Crystal-balling the Minimum Financial Requirements for Contractor Licensing

Michael Chesterman September 19, 2017
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Recent Developments

On 22 August 2017, in introducing the Building Industry Fairness (Security of Payment ) Bill 2017 (BIF Bill), the Hon Michael de Brenni, Minister for Housing and Public Works and Minister for Sport, stated that in relation to the Minimum Financial Requirements for licensing (MFR’s):

“The bill will restore tougher minimum financial requirements. This provides the Queensland Building and Construction Commission with an insight into a company’s financial position and allows it to act on any potential problems. The bill provides that a regulation may prescribe increased financial reporting by QBCC contractor licensees.”

Further information can be found in the explanatory notes for the BIF Bill where it is stated, “Clause 304 provides that a regulation may prescribe the minimum financial requirements for the licence under this Act. It is intended for the financial requirements stated in the board’s policies to be transferred into regulation.”

The industry had been on notice for some time that tougher MFR’s were imminent. In a press release dated 8 February 2017, the Chair of the Queensland Building and Construction Board, Dick Williams, in indicating that the Board would be immediately undertaking a comprehensive review of the MFR’s, was quoted as saying:

“The Minimum Financial Requirements (MFR) Policy introduced by the previous board had significant flaws that decreased protection for homeowners and industry members against the financial failure of licensees, and building company collapses.”

Furthermore, in a press release dated 25 August 2017 the QBCC Commissioner, Brett Bassett, in signalling a crackdown by the Commission in relation to building companies operating under high-risk financial circumstances as a result of considerably exceeding their maximum revenue limits, stated:

“Prior to October 2014 the QBCC required licensees to submit annual financial records, but this requirement no longer exists. The QBCC’s new review will help ensure that companies in high-risk financial circumstances can reassess their situation and minimise their risk.”

However, it should be noted that this approved audit program is limited in terms of its scope. It will only be based on licensees who have taken out policies under the Queensland Home Warranty Scheme, where the aggregate value of the notified residential construction work for the last financial year exceeds MR allowed for licensees by 30 percent or more.

All building work of a commercial nature will be outside the scope of this audit program.

What are the current MFR’s?

Given all this commentary, it is appropriate to examine in some detail the current MFR’s.

The current MFR’s, effective 9 October 2015, are outlined in a very detailed 57-page document, with objectives to “promote financially viable businesses and foster professional business practices in the Queensland building industry.”

The MFR’s requirements apply to approximately 87,000 licensees, all of which must comply with the following:

  • have a certain level of Net Tangible Assets;
  • based on their NTA, not exceed a prescribed Maximum Revenue (MR) each financial year;
  • demonstrate a current ratio (current assets = current liabilities) of 1:1;
  • prepare and maintain internal management accounts at least on a quarterly basis;
  • pay all undisputed debts as and when they fall due within industry trading terms; and
  • in a limited number of licence categories e.g Builder design, termite management, and passive fire protection, obtain Professional Indemnity Insurance.

A failure by a licensee in respect to any of these requirements is grounds for the QBCC to take compliance action that may comprise of instigating a financial audit, the imposition of a condition, or moving to suspend the licence.

It should be noted that the Board, in approving the current MFR’s, did not seek to revisit two very significant changes they made to the previous MFR Policy (October 2014), namely;

  1. Contractors not required to confirm at renewal of their licence, that they meet the MFR’s. Prior to October 2014, this was established by way of certain licensees being allowed to self certify that they had a certain level of NTA’s, or if not permitted to self certify their financial position, an ‘accepted independent accountant’ verify that they had sufficient NTA’s and meet the current ratio.
  2. A requirement that contractors must pay all undisputed debts as they fall due, remains in place. The 2015/16 QBCC Annual Report disclosed that in relation to this requirement, the QBCC undertook 445 non-payment of debts investigations, resulting in the suspension of 93 licences and the cancellation of 49 licences. Furthermore, comment was made that since the introduction of the MFR policy in October 2014, the QBCC had recovered $9,628,168.17 for creditors as result of contractors electing to resolve disputes rather than breach this aspect of the MFR’s.

The major change that came into effect in the formulating of the current policy is essentially an extension of the obligation which required large companies to submit audited financial accounts to ASIC so that they had to provide a copy of these accounts to the QBCC for review.

Compliance and enforcement of the MFR’s

In July 2017 the QBCC published its Compliance and Enforcement Strategy, in which it identified 7, equally weighted priorities, namely:

  1. Eradicating unlicensed work and ensuring licence currency;
  2. Reducing risks associated with fire safety installations not being maintained in accordance with the law;
  3. Improving the quality of work performed by licensees;
  4. Ensuring appropriate supervision of building work;
  5. Ensuring licensees notify the QBCC of Notifiable Work performed in accordance with the law;
  6. Licensees maintaining Minimum Financial Requirements; and
  7. Certifier compliance.

The QBCC is clearly committed to attempting to ensure licenses (87,000) meet the MFR’s at all times but they also have 6 other equally significant compliance and enforcement priorities to resource.

What could be possible changes to the MFR’s?

Annual licensing renewal requirements would appear certain to be reimposed in some form. However, there may be further changes as a result of particular aspects of the current MFR’s attracting criticism from some quarters, namely:

  • Licensees who self determine that they will only generate MR up to a certain amount (currently up to $600,000) for a financial year are afforded the ability to self certify that they have sufficient NTA. It is highly likely that many such licensees are generating revenue in excess of their allowed MR and therefore potentially at risk of failing because of having insufficient NTA to support their turnover.
  • There is an ability for licensees, other than those of a self certifying nature, in certain circumstances and subject to specified requirements, to be able to ‘top up’ their NTA by relying on a Deed of Covenant and Assurance from another related entity e.g director of a licensed company, providing that entity has “net real unencumbered assets” to support their financial commitment. However, this assurance does not require the legal transfer of assets into the licensed entity to support their MR.
  • Information in an MFR Report provided by an accepted independent accountant to the QBCC in support of a licensee’s financial position may be up to 4 months in age, from the end of the financial reporting period being relied upon, at the time the accountant signs the report. There has been criticism that by allowing such aged financial information, the QBCC may be receiving and accepting an MFR report in respect of the financial position of a licensee that could have significantly changed in this period of time.
  • Relying on NTA and current ratio as key financial measures in formulating the MFR’s. It has been suggested that there may be more suitable financial measures to confirm the solvency of licensees.

We at Helix Legal will keep you informed of relevant developments to this most significant industry issue. If you have any questions in relation to the MFR’s please feel free to contact Michael Chesterman at michael@helix.legal or on 0418180330.

Not intended as legal advice. Read full disclaimer.
Michael Chesterman September 19, 2017

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