Inbrief: Construction industry professionals should prepare for the implementation of project bank accounts to Queensland Government projects from 1 January 2018
On 22 August 2017 the Queensland Government introduced the Building Industry Fairness (Security of Payment) Bill 2017 (Bill) to Parliament. The most significant change to current industry practice as a result of the Bill will be the introduction of Project Bank Accounts (PBAs). The purpose of this article is to highlight the projects to which PBAs will apply and the critical factors that contracting parties must consider in assessing whether the PBA regime will affect their contract.
Will your contract be a PBA contract?
The PBA regime will be implemented in two phases commencing with a limited roll out on Queensland State Government projects, to evaluate the effectiveness of the new regime. The Government's intention is that the second phase will extend the legislation to private contracts.
PBA phase one
The first phase of PBAs is expected to commence on 1 January 2018. This will apply to projects when:
(a) the principal is the State of Queensland or a State authority has decided that a PBA is to be established for the head contract;
(b) more than 50% of the contract price is for building work;
(c) the contract price for the building contract is between $1 million and $10 million; and
(d) the contract is not a subcontract for another building contract.
If you are a head contractor entering into a contract with the State of Queensland or a State authority after 1 January 2018, you should carefully consider whether your contract with the State satisfies the requirements of a phase one PBA.
PBA phase two
The second phase of PBAs is expected to commence on 1 January 2019, expanding the application of PBAs to the private sector, so that the regime will apply if:
(a) more than 50% of the contract price is for building work;
(b) the contract price for the building contract is $1 million or more; and
(c) the contracted party enters into a subcontract for all or part of the contracted building work.
All construction industry professionals should be aware of the possible application of PBAs to private contracts, including second tier subcontracts, and should familiarise themselves with their potential obligation to establish and administer PBAs.
Issues to consider under the proposed PBA regime
Will your contract fall within the scope of the PBA regime?
The Government has frequently stated its intention that PBAs will not apply to "engineering contracts", however, there is currently no express exclusion in the Bill to this effect. Further, it is important to note that the Bill does not define "engineering contracts".
It appears from the Government's response to submissions on the Bill, that the engineering contract exclusion is a reference to the type of work which falls outside of the Bill's definition of "building". Specifically, the Bill has been drafted so that there are cascading definitions which limit the application of the PBA regime.
The Bill outlines that for the PBA regime to apply more than 50% of the contract price must relate to work that is "building work". The Bill narrowly defines building work to mean:
(a) the erection or construction of a building;
(b) the renovation, alteration, extension, improvement or repair of a building;
(c) the provision of lighting, heating, ventilation, air-conditioning, water supply, sewerage or drainage in connection with a building;
(d) any site work (including the construction of retaining structures) related to work of a kind referred to above;
(e) the preparation of plans or specifications for the performance of building work;
(f) contract administration carried out by a person in relation to the construction of a building designed by the person;
(g) fire protection work;
(h) carrying out a completed building inspection; or
(i) the inspection or investigation of a building, and the provision of advice or a report, for termite management systems for the building or for termite infestation in the building.
The Bill further restricts the application of the regime by defining "building" as "a fixed structure that is wholly or partly enclosed by walls or is roofed." This narrow definition when read in conjunction with the definition for "building work" clearly limits the PBA regime to projects over $1 million where the majority of project costs are associated with a physical building. By way of example, this would potentially capture projects for the construction of hospitals, schools, stadiums and medium/high-density residential buildings. This interpretation of the Bill is consistent with the Government's intention to exclude engineering contracts which it describes as projects for "infrastructure such as bridges, roads and ports".
As a result of these definitions, principals and head contractors should be conscious of whether the subject matter of their contract concerns a "building" or "building work" and whether more than 50% of the contract price relates to this work.
Will your contract be excluded from the PBA requirements?
Principals and head contractors should consider whether the work under their contracts is excluded from the PBA provisions. The Bill expressly provides examples of a number of circumstances where a PBA will not be required, including when:
(a) the only building work under the contract is for the purposes of maintenance;
(b) the proposed building work under the contract is in relation to the construction of less than three living units. A living unit is:
(i) a single detached dwelling; or
(ii) a residential unit.
The Bill confirms that a duplex is considered to be two living units;
(c) subject to the multiple contract provisions, separate contracts are entered into as a result of separate tender processes;
(d) the relevant building contract is entered into before the commencement of the relevant provisions of the Bill, and the principal was a private entity or local Government; and
(e) the principal is the State or a State authority and the tender for contract was issued or advertised prior to the commencement of the relevant provisions of the Bill.
The introduction of PBAs creates a complex process that seeks to ensure that subcontractors are paid in a timely and efficient manner. Whether phase two of the proposed PBA implementation will proceed largely depends on the success of phase one. Notwithstanding the uncertainty regarding the delayed implementation of PBAs in the private sector, all construction industry professionals should be aware of the proposed PBA regime and prepare for its possible implementation from 1 January 2018.