The implementation of project bank accounts looks to be well on the way to becoming law in Queensland given introduction of the Building Industry Fairness (Security of Payment) Bill 2017 to parliament in August.
What are Project Bank Accounts (PBA’s)?
According to relevant Queensland Government websites “PBAs are trust accounts that aim to ensure payment for work completed by subcontractors. Progress payments are held in trust for head contractors and subcontractors. In events such as insolvency, the money is safe and helps ensure subcontractors are paid”.
In the first phase, it is proposed PBAs will apply to all government projects (excluding engineering projects) valued at between $1 million and $10 million from 1 January 2018.
Pending successful implementation of the first phase, the government will roll out the PBA model to both government and private sector projects over $1 million no sooner than January 2019.”
Whilst the legislation seeks to bring about a more level playing field for subcontractors it also poses significant issues for head contractors, especially if in dispute with one or more subcontractors.
There is also potential for financiers to require copies or even audits of the PBA’s before they release progress claims. How financiers react to this new legislative process will be a work in progress.
The PBA’s are classified as trust accounts and as such there is an expectation that there will be attached administrative costs which are yet to be determined. It is also unclear on how variations to contracts are treated inside the PBA’s.
In times past some head contractors may have utilized current progress claims to finance the next construction phase, with the intention of finalizing the project and paying all involved parties at or near the end. Given financiers usually only fund seventy percent on the cost to complete on construction projects, of which the build price is only one component, the availability of additional funding midway through a project can be tricky to obtain.
The main intention of the legislation is that subcontractors be paid in full before the head contractor is allowed access to the funds. Whilst this is justifiably fair it does have the potential to have a negative impact on the project cashflow. This could in some instances lead to projects being delayed until the head contractor sources additional funds, or applies to the good nature of the existing lender for assistance. In better times this may have been an easier proposition however banks have significantly tightened their purse strings post GFC which has seen their appetite for project variations not what it used to be. More than ever, the builder who eventually wins the construction tender needs to take into account timing of payments and not just the overall profit margin.
Western Australia who currently has a similar process in place is still in the throes of attempting to make it’s legislation effective. Whilst it has shown that some head contractors are able to continue to perform, it has also shown that others do not have the financial resilience to weather such strict regulatory regimes.
All these issues could conceivably increase the time in which subcontractors are paid and / or see them suddenly without work because of the suspension of the project. This ironically is actually what the legislation is seeking to prevent. I suppose you can’t always have your cake and eat it as well. Time will tell.