This article was written by Prudence Lupton and Sophie Sweeney.
On 26 October 2017, the Queensland Parliament passed the Building Industry Fairness (Security of Payment) Bill 2017 (“BIF Bill”). The BIF Bill proposed widespread changes to existing Queensland security of payment legislation, repealing and replacing the Building and Construction Industry Payments Act 2004 (Qld) (“BCIPA”) and the Subcontractors’ Charges Act 1974 (Qld) (“SCA”) and introducing new regimes (with some significant changes for BCIPA but the SCA largely unchanged). The BIF Bill also modified the powers of the Queensland Building and Construction Commission (“QBCC”) by amending the Queensland Building and Construction Commission Act 1991 (Qld) (“QBCC Act”). Most significantly, the BIF Bill introduced a Project Bank Accounts regime in relation to certain construction projects in Queensland.
While the Building Industry Fairness (Security of Payment) Act 2017 (“BIFA”) was assented to on 10 November 2017, the majority of the provisions were due to commence upon proclamation.
On 22 February 2018, provisions under the BIFA relating to Project Bank Accounts were proclaimed to commence today, 1 March 2018.
Implementation of Project Bank Accounts in two phases
In order to protect the interests of subcontractors, the BIFA introduces a mandatory requirement for Project Bank Accounts to be established by head contractors. The obligation to set up such bank accounts only applies to “building contracts” of a certain nature and value and the regime will be introduced in two phases:
- Phase 1: Project Bank Accounts required for all government building contracts valued between $1 million and $10 million, where more than 50% of the contract price is for building work, excluding infrastructure projects (such as bridges, roads and ports) – effective as of 1 March 2018; and
- Phase 2: Scope for Project Bank Accounts to be required in the private sector for all building and construction projects over $1 million, excluding infrastructure projects (such as bridges, roads and ports), intended to commence in early 2019 (subject to review of Phase 1).
Currently, the BIFA only applies to building contracts falling within the Phase 1 definition. However, Project Bank Accounts will not be required for contracts tendered prior to 1 March 2018 that would otherwise have fallen within the Phase 1 definition.
It should be noted that where a contract which does not fall within the Phase 1 definition is amended or varied such that it later falls into the Phase 1 definition, a Project Bank Account will be required for that contract, but only if the contract was tendered after 1 March 2018 and only if the increase in contract price is more than 30%.
The BIFA contains provision for a compulsory “review of the operation and effectiveness of the 2017 suite of building and construction reforms”. This review must commence no later than 1 September 2018.
Penalties for non-compliance
Harsh penalties have been introduced under the BIFA for non-compliance with the Project Bank Account provisions. Head contractors may be liable for between 50 and 500 penalty units (which equates to between $6,307.50 and $63,075 based on the current penalty unit rate) where they do not comply with the Project Bank Account provisions, and could even face up to 2 years imprisonment.
Establishing Project Bank Accounts
A head contractor is required to establish the Project Bank Account within 20 business days of entering into the first subcontract for the relevant building contract. Failure to establish the Project Bank Account within the required timeframe may result in the head contractor being liable for a maximum of 500 penalty units (currently equates to $63,075).
The Project Bank Account must comprise of three trust accounts:
- a general trust account for the management of progress payments;
- a retention account for amounts held as retention monies; and
- a disputed funds account for amounts that are the subject of a “payment dispute”.
Payments to and from Project Bank Accounts
Any amounts payable by the principal to the head contractor under the head contract must be paid into the Project Bank Account. All payments to subcontractor beneficiaries owed by the head contractor under the relevant subcontracts must be paid out of the Project Bank Account.
Only "first tier subcontractors" (where performance of the subcontract contributes directly to the performance of the contract) and head contractors are beneficiaries of funds in the Project Bank Account trust accounts.
The BIFA establishes an order of priority for distribution of funds from the Project Bank Account, in accordance with a payment instruction that is to be prepared by the head contractor, with all first tier subcontractors being paid first, followed by the head contractor.
Where funds in a Project Bank Account trust account are insufficient to cover an amount owing to a subcontractor beneficiary, the head contractor is obligated to deposit money into the trust account to equal the shortfall, or be liable for 100 penalty units (currently equates to $12,615).
To prevent head contractors circumventing the order of priority for payment, where a subcontractor is a “related entity” of the head contractor, the BIFA requires that the subcontractor also establish and maintain a Project Bank Account in respect of the subcontract.
Effect of insolvency of head contractor
If the head contractor becomes insolvent and enters administration the principal may step in and replace the head contractor as trustee of the Project Bank Account trust accounts. As trustee, the principal must open principal trust accounts for amounts held in the existing Project Bank Accounts and make payments from these accounts to subcontractor beneficiaries and the head contractor according to the terms of the BIFA. Note that the head contractor will still be liable to top-up any shortfall in the Project Bank Account trust accounts even after it is removed as trustee.
Administration and record-keeping requirements
The BIFA imposes strict administration and record-keeping requirements on the head contractor and information sharing obligations between the head contractor and principal and the head contractor and subcontractors.
Further detail regarding these obligations is prescribed by the regulations (see below).
Regulations also introduced
Regulations in relation to the BIFA also come into effect on 1 March 2018. These regulations provide further definitions under the BIFA and set out the details of information required to be shared with the principal and subcontractors.
Transitional regulations have also been introduced (again commencing on 1 March 2018) which clarify the head contractor’s obligations for payment into the disputed funds account and link the Project Bank Account provisions in force under the BIFA to the existing security of payment legislation in Queensland. These regulations cater for the fact that certain amendments under the BIFA that interact with the provisions already in force have not yet been proclaimed (for example the repeal and replacement of the BCIPA – see below).
Other provisions under the BIFA yet to be proclaimed
Changes to the security of payment regime under the BCIPA and the mechanism for subcontractors to secure money owed by head contractors under the SCA have not yet commenced. The Queensland government has announced that these new provisions will commence on 1 July 2018.
Further, the provisions in the BIFA amending the powers of the QBCC under the QBCC Act are yet to be proclaimed. According to the Queensland government, these changes will come into force on 1 January 2019.
We will provide further updates as and when the remaining provisions of the BIFA are proclaimed.