30 August 2017
The Building Industry Fairness (Security of Payment) Bill 2017, which largely deals with security of payment, was recently tabled in parliament and referred to a parliamentary committee for further consideration. Here’s what you need to know about the tabled bill.
The government has introduced a broad ranging Bill with the primary intent of improving security of payment for subcontractors.
If passed, the legislation will bring about the introduction of project bank accounts (PBAs) and affect changes to BCIPA, subcontractor charges, retentions, contracts, unlicensed building work, directions to rectify, phoenixing and minimum financial requirements.
The government claims that the reforms set out in the Bill will reduce disputes and payment delays, and reduce the cost of construction because subcontractors will no longer have additional costs embedded in their subcontracts to offset the risk of bad debts and the impact of delayed payment.
Master Builders does not believe that this will happen. We believe that construction costs will increase (in the order of 3% at least) given the cost to administer the PBAs and the contracts, as well as the additional time needed to deal with disputes – with no additional security for payment given to anyone in the contractual chain.
Generally, the Bill relies heavily on the threat of punishment, both penalty points and imprisonment. However, the Bill requires the subcontractor or someone else first proving that an offence has been committed and then alerting the QBCC to the alleged offence before punishment can be imposed.
Project Bank Accounts (PBAs)
The key change under the Bill will be the introduction of a system of project bank accounts to apply to state government building projects between $1 million and $10 million from January 2018.
This will then be expanded at a date that the government has committed will be no earlier than January 2019. The extension will be to all private non-residential, local and state government projects over $1 million. Single house and duplex projects will continue to be excluded regardless of the value. However, residential projects on the same or adjacent sites with a combined contract value of at least $1 million and at least three or more dwellings (living units) will require PBAs.
The government also intends to extend the system beyond the first tier of subcontractors to sub-subbies at a later date.
Under PBAs, the head contractor will continue to control the money coming out of the PBAs so there is no security of payment for the subcontractors. The subcontractors will still need to take action to enforce their contractual rights to recover amounts that they claim they are entitled to under the subcontract. In the interim, the subcontractor does not get any money except the amounts that the contractor wants to pay the subcontractor.
- Head contractor writes the payment instruction for the bank so the head contractor decides who gets paid and how much. There is no assurance that the correct payment will be made to the subcontractor out of the PBA.
- If the contractor issues a payment schedule or a payment instruction for an amount that is less than the amount claimed by the subcontractor, the subcontractor must decide whether to accept it, make an application for adjudication, or commence legal proceedings. This is no different to what the subcontractor must do now. The onus is still on the subcontractor to enforce its rights under its subcontract and the legislation.
- The head contractor is required to pay an amount that is ‘disputed’ into the Disputed Funds PBA until the dispute is resolved. However, the amount to be held in that PBA is the difference between the payment schedule (if one is issued) and the payment instruction. It is not a difference between the payment claim amount and the payment schedule amount.
- Amounts in dispute between the subcontractor and the contractor are not dealt with by the PBA.
- The principal must get a copy of the payment instruction, but has no knowledge of what the subcontractor is entitled to under its subcontract so cannot say that the payment instruction amount is incorrect.
- The head contractor must deposit additional funds in the PBA if there is a shortfall or the principal doesn’t pay. Therefore, if the head contractor does not do so, there will not be enough money in the PBA to pay the subcontractor, There is no security of payment because the system still relies on the head contractor making payments to the subcontractors, even if they haven’t received payment from the principal.
- A subcontractor’s charge can still attach to money owing to the head contractor from the principal, so a charge will stop money going into the PBA from the principal and the head contractor will be required to top up the PBA.
- The general PBA will typically have no money in it as withdrawals will occur on the same or next day after payment is made by the principal. In the event that the head contractor becomes insolvent, there will not be any money in the PBA to secure any additional money that the subcontractor may be owed at that time.
- There is unlikely to be any money in the Disputed Funds PBA either in the event that the head contractor becomes insolvent. This is because the head contractor is unlikely to note a different amount on the payment instruction to that noted on the payment schedule.
- The head contractor can withdraw money from the Retention PBA to cover costs to rectify a subcontractor’s defective works or to secure the subcontractor’s performance. Again this is no change to the current contractual arrangement and there is no security of payment if the head contractor withdraws money from the Retention PBA – either validly or in breach of the legislation.
- All payments to subcontractors must be made out of the PBA so the head contractor is unlikely to make payments before the principal deposits money into the PBA. Some subcontractors will have longer payment timeframes than they do now.
- PBAs are not required for short projects. For example, where there is less than 90 days between when a PBA must be opened and practical completion of the head contract.
- The head contractor is entitled to the interest that accrues on the PBAs but can only withdraw the interest once every 12 months or on closing of the PBA.
BCIPA Adjudication Process
The adjudication process will essentially remain the same but there are a few significant changes regarding timeframes and procedures. These changes relate to what is a payment claim, the consequences of not issuing a payment schedule and the adjudication process.
Claimants will still be required to prove their claim and that the adjudicator has jurisdiction before the respondent is required to prove its position.
- Payment claims under the Act no longer require a reference to the Act but must clearly request payment to be made otherwise it is not a valid payment claim. The Explanatory Notes state that this may be done by submitting an invoice with a due date. This will be an issue for many commercial contracts because invoices are typically not provided until the payment schedule/certificate has been issued. Further, many commercial contracts require Recipient Created Tax Invoices and it is unlikely that these would be considered payment claims because they are given by the respondent to the claimant. This change is therefore likely to increase the number of invalid payment claims and adjudication applications.
- There will be a requirement for a payment schedule to be issued even if the respondent intends to pay the claimed amount in full by the due date for payment. This is particularly onerous when the respondent intends to pay in full on time and if payment is made, the claimant has suffered no loss yet the respondent has been put to a considerable degree of extra work. This is a significant issue given it is an offence and grounds for disciplinary action.
- The ‘second chance’ payment schedule requirement has been removed. When a valid payment schedule has not been issued, the claimant may proceed to adjudication without further notice to the respondent.
- The claimant cannot commence proceedings in court until it gives a warning notice to the respondent and at least 5 business days has passed. There is no opportunity for a payment schedule to be issued in this period but provides the respondent with notice of the possible commencement of legal proceedings.
- When payment is not made by the due date for payment, the subcontractor must still make the decision to lodge an application for adjudication or commence proceedings to recover an amount owed in court. There is no automatic trigger.
- The timeframes for lodging an application for adjudication have changed. The new timeframes will be:
- 30 business days if no payment schedule was issued and no payment in full
- 40 business days if no payment of the scheduled amount
- 30 business days if the scheduled amount is less than the claimed amount.
- The respondent will be able to request an extension of time of up to 15 business days to submit an adjudication response for both a standard and a complex payment claim.
- No new reasons can be raised in an adjudication response that weren’t included in the payment schedule regardless of whether it is a standard or complex payment claim.
- The adjudicator cannot order the release of bank guarantees held as security. The claimant can only include an amount for cash retention in its payment claim for consideration by the adjudicator.
- There will be a limit on the length of any adjudication application or adjudication response which will be set by Regulation but there is no detail as yet on what the regulated length will be.
- Adjudicators must determine if the payment claim and/or adjudication application is vexatious or frivolous.
- Adjudicators will be able to decide that there is no jurisdiction or that the application is vexatious or frivolous prior to the time for submission of the adjudication response.
- Adjudicators will be required to decide how the adjudication application fee is to be proportioned.
It will become an offence not to respond to a notice of claim of charge and the time limit to do so will be reduced to 5 business days from the current 14 days.
No substantial change to the process is being proposed and subcontractors will still be required to take action in court to enforce their contractual rights in order to recover amounts that they claim they are entitled to under the subcontract.
The changes will automatically require the contracting party to release retentions when required to do so under the contract or if the contract does not provide for it, at the end of the 12 month statutory defects liability period. The penalty for not doing so will be up to $25,000 or one year imprisonment. There will be an exception in cases where the money is the subject of a dispute between the parties.
There will be a new definition of practical completion where the contract does not provide it.
The contractor will be required to advise subcontractors, at least 10 business days before the defects liability period ends, what date it ends and how much is proposed to be released and on what date. This will not apply to the head contract.
Disciplinary action may be taken if the licensee contravenes the Act or fails to release retention when required to do so.
There will be a new penalty (up to $45,000) where a party to a contract causes financial loss by deliberately failing to comply with a contract.
Contracts will be required to contain mandatory provisions and there will be prohibited provisions. At this stage, Master Builders has no indication what those provisions will be.
Unlicensed/unlawful building work
There will be a big hike in fines for unlicensed building, increasing up to one year imprisonment for a third offence.
Directions to rectify
Consumers will not be able to request the QBCC to give a direction to rectify unless the request is made within 12 months of the person becoming aware of the defective or incomplete work.
There will be a new penalty of four demerit points when a direction to rectify is issued.
The timeframe for QBCC to issue direction to rectify will be extended from six years and three months to six years and six months.
There will be a new provision to allow for an extension of time to comply with a direction to rectify. This will not be a reviewable decision.
The Bill will extend the QBCC’s powers to clamp down on ‘shadow directors’ and corporate ‘phoenixing’. It will do this by broadening the definition of an influential person to cover shadow directors and individuals who are influential in a company’s business or financial standing. If someone is an influential person within two years of a building company’s financial failure, they will be excluded.
Minimum Financial Requirements
While the Bill does not change the minimum financial requirements, it is expected that annual reporting will be re-introduced in the regulations (which are still to be released).
The QBCC will also have its financial investigation powers increased.
The Bill has been referred to the relevant Parliamentary Committee for consideration before being debated in Parliament. A copy of the Bill, explanatory notes and explanatory speech are available on the Queensland Parliament website.
Master Builders will be making a substantial submission to the parliamentary committee on the Bill over the coming weeks.