Big news for the Queensland construction industry:
It is expected that the Building Industry Fairness (Security of Payment) Act 2017 (the BIF Act) will be proclaimed into law in the first half of 2018.
The BIF Act incorporates:
- Project Bank Accounts (PBAs);
- a revised version of the Building and Construction Industry Payments Act 2004 (BCIPA);
- a revised version of the Subcontractors’ Charges Act 1974 (Subcontractors’ Charges); and
- a revised version of the Queensland Building and Construction Commission Act 1991 (QBCC Act).
Chapter 2 of the BIF Act includes provisions in respect of Project Bank Accounts (PBAs). The State Government has announced that from 1 March 2018, projects tendered by the Queensland Government will use PBAs on building and construction projects (excluding engineering projects) valued between $1 million and $10 million. The State Government plans to extend the reach of PBAs to private sector projects valued from $1 million after 1 January 2019.
It is critical that head contractors properly apply the PBA legislation to their circumstances.
To help you and your business understand the requirements and risks, we discuss the operation of the PBA provisions across a 3 part series of articles:
- Does Queensland’s Project Bank Account legislation apply to you? (this article);
- Caught by the Project Bank Account legislation? What now?;
- Huge fines or jail time for Project Bank Account Breaches.
PROJECT BANK ACCOUNTS (PBAs)
The best way to understand project bank accounts is to run through a typical example.
Let’s take the view point of a head contractor, who bears the key responsibilities in relation to the accounts.
The head contractor is engaged by a principal under a head contract.
Is the head contractor required to establish a PBA?
To determine whether they must establish project bank accounts, a head contractor must ask theselves:
- Have they been engaged under a building contract? (other than for residential construction work, as defined).
- Is the building contract a PBA contract?
Contract for building work?
The head contractor must also consider whether it is has been engaged under a contract for building work.
To answer this question, the head contract must consider 2 separate yet related definitions:
- Building work which is broadly defined and generally includes all things of and incidental to the construction or renovation of a building (including the preparation of plans and specifications, contract administration and inspections).
- Building which is defined as a fixed structure that is wholly or partly enclosed by walls or is roofed.
PBA Contract?
If satisfied it has been engaged under a ‘building contract’, the head contractor must then determine whether that building contract also meets the definition of a PBA contract.
A building contract is a PBA contract if:
- The principal for the contract is the State or State authority that has decided a project bank account is to be established for the contract;
- More than 50% of the contract price is for building work;
- The contract price for the building is between $1 million and $10 million (including GST); and
- The building contract is a head contract (not a subcontract).
The building contract may also be a PBA contract if it is a contract with the State as principal and has been declared by regulation as a PBA contract.
If the contract price is not clear, the head contract must make a reasonable estimate of the amount the head contractor is entitled to be paid under the contract.
Amendment to Contract resulting in building contract becoming a PBA Contract?
Sometimes the contract price for a building contract increases over time because of variations or amendments to the contract.
What happens then? In this instance, could the building contract, which may not have originally met the definition, become a PBA Contract part way through a project?
The short answer is yes.
Under section 15, a project bank account may be required for a building contract after an amendment to the contract.
In those circumstances, the head contractor must establish the project accounts within 20 business days after the requirement arises.
An exception to this rule arises if the head contractor can prove that there is less than 90 days until the day of practical completion for the building work carried out under the contract would occur.
Head Contractor can’t avoid PBA by subcontracting to a related entity
Under the BIF Act, only first tier subcontractors can be beneficiaries of project bank accounts.
However, the BIF Act also says that a project bank account is also required for the second tier subcontract if:
- the head contractor engages a related entity to carry out all of the work; and
- that related entity further engages subcontractors to carry out all or part of the building work required under the subcontract.
Section 19 of the BIF Act prescribes a broad definition of “related entity”.
The result of all this is that the head contractor cannot avoid its obligations to first tier subcontractor beneficiaries by simply engaging a related entity between the head contractor and its bona fide first tier subcontractors.
When is a Project Bank Account not required?
Section 16 -18 of the Act makes clear that PBAs are not required where:
- a head contractor is engaged under a building contract for residential construction work, unless the residential construction work relates to 3 or move living units (as defined);
- the only building work under the contract is maintenance work; or
- the first time the State or State authority issued or advertised the tender was before the commencement of section 18 (even if that same building contract was later varied, amended, had a change to the contract price, or had a change to be carried out under the contract).
Next steps
So are you caught by the PBA legislation?
If so, see here for our article on setting up and operating a PBA.
If not, then play on, but register for updates from us, as the State Government has indicated that the PBA legislation will become subject to review in early 2019.