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Security for payment - will head contractors be saved by Commonwealth reforms?

ANALYSIS: Reforms proposed in Queensland, Australia to security for payment arrangements in construction projects may stifle cash flows and add more red tape for head contractors on building projects.31 Aug 2017

In parallel, the Commonwealth government is reviewing Australia's idiosyncratic state-based security for payment legislation and may seek to flex its constitutional muscles and create a single piece of national, harmonised security for payment legislation. The review is due to be published in December 2017.

Whatever the outcome, significant change is on the cards for Australian head contractors that could well hit their bottom line.

Queensland

On 22 August, a bill on security for payment was introduced into the Queensland parliament. Should it be passed in its current form, the bill imposes significant changes to the state's security of payment regime that are seen as being subcontractor friendly.

Notably, the bill provides for the introduction of project bank accounts (PBA) on certain building projects, initially only for government contracts between A$1 million ($791,000) and A$10 million ($7.9 million), with the potential for extension to all building contracts over A$1 million, including private sector contracts, from 1 January 2019. As drafted, the bill only imposes PBAs on building contracts, and not civil or other infrastructure works. 

PBAs are trust accounts that have to be set up by a head contractor within 20 days of entering into a subcontract, with both the head contractor and subcontractors as beneficiaries.  

All payments by the principal are made into the PBA, with withdrawals by head contractors restricted to paying subcontractors. Only the balance is permitted for release to head contractors, and where there are insufficient funds available to pay a subcontractor, the head contractor is required to cover the shortfall.

Retention amounts are also paid into the PBA and the head contractor must make it clear which subcontractor the money is being held for. 

Any failure to establish a PBA or administer it correctly may constitute an offence.

A similar system introduced in Western Australia (WA) last year has been contentious, with some contractors unhappy because of the cash flow ramifications and extra red tape. Problems also arise when subcontractor costs are higher than originally agreed or there is a dispute over amounts payable.

In addition to PBAs, the bill also makes significant amendments to Queensland's security of payment regime, including:

  • Payment claims no longer need to be endorsed;
  • Additional penalties apply, including fines and possible imprisonment for various offences, including the performance of unlicensed building work. Any failure to respond to a payment claim with a payment schedule attracts a penalty and is grounds for disciplinary action, and also renders the respondent liable to pay the full amount of the claim;
  • Respondents are no longer able to raise new reasons for withholding payment in an adjudication response;
  • Failure by a respondent to pay an adjudicated amount by the due date may attract a penalty and disciplinary action; and
  • New provisions regulate retention amounts.

If passed, these changes significantly shift the balance of Queensland's legislation in favour of subcontractors.

Commonwealth government changes

Head contractors fretting about this further divergence between Australia's various security for payment laws are now watching to see what the Commonwealth government will do.

The on-going review is considering all state-based security for payment legislation with a view to legislating a single, common system for all states and territories. There is a way to go for this to happen, and there may be constitutional roadblocks, but if it is legislated successfully this process might override Queensland's latest proposed changes.

The review terms recognise that "while well-intentioned, the often vastly different security of payment laws operating in each jurisdiction are not working as well as intended" and that the lack of consistency between jurisdictions is an ongoing issue within the industry. 

The full report is due by the end of the year, but a draft report next month may give some insight into what changes are proposed and what impact this may have on the payment legislation already in place in WA and proposed for Queensland.

Clearly, the industry would benefit from a single piece of harmonised legislation that appropriately balances the interests of head contractors, subcontractors and principals and encourages the prompt and cost-effective resolution of payment disputes.  Whether such an outcome is achievable remains to be seen.

Adam Perl is an infrastructure expert with Pinsent Masons, the law firm behind Out-Law.com