SOP reforms fail the ‘pub test’

Michael Chesterman December 12, 2019
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If I walked into a pub today, found a group of subcontractors having a beer and asked the following question:

Do you believe the current Security of Payment (SOP) reforms will deliver improved payment outcomes for subcontractors working in the construction industry?

Unfortunately, I believe that the response would be a resounding NO.

The main reason for this being the case is, in my view, concerns that the reforms will not deliver outcomes as intended, particularly those relating to the establishment of Project Bank Accounts (PBA), as a result of extensive legislative changes and delays.

The death knell of any legislation of this nature is a lack of belief by the people which it is intended to protect or assist that the promised outcomes will eventuate.

At the outset, I wish to point out that I am not questioning the commitment and desire of the government to deliver tangible SOP improvements for subcontractors.

In a previous article I stated:

“I have not met a single person who does not believe that the construction industry has a serious Security of Payment (SOP) problem. In the 25 years I have been involved in the industry, I have witnessed every Queensland government over this period commit to doing something about this major industry issue. We all have our views on the effectiveness of the solutions adopted by different governments. However, I have only ever witnessed a genuine desire by all governments to make a real difference in this regard.

The current Queensland government clearly has a razor sharp SOP focus and is committed to the implementation of a number of key initiatives they believe will be effective.”

My concerns are centered around the process employed to develop these reforms in the first instance.

What are the reforms?

These SOP reforms are contained in the Building Industry Fairness (Security of Payment) Act 201(BIFA), namely:

  1. Imposition of new and tougher Licensing Minimum Financial Requirements (MFR) on contractors which is being implemented in stages.
  2. Regulating contracts between builders and subcontractors by mandating certain provisions (section 67 GA) and prohibiting others (section 67GB) that could be prescribed in the Queensland Building and Construction Commission Act 1991. The government has not released any details regarding this reform.
  3. Controlling and directing the flow of money between subcontractors and builders with the establishment of Project Bank Accounts (PBA). A trial of government projects (excluding engineering projects) valued between $1 million and $10 million (including GST) commenced on 1 March 2018.
  4. Redefining, in favour of subcontractors, the operations of the Building and Construction Industry Payments Act 2004 (BCIPA) through a number of procedural changes which came into full effect on 17 December 2018.

Previous identified BIFA problems

I have outlined in several previous articles, development and implementation issues with these reforms, namely they:

The government sought to address some of these issues through:

Government review of BIFA

The Building Industry Fairness Reforms Implementation and Evaluation Panel (Panel) was established on 14 May 2018 to assess the implementation and effectiveness of these reforms.

On 28 November 2019 the government released the Panel’s report.

Panel findings

On the Department of Housing and Public Works website, it is stated:

“The Panel found that the BIF Act reflects the government’s policy intent to effect cultural change to provide for effective, efficient and fair processes for securing money in the building and construction industry. The Panel identified 20 recommendations to enhance the existing framework and improve security of payment outcomes for the building and construction industry.

The 20 recommendations are grouped in the following three themes:

1. Managing the financial transition to enable industry to get ready for future implementation.

2. Simplifying the framework to reduce administrative costs while providing for effective monitoring and enforcement.

3. Improving protections, including having a single retention trust account to be held by all contractors and private principals in the contractual chain.”

Government’s response

The Government has accepted or accepted in-principle the Panel’s 20 recommendations.

Further issues revealed by the Panel’s report

I have written two recent articles on the findings of the Panel that in my view identify further BIFA development and implementation issues, namely:

There are two other very significant issues I have also noted, namely:

1. In a press release dated 28 November 2019 the responsible Minister stated:

“Within 24 months, PBAs will apply to all Queensland building projects valued at over $1 million.”

Furthermore, on the Department of Housing and Public Works website it is stated:

“Implementing the Panel’s recommendations will deliver an enhanced PBA framework that will be phased in over a number of years. This will allow time for businesses to change their financial management practices, adapt to not having the ability to co-mingle project funds to use on other projects, and provide for market readiness and industry education.

The Government’s approach will be to expand PBAs to:

  • government building projects above $1 million, including Health and Hospital Services from 1 July 2020
  • building projects above $10 million from 1 July 2021
  • building projects above $3 million from 1 January 2022
  • building projects above $1 million from 1 July 2022.”

This means that from the time BIFA became law on 10 November 2017, it will be four and half years before PBA are fully implemented. It also needs to be recognised that PBA were initial flagged by the government as a possible SOP solution in the release of a Discussion Paper on 17 December 2015. This means that it will be six and half years from the initial floating of the idea of PBA to their full implementation.

For the record, I am pleased that the government is being cautious in the implementation of PBA and have previously published an article saying as much, but it does beg the question:

How is it possible that such major PBA amendments are now required some two years after BIFA became law?

I can hear some people say that this was the whole purpose of the government in the first instance, conducting a trial of PBA in relation to government projects valued at between $1 million and $10 million, excluding engineering projects. With respect, prior to the release of the Panel’s report such a long, staged roll out of PBA had never been raised as a possibility.

In an article entitled Testing the waters of the wrong ocean I pointed out that at one time, information on the Department of Housing and Public Works website indicated that in relation PBA:

“Following successful implementation, this model is set to apply to private sector projects valued from $1 million. However, this will not occur before 1 March 2019.”

2. Under the heading “Security over money held in or paid from the PBA to subcontractors” (page 44) of the report by the Panel, it is stated:

“A stated policy intention of the BIF Act is to secure money held in the PBA in the event of an insolvency. The framework created by the BIF Act is capable of ensuring that money being held in a PBA or retention trust account that is liable to be paid to a subcontractor beneficiary:

  • would not form part of the assets of a head contractor on insolvency; and
  • could not be called on to satisfy a debt (secured or otherwise) of the head contractor.

However, the BIF Act does not alter the preferencing laws under the Commonwealth’s Bankruptcy Act 1996 and Corporations Act 2001. It is arguable that there may be certain circumstances where money paid from a PBA could be the subject of an unfair preference claim. On advice, the Panel has been able to conclude that these circumstances are likely to be very rare in practice. The Queensland Government has done all that it can to ensure the funds in a PBA liable to be paid to a subcontract beneficiary are unable to be distributed to secured creditors in the event of head contractor insolvency.”

The words ‘It is arguable that there may be certain circumstances where money paid from a PBA could be the subject of an unfair preference claim’ should be of concern to all industry participants.

If the PBA framework is not capable of operating as intended in the case of builder insolvency, then one of the main reasons for establishing them ceases to exist.

Final thoughts      

As I have previously stated, I am not questioning the desire of the government to deliver SOP reforms through BIFA. However, in my view there can be no ‘sugar coating’ the fact that the initial Bill that gave rise to BIFA had serious policy failings, the majority relating to PBA.

How else can all the subsequent amendments and implementation delays be explained?

 

 

 

Not intended as legal advice. Read full disclaimer.
Michael Chesterman December 12, 2019

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