Building industry reform Building Industry Fairness Security of
Building industry reform Building Industry Fairness (Security of Payment) Act Alex Power Special Counsel 24 November 2017
Introduction The Building Industry Fairness (Security of Payment) Act (BIF) was enacted on 26 October 2017, and received assent on 10 November 2017. BIF – 3 major reforms Project Bank Accounts – to secure payment to subcontractors Building and Construction Industry Payments Act (BCIPA) replaced with a new payment claim regime Queensland Building and Construction Commission Act (QBCC Act) amended to implement licensing reforms and to regulate building products
Reasons for reform ■ Insolvency of head contractors, which leave subcontractors unpaid ■ Retention money being used as cash flow by head contractors instead of being kept aside for return to subcontractors ■ Delays in payment to subcontractors
Pathway to reform ■ December 2015 - Discussion paper issued to the construction industry ■ November 2016 – Queensland Building Plan issued to the construction industry ■ August 2017 – BIF Bill introduced to parliament ■ August/September 2017 – Public submissions made on BIF Bill ■ October 2017 – BIF Bill passed ■ November 2017 – BIF Bill assented to ■ Proclamation yet to occur to allow PBA and replacement of BCIPA to commence
Project Bank Accounts (PBAs)
Reason for Project Bank Accounts (PBAs) ■ The Queensland Government has highlighted the non-payment or slow payment of subcontractors as its reason for introducing Project Bank Accounts (PBAs) ■ PBAs will be trust accounts created by the head contractor, in which progress payments, retention and disputed funds will be held for its subcontractors ■ The purpose of PBAs is to quarantine funds owing to subcontractors, to better secure these monies with view to ensuring subcontractors get paid
Trust accounts Head contractor to open three trust accounts (PBA) Principal Head contractor General trust account Retention account Disputed funds account First tier subcontractor PBAs are only established for the benefit of first tier subcontractors (not lower tier sub-subcontractors)
PBAs – Two phases Phase 1 Trial State government building contracts between $1 million $10 million (State authorities can decide to also participate) Phase 2 All government and private sector building contracts over $1 million Tenders 1 January 2018 1 January 2019
Elements for a PBA Contract Principal is a State authority who has decided to ‘opt in' More than 50% of the contract price is for building work Contract price is between $1 million and $10 million Contract tendered after commencement of BIF The contract is not a subcontract OR
Will PBAs apply to local governments? ■ State authorities include local governments, and corporations owned by the State ■ For phase 1, PBAs do not automatically apply to State authorities: ■ A PBA will only apply to a State authority that has decided to use a PBA ■ In other words, for State authorities it is ‘opt-in’ ■ For phase 2, PBAs will automatically apply to State authorities
Will PBAs apply to government contracts already tendered? ■ PBAs are not required for government contracts tendered before the commencement of BIF: ■ if the principal is the State or a State authority; and ■ if the first time the tender for the contract was issued or advertised was before the commencement of BIF; and ■ the PBA will continue to not be required regardless of a variation, change in the contract price or change in the work.
What if the sum of a government contract is amended to exceed $1 million? ■ If a government contract, entered into after the commencement of BIF is amended so that the contract price is between $1 million and $10 million: ■ a PBA will be required, but only if the contract price was increased by 30% or more.
What work will and will not require PBAs? ■ PBAs apply to building contracts, for building work ■ BIF contains a definition of building work which captures the construction of a building but also includes many other elements connected with the construction of a building ■ For example: ■ services to the building (drainage, air conditioning, lighting) ■ fire protection ■ contract administration
What work will and will not require PBAs? ■ Residential work is excluded for phase 1, but will be included for phase 2 (apart from minor residential work – less than 3 living units) ■ Maintenance work is excluded for both phases 1 and 2 ■ ‘Engineering projects’ are excluded for both phases 1 and 2, being projects for bridges, roads and ports
PBAs – Related entities If the head contractor and first tier subcontractor are related entities, the first tier subcontractor must establish a PBA as well Principal – state government PBA required Head contractor “Buildcorp Constructions” Related entities PBA required Sub-subcontractor First tier subcontractor “Buildcorp Trades” Sub-subcontractor
When trust accounts must be opened Head contractor to open accounts no later than 20 business days after the first subcontract is signed General trust account Retention account Disputed funds account
General Trust Account Principal pays into general trust account General trust account Head contractor issues payment instruction for payment out Retention account First tier subcontractors Head contractor
Payment process Subcontractor submits progress claim to the head contractor Head contractor submits progress claim to the principal Superintendent submits progress schedule to the head contractor and principal Head contractor submits progress payment instruction to the bank for payment to first tier subcontractors and head contractor Principal deposits the payment into the PBA’s general account Bank pays the first tier subcontractors and the head contractor, and pays retention money into the retention account
Order of priority and shortfalls ■ Order of priority ■ The payment to the subcontractors and head contractor out of the general trust account occurs simultaneously ■ However if payment is not made to the subcontractor in full, the head contractor is not permitted to pay itself ■ Shortfalls ■ If the head contractor knows that there will be an insufficient amount available to pay a subcontractor, the head contractor must ‘top up’ the account itself
Line of sight by principal Line of sight PBA – head contractor Deposits and withdrawals Principal Payment instructions Account payment reports
Retention account ■ The retention account quarantines the retention amounts to be repaid to subcontractors ■ In the event of head contractor insolvency, the funds remain protected for payment to the subcontractors ■ The head contractor can only access to: ■ return the monies to the subcontractor; or ■ to pay itself for rectification of defects in the subcontractor’s work
Disputed funds account A payment dispute will occur when Head contractor’s payment instruction of funds payable to the subcontractor The head contractor fails to give the is less than the head contractor’s subcontractor a payment schedule Head contractor transfers the difference between the payment instruction and the payment schedule Disputed funds account Head contractor transfers the full amount of the subcontractor’s payment claim
Dissolving a PBA ■ A head contractor may dissolve a PBA when: ■ once each subcontractor has been paid all amounts, including retention monies, that it is owed; or ■ when only maintenance work under the building contract remains.
Termination of head contract or insolvency of head contractor ■ The principal will replace the head contractor as the trustee of the PBA in circumstances where: ■ the contract is terminated by the principal for default of the head contractor; or ■ the head contractor has an administrator or liquidator appointed, or is wound up. ■ As trustee, the principal will prepare payment instructions and cause payments to be made to the subcontractor and head contractor from the PBA. ■ The head contractor is still liable to top up any shortfalls in the PBA for the payment of subcontractors.
Penalties for non-compliance ■ There are serious penalties for head contractors who fail to establish and administers the PBAs in accordance with their statutory obligations ■ Penalties range up to 300 penalty units $37, 845) or 2 years imprisonment for an individual, or a maximum fine of $189, 225 for a company
Penalties – entering into PBA ■ Head contractor must notify (in approved form) subcontractor of details of PBA (200 penalty units or 1 year jail) ■ before subcontract is entered into; or ■ within 10 business days after date PBA is required if subcontract entered into before PBA required ■ Head contractor required to give principal notice of ‘information prescribed by regulation’ (and changes to that information) within 5 business days after entering subcontract or becoming aware of change (200 penalty units)
Penalties – Payment in ■ Head contractor must pay retention money in to retention account (200 penalty units or 2 years jail) ■ must be ‘identifiable’ as being held for specific beneficiary (100 penalty units) ■ ‘Payment dispute’ amounts to be transferred by head contractor from general trust account (200 penalty units or 1 year jail) – defined as: ■ head contractor issues payment schedule for $100 but issues payment instruction to bank for $80 – payment dispute is $20 ■ head contractor fails to issue payment schedule – payment dispute is amount of payment claim
Penalties – Payment out ■ Head contractor can only pay subcontractor out of trust account (200 penalty units or 1 year jail) ■ must pay subcontractors before it pays itself (300 penalty units or 2 years jail) ■ Head contractor can withdraw for limited purposes (300 penalty units or 2 years jail) ■ paying subcontractor liable to pay under the subcontract ■ paying head contractor (subject to priority) to the extent no other liability to pay subcontractor for the same work ■ returning amounts paid by principal in error ■ as required by Court or Adjudication ■ to transfer as required by BIF Act (e. g. payment dispute amounts)
Penalties – Payment out ■ Payment dispute amounts can be paid out (300 penalty units or 2 years jail) ■ to subcontractor ■ to head contractor pursuant to outcome of ‘dispute resolution process’ (prescribed by regulation) ■ as prescribed by regulation ■ Head contractor must notify subcontractor of transfer (50 penalty units) ■ must be transferred back to general trust account if 60 days have elapsed since notice unless ongoing dispute process (50 penalty units) ■ Interest earned on account can be paid out to head contractor every 12 months or when PBA closed ■ cannot use account for investments (200 penalty units or 1 year jail) ■ Copy of all payment instructions to be given to principal and subcontractors as soon as practicable (100 penalty units)
Penalties – Close out ■ Head contractor can close PBA when (500 penalty units or 1 year jail): ■ all subcontractors have been paid (i. e. no more subcontractor beneficiaries); OR ■ only maintenance work remaining ■ Closing any of the trust accounts constitutes closing ■ Must maintain copy of records of all transactions for 7 years (300 penalty units or 1 year jail)
Concerns for head contractors ■ Additional administration to establish and administer the three trust accounts for a head contract ■ Having to cover shortfalls in the trust accounts ■ Retention money can no longer be used as part of working capital ■ Exposure to fines and imprisonment for non-compliance
Are PBAs effective for subcontractors? ■ Benefits ■ Subcontractor gets paid at the same time as the head contractor ■ The head contractor can only be paid if it has paid the subcontractor ■ The retention monies are kept in a separate account ■ Deficiencies ■ Only currently applies to government projects between $1 million and $10 million ■ Only applies to first tier subcontractors at this stage ■ The head contractor still decides on how much the subcontractor gets paid, as per the head contractor’s payment schedule
Security of Payment reform
Security of payment reform ■ The Building and Construction Industry Payments Act (BCIPA) has been repealed ■ The Building Industry Fairness (Security of Payment) Act (BIF) enacted on 26 October 2017 now provides for security of payment claims ■ BIF has also introduced changes which make the process more claimant friendly ■ BIF does not commence until it is proclaimed (which should be soon)
Security of payment in brief ■ The legislation sits alongside the contractual process ■ Interim rights only ■ To make a claim, must have: ■ a construction contract ■ a reference date ■ Cannot contract out of the legislation
Parallel processes Contract Security of payment Progress Claim Payment claim Progress Certificate Payment schedule Dispute? Adjudication?
Security of payment process Enforcement? Payment claim served by contractor on principal Payment schedule served by principal on contractor 1 2 Adjudication response lodged by principal Adjudicator’s determination 4 5 Adjudication application lodged with the QBCC by contractor and served on principal 3 Any adjudicated amount is payable within five business days, or enforceable as a judgment debt 6
Construction contracts ■ A contract for the carrying out of construction work (section 65 of BIF Act) or related goods and services (section 66 of BIF Act) ■ Whether written or oral, or partly written or partly oral ■ Construction work has a broad definition which captures not only construction of buildings but other activities ■ Certain exclusions (eg. mining work)
What are reference dates? ■ Determined by the contract ■ Often occur monthly, but: ■ what about after practical completion? ■ Are there preconditions to reference dates? ■ Effect of termination (BCIPA versus BIF Act)
Two types of claim – standard and complex ■ The 2014 BCIPA amendments introduced ‘standard’ and ‘complex’ payment claims ■ ‘Standard’ payment claims are for up to and including $750, 000 ■ ‘Complex’ payment claims are for more than $750, 000 ■ they afford more time for respondents to issue payment schedules and responses ■ they afford more time the adjudicator to issue his decision ■ the respondent has been able to raise new reasons
Out with the old, in with the new
Payment claims under BIF ■ A payment claim no longer needs to state that it is made pursuant to the security of payment legislation ■ A document will be a payment claim if: ■ it identifies the construction work to which it relates; ■ states the claimed amount of the progress payment; ■ requests payment of the claimed amount. ■ Any document (such as an invoice, for example) if it meets the above requirements will be a payment claim.
Compulsory payment schedules ■ If a respondent pays the full amount claimed by the claimant, then no payment schedule is required to be issued by it ■ if the full amount is paid before the end of the period for responding to the payment claim ■ It is otherwise compulsory for a respondent to issue a payment schedule ■ Failure to issue a payment schedule will result in the claimant being liable for: ■ the full amount of the payment claim ■ a penalty of 100 penalty units ■ disciplinary action by the QBCC in respect of the claimant’s licence
No ‘second chances’ ■ There is no longer a ‘second chance notice’ to issue a payment schedule ■ Second chance notices: ■ increased the timeframes of the adjudication process ■ encouraged respondents not to issue a payment schedule at their first opportunity
No new reasons in adjudication response ■ A payment schedule needs to be a complete response setting out all reasons a respondent may have for withholding payment ■ A respondent cannot introduce new reasons in its adjudication response that are not in its payment schedule, even for ‘complex’ claims (ie. claims over $750, 000) ■ The BIF regulations (yet to be released) will place limitations on the length of submissions and accompanying documents
BIF – two types of payment claims Standard Payment Claim Adjudicator’s decision 10 Adjudication response 10 Adjudication application 30 Payment schedule 10 Payment claim es sin bu sd ay sd s s s ay ay sd sd es sin bu bu es sin bu Complex Payment Claim Adjudicator’s decision 15 Adjudication response 15 Adjudication application 30 Payment schedule 15 Payment claim s ay sd es sin bu bu
Longer timeframes to make an adjudication application Pre-BIF Payment schedule served by respondent Adjudication application by claimant 10 business days BIF Last day the payment schedule could be given or due date for progress payment (whichever is later) 30 business days Adjudication application by claimant
Time limits: BCIPA and BIF Act ■ The time limit for making a payment claim has not changed. ■ For regular monthly claims (not final claims), the longer of: ■ six months after the construction work was last carried out (if not otherwise prescribed) ■ For final claims, the longer of: ■ 28 days after the end of the last DLP; ■ 6 months after the completion of all construction work; and ■ 6 months after the complete supply of all related goods and services (if not otherwise prescribed)
Other amendments ■ If the contract is terminated, a ‘reference date’ from which the claimant can make a payment claim will arise on the date of the termination ■ Adjudicators can take into account the conduct of the parties when deciding the proportion of costs to be borne
Penalties ■ Failure to respond to a payment claim ■ up to 100 penalty units may apply ■ ground for disciplinary action under the QBCC Act ■ Failure to pay adjudicated amount ■ up to 200 penalty units may apply ■ ground for disciplinary action under QBCC Act
Subcontractors’ Charges Act ■ The Subcontractors’ Charges Act 1974 (Qld) has been incorporated into BIF ■ The wording of the Act has been modernised, but its effect remains the same ■ The purpose of the Act is to freeze money payable from the principal (‘employer’) to the contractor, so that it is held for the subcontractor ■ The subcontractor becomes a secured creditor for the retained monies ■ The subcontractor must commence court proceedings for the retained monies ■ The Court will determine if the subcontractor will be paid and if so, how much
Effect on payment Pay $ into Court Hold onto $ Employer Head Contract Payment Pay $ to Subcontractor (if Contractor consents) Lodge subcontractor’s charge Head contractor Subcontractor
Procedure Subcontractor gives a Notice of Claim of Charge (Form 1) to the Employer and a Notice to Contractor of Claim of Charge Being Given (Form 2) to the Contractor The Employer must retain any money payable to the Contractor or pay it into Court The Contractor gives a Contractors Notice (Form 4) to the Subcontractor and Employer which states whether the Subcontractor accepts liability or disputes the claim If the Contractor accepts liability The Employer pays the retained amount to the Subcontractor If the Contractor disputes the claim The Subcontractor must commence proceedings within one month of the date of service of the Notice of Claim of Charge, or the charge will lapse Matter proceeds to trial and Court decides if the subcontractor will be paid, how much and by whom
Reforms to Queensland Building and Construction Commission Act
Reforms to QBCC Act ■ The Queensland Government wishes to curtail the practice of corporate ‘phoenixing’ ■ where a building company becomes insolvent and the directors set up a new company which undertakes the same type of work ■ The QBCC Act provided that a director or influential person of a building company that went insolvent was an ‘excluded individual’ and could not, for 3 years: ■ hold a building licence or be a nominee for a licensed company ■ be a director or an influential person for a licensed company
Excluded Individuals Dynamic Fitouts Pty Ltd Dynamic Constructions Pty Ltd In Liquidation Excluded Company QBCC License Limited grounds for submissions to QBCC CEO – Mr J Dynamo Excluded Individual QBCC
Definition of ‘Influential Person’ expanded CEOs Person who causes someone to believe they control or influence the company’s business General Managers Influential person Person who participates in making decisions that affects the company’s business Person who gives instructions to an officer of the company who acts on them Person who controls 50% or more of shares
Minimum Financial Requirements ■ To ensure that the QBCC has greater financial oversight of construction companies: ■ the ‘Minimum Financial Requirements’, which was previously a policy document, will now be part of Regulation to the QBCC Act ■ The detail of the amended Regulation is yet to be released, however it is anticipated that the Minimum Financial Requirements will be more stringent ■ The purpose of the Minimum Financial Requirements is to lower the incidence of financial failure in the building industry
Other amendments ■ Where a building contract does not contain a defects liability period, the QBCC Act will provide for a statutory 12 months defects liability period ■ If a direction is given by the QBCC under section 72 A QBCC Act to rectify defective work, the builder must not delay ■ otherwise, 4 demerit points on licence ■ A party to a building contract must not without reasonable excuse cause another party to the contract to suffer significant financial loss because the person deliberately avoids complying with the contract ■ up to 350 penalty units may apply
Non-conforming building products – amendments to QBCC Act
Non-conforming building products ■ On 31 August 2017, the Non-Confirming Building Products – Chain of Responsibility Amendment Bill was enacted ■ It amends the QBCC Act to provide for a chain of responsibility in respect of non-conforming building products ■ All participants in the building supply chain now have a primary duty to ensure that their building products confirm
Building supply chain Manufacturer Importer Supplier Builder Certifier Primary duty to ensure that building products are not non-conforming products
Primary Duty ■ The primary duty of each person in the chain of responsibility for a building product is to ensure that a product is not a non-conforming building product ■ A Chief Executive Officer of any company in the chain of responsibility must exercise due diligence to ensure its company complies with its primary duty
What is a non-conforming building product? Is not safe Non-conforming building product Does not comply with regulatory provisions Does not perform to the standard it is represented to perform to Example: Building product that is labelled as being non-combustible but which is combustible
Other duties ■ A person in the chain of responsibility must provide information regarding the suitability of the product and instructions as to its use, to the next person in the chain ■ A person in the chain of responsibility has two days to notify the QBCC if they become aware that: ■ a building product is non-conforming; or ■ an incident was caused by a non-conforming building product.
Flammable cladding timeline Nonconforming Building Products (QLD) enacted Australian Senate Committee inquiry Lacrosse apartment building fire, Melbourne Senate Committee Inquiry Report – flammable cladding Torch Tower fire, Dubai Grenfell Tower fire, West London 2014 2015 2016 2017 Building audits in various states and territories (2014 -2017)
Flammable cladding
Lacrosse building fire Melbourne, 2014
Torch Tower Dubai, 2015 and 2017 2015 2017
Grenfell disaster London 2017
Workplace health and safety ■ The QBCC will now ‘information share’ with the regulators under the Work Health and Safety Act, Electrical Safety Act and Public Health Act to become aware of any breaches by builders under those Acts ■ The QBCC has the power to suspend or cancel the builder’s licence, if: ■ the builder is convicted of an offence under those Acts; or ■ the builder has caused death or serious injury, or is causing risk to health and safety, on a work site Work Health and Safety Queensland QBCC Information sharing Electrical Safety Officer Queensland Health
QBCC inspector powers increased Give directions to remove or minimise a risk (eg. install temporary overhead protection) Enter finished construction buildings (previously could only enter active building sites) Have samples tested Issue stop work notices QBCC inspection powers Take documents - with consent from occupier or warrant from Magistrate Take building materials and product Seize evidence Make recordings
Recall orders and warning statements ■ The Minister is now empowered to make a recall order for any products which are non-conforming or which constitute a safety risk ■ The Minister also has the power to publish a warning statement about the use of a product ■ A Building Products Advisory Committee has been established to advise the Minister and the QBCC as to: ■ any unsafe building products in the community ■ promotion and raising awareness of the safe use of products in the industry
Conclusion ■ The amendments to the QBCC Act, and the repeal of BCIPA and replacement with BIF is wide-ranging ■ All people participating in the construction industry will need to ensure they are apprised of these amendments, given their effect and the introduction of numerous penalties
Contact Alex Power Special Counsel T (07) 3233 8896 E apower@mccullough. com. au Disclaimer: This presentation covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. This presentation is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this presentation.
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