PBA, the head contractor is required to top up the PBA to ensure it contains sufficient funds to pay subcontractors
In order to protect the integrity of the PBA, the Bill expressly provides that the proceeds in the PBA cannot be used to pay the debt of a creditor of the head contractor, or attached or taken in execution under a court order or process for the benefit of the head contractor. For any financier of the head contractor, this effectively means the claims of the subcontractors are paid in priority, because until such claims are made, amounts owing to the head contractor cannot be released from the PBA to pay the head contractor's financiers and other creditors.
The Bill also provides that a PBA will be a statutory interest to which s73(2) of the PPSA applies and has priority over all security interest in relation to all money held on trust under the PBA. The effect of this is that the subcontractors can register a security interest against the head contractors. Head contractors will need to be aware of this when negotiating any financing arrangements going forward as they will need to ensure that the granting of this security interest doesn't cause a breach under their financing arrangements.
Deterrence provisions and penalties
Currently the Bill only apples PBAs to "first tier subcontracts". However, anticipating potential structures that might be employed to negate the impact of PBAs, the legislature has included "related entity" provisions which require first tier subcontractors to also implement PBAs where the first tier subcontractor is a related entity of the head contractor.
There are harsh penalties for head contractors failing to comply with the PBA regime, including potential imprisonment of up to 2 years.
Current status of reforms
The Building Industry Fairness (Security of Payment) Bill 2017 (the "Bill"), was passed by the Assembly on 26 October 2017 with only minor amendments. It has not yet received ascent and, given the current caretaker mode of the Queensland Government, it remains unclear when it will take effect.