Government Project Trust Account Legislation: Are They a Shield for Subbies and Developers?
When a builder submits a progress claim, they are not only asking to be reimbursed for costs incurred by their business, but also on behalf of the consultants, subcontractors & suppliers that have performed work on and/or provided materials for the project – only a portion of the progress payment is actually the builders money. The problem is, some builders continue to treat the entire progress payment as their own, using subcontractor & supplier entitlements to cash flow other projects.
Rethinking Cash Flow: Prudent Practice or Risky Business?
Some would argue that this approach to cash flow management is perfectly valid & that it all ‘squares off’ in the end – and in a market where all projects linked to the builder are being completed on or under budget, they may be right (at least on that last bit).
But when the Australian Constructors Association is reporting that building firms are entering administration at twice the rate of other industries & over 50% of large contractors fit the technical definition for insolvency, it’s inconceivable to think that we should accept a practice that requires subcontractors & suppliers to (involuntarily) risk their entitlements at their builders’ discretion before they can be paid.
Governments Are Now Stepping In To Protect Subcontractor Payments – But How Effective Are These New Rules?
Several Governments have decided to step in with specific legislation intended to protect subcontractor payments. The QLD, NSW & WA Governments have all introduced rules governing how builders are to manage progress payments and/or retention money held against subcontractors. We’ve looked at the various legislations introduced to date, both in principle & in practice, so we thought we’d provide an assessment of each from intent to adoption & outcomes. We also provide some insight into our ongoing interactions with the various industry bodies that have introduced these policies/processes as well as those set to influence future frameworks.
QLD Building & Construction Commission (QBCC)
- Trailblazing Initiative: QBCC Reform Takes the Lead.
- Constructive Approach: A Positive Intent for the Industry.
- Financial Segregation: Compelling Builders to ‘Silo’ Funds by Project.
- Intricate and Confusing: QBCC Reform’s Complexity.
- Misplaced Emphasis: A Focus on Compliance Over Results.
- Limited Safeguarding: Offering Minimal Additional Protection for Subcontractor Payments.
- Unintended Escape Routes: Loopholes That Can Be Exploited.
- Missing the Mark: QBCC Reform’s Compliance-Centric Approach.
- Subcontractor Vulnerability: Affording Little Extra Protection for Payment Security.
The Queensland Building & Construction Commission (QBCC) has mandated that project funds be ‘siloed’ into dedicated trust accounts with strict rules surrounding payment practices & the threat of penalties or fines for non-compliance. Whilst positive in intent (and credit for going first), the current legislation is overly complex (our experience is that very few Builders understand the rules to the extent required, making compliance ‘difficult’) and contains several loopholes which leave room for exploitation. Ironically, the Act also encourages behaviour that runs contrary to the stated objective of protecting of subcontractor payments in some ways.
Exploring QBCC: Complexities & Examples of Loopholes
Legislation may allow for a ‘window’ between the builder receiving a progress payment & the subcontractor entitlement being recognised, meaning a builder can withdraw project funds from the trust account, then later deposit the amount required to cover due invoices back into the account and still be compliant.
Timing is everything: it’s common for administrators to be appointed shortly after a progress payment being received – this is precisely when this ‘window’ may apply to your project. In other words, the Act is ineffective at the point at which it is most required to protect subcontractors.
The QBCC has fixed the beneficial entitlements for subcontractors only; the legislation excludes consultants and suppliers meaning that it is currently an offence under the Act to pay these parties directly out of the project trust account
The Act requires that Builders transfer funds from the project account into their operating account to pay these invoices! Besides the inefficiency, we can’t quite get our head around the logic: why wouldn’t you want as many of these third parties as possible paid from the project account?
We understand that a huge amount of consultation/input was sought from the various industry groups throughout the development of the Act however, it would appear that in trying to cater to the demands of every stakeholder, they’ve ended up with an extremely convoluted set of rules that ultimately, fail to achieve the stated objective: protecting subcontractor payments. Any legislation that permits builders to withdraw project funds from these accounts legally (let alone the opportunity for the builder to access these funds outside the law) leaves subcontractor & supplier payments exposed, whilst the process itself also places additional administrative burden on all Builders, including those who were already managing funds responsibly.
Finally (and perhaps worst of all), there is only one way to comply – theirs. There is no room for industry to innovate or build on core principles, even when doing so would achieve a superior practical outcome (QBCC compliance currently requires that IPEX ‘dilute’ our terms & change our operating processes in QLD to the extent that our subcontractor payment protections are greater in every other state/territory).
We have made both the QBCC & The Department of Energy & Public Works aware of our thoughts on the above & provided a summary of changes we believe are required to improve practical outcomes. Feedback suggests that at the very least, there is likely to be a shift towards a more appropriate timing for recognition of beneficial interest & potentially a software certification framework. We remain hopeful that the QBCC continues to move towards a system that is outcome rather than compliance focused.
NSW & WA: RETENTION FUNDS PROTECTION
- Clarity and Simplicity: Both WA and NSW reforms are designed for ease of understanding.
- Industry-Wide Acceptance: Encouraging widespread adoption of these reforms.
- Principles-Based Approach: Providing a guiding framework for the construction sector in both states.
- Narrow Focus: Solely Shields Retention Funds.
- Payment Vulnerability: Leaves Subcontractor and Supplier Payments Unprotected.
The NSW & WA Governments have adopted trust account requirements to protect subcontractor retention monies. Whilst we view these rules as being clear, effective & far easier to comply with than those currently in place for QLD, they only serve to protect a small portion of the overall contract sum for any given project. Retention funds are undoubtedly important, but so is the other 95%!
Government Initiatives Across the Country: What’s in the Pipeline?
Although the Murray Review (2018) & recommendations were endorsed by each State in recognition of the significance of these problems, it would be fair to say that there has been varied but somewhat ‘limited’ progress made in terms of implementation (hence the wildly contrasting rules state by state). There is no doubt that those who have been slower to move will be monitoring the outcomes achieved by their interstate colleagues closely.
Federally, the Albanese Government has also committed to review & respond to the Murray Review recommendations, the intent of which is a national set of rules for statutory trusts. To this end, we have met with David Pocock’s office as they look to understand/avoid the mistakes made by early government interventions in piecing together a proposed national framework. IPEX has been asked to appear before the NCIF Panel to provide specifics around practical limitations of existing frameworks as well as providing further insight on our own model; of particular interest was how to facilitate builder adoption without a mandate. We look forward to getting the chance to contribute to this important work.
and the Solution?
Given the vast sums of money at stake, it’s only a matter of time before more stringent controls are introduced, be it self-preservation from those providing project funding, or via direct government regulation – change is coming. Whilst admirable, the various trust account models that have been proposed to ‘fix’ this broken payment model so far all have one critical flaw – they still rely on ‘trust’:
- Trust that the imposed ‘rules’ are understood by the builder; and
- Trust that penalties for non-compliance with these rules are sufficient to ensure that all builders will operate within them at all times, even when doing so is to their personal detriment (i.e. they are under extreme financial duress – a choice between going under or breaking the rules).
So far, Government has introduced a series of half measures. Lots of extra checks & balances without going far enough to solve any of the underlying issues. Certainly nothing introduced to date offers any real protection for subcontractor/supplier entitlements (or developer funds), nor do they get the industry closer to a payment model that removes the need driving builders to access these funds in the first place.
Whilst we remain hopeful that a principles and outcomes based framework can be established nationally at some point in the near future, we’re not waiting. IPEX has already built a commercially viable model that not only protects subcontractor & supplier payments but equally, provides a level of certainty to developers & lenders that allows them to offer improved commercial terms to ‘good’ Builders.