Building industry fairness – Security of Payments act

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As the launch of Project Bank Accounts (PBA’s)to the wider construction market starts to sink in, the Queensland construction industry is being forced to address the complexities and gear up for the new environment.

The Queensland government states that these legal changes have been introduced to “safeguard progress payments, protect retention monies and allow for more timely payments to subcontractors”.

The intention is to make sure subbies get paid and in a timely fashion, indeed one legal opinion suggests that this Act will “make Queensland legislation the most weighted in favour of claimants in Australia”.

Any time the Government intervenes in an industry, it is normally to fix a problem and oftentimes it’s a problem that the industry in question cannot fix within itself.

And so it appears within our industry today, that the amount of insolvencies and non-payments to subcontractors and the associated hardship created, has reached a level that cannot be ignored. Whether or not this legal measure will provide the solution required remains to be seen.

 

Recent Queensland Insolvencies

  • Ostwald Bros Pty Ltd ‐ $61million
  • Cullen Group Pty Ltd ‐ $18million
  • Bloomer Constructions (Qld) Pty Ltd ‐ $14million
  • Gary Deane Constructions Pty Ltd ‐ $13million
  • Bluestone Constructions Pty Ltd ‐ $6.8million
  • CKP Constructions Pty Ltd ‐ $3million
  • DJ Builders & Son Pty Ltd ‐ $2million
  • Batir Pty Ltd ‐ $2million
  • Ware Building Pty Ltd ‐ $1million

 

What is a Project Bank Account (PBA)

A project bank account is a trust over the following amounts:

  • an amount paid by the principal to the head contractor under a building contract
  • an amount a subcontractor is entitled to be paid by the head contractor under a first tier subcontract
  • a retention amount withheld from a subcontractor under a first tier subcontract
  • an amount that is the subject of a payment dispute.

When are PBAs required?

  • PBAs are required for “PBA contracts”.
  • A contract is a PBA contract if:
    1. the principal is the State or a government owned corporation/local authority that opts in;
    2. the contract price is between $1million and $10million;
    3. more than 50% of the contract price is for “building work”.
  • If above features are present and the head contractor enters into a subcontract then a PBA is required.

Currently this is aimed at larger building projects, so there are sections of the industry not effected. When introduced into the private sector in March this year, any private sector project over $1M in value will require PBA’s, although civil, engineering and infrastructure projects are excluded. So many in the industry won’t need to concern themselves with the changes and whatever payment problems exist in those sectors will presumably continue.

Most legislation has unintended consequences and it is most likely that this legislation will follow that pattern. It’s likely that this will have a ‘shake-out’ effect where head contractors that do not have sufficient liquidity will be caught out or be unable to effectively tender for certain contracts.

We’ve all heard about Laing O’Rourke’s problem late year when their building license was suspended in Queensland due to insufficient equity held by the business.

Larger and more highly resourced companies will be able to use this to their advantage and effectively use the legislation to out-manoeuvre their competition.

Important points to note:

  • A building contract can become a PBA contract after it is signed
  • “Subcontractors” are beneficiaries but not “suppliers”
  • More than 50% of the contract price must be for “building work” – definition close to identical to QBCC Act definition
  • “Related entities” provision
  • “Residential construction work” excluded

There are already legal requirements in place which have varying degrees of effectiveness, some of which are ignored, flaunted or only complied with in an ad-hoc manner. Any legal requirement is only as effective to the level it is policed. Good industry players that treat their subcontractors decently and ethically have done so for many decades and enjoy the reputation and trust that comes from such behaviour.

The intention is to catch the underhanded, the game players and to instruct those who may simply be uninformed as to their responsibilities. Those who are determined to behave in an unethical manner will probably continue to do so and the legislation will only be effective in such situations when there is the commensurate level of policing powers by the relevant statutory bodies.

Who is a supplier

  • A subcontractor is a supplier if, under their subcontract, the subcontractor is only required to supply goods or services without also carrying out building work.
  • However, a subcontractor is not a supplier if the goods supplied are:
    • materials or components that were specifically manufactured, or significantly modified, by the subcontractor for incorporation into the building work to be carried out under the head contract for the subcontract; or
    • plant or materials that were specifically manufactured, or significantly modified, by the subcontractor for use in connection with the building work to be carried out under the head contract for the subcontract.

What does it mean to me?

  • It’s our understanding that Construction Modellers will be seen as a supplier by this legislation so will not be directly impacted
  • Fabricators will fall under the Subcontractor definition and will need to comply
  • There is much and more that Construction Modellers can do for their Fabricator clients to assist in cost recovery for variations, and by doing so, improve the likelihood of receiving payment for additional modelling and detailing work.