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SOP reforms suffer as a result of protracted process and lack of vision

Michael Chesterman
Michael Chesterman February 27, 2019

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.

These key (there are others of less significance) initiatives are:

  • Imposition of new and tougher Licensing Minimum Financial Requirements on contractors;
  • Regulating contracts between contractors and subcontractors by mandating certain provisions and prohibiting others;
  • Controlling and directing the flow of money between subcontractors and builders with the establishment of Project Bank Accounts (PBA);
  • Redefining in favour of subcontractors the operations of the Building and Construction Industry Payments Act 2004 (BCIPA) through a number of procedural changes.

However, as I have outlined in detail over the course of numerous previous articles which I will summarise under ‘Final thoughts’ in this article, I do not share the government’s confidence.

SOP reform process

To appreciate how and why the government settled on these key SOP initiatives, it is  important to understand the reform process adopted by the government.

At the outset it must be recognised that these reforms have been born out of a political imperative need. It is a matter of public record that to secure the support of the independent Member for Nicklin, Peter Wellington, to form a minority government in early 2015, the government agreed to examine 21 issues he flagged as requiring attention, one of which was to review subcontractor payment laws.

This agreement was quite properly made public at the time of these negotiations and the government was fully transparent in relation to this issue.

The following is the process that has been adopted by the government in relation to the adoption of these SOP initiatives. I have only highlighted significant steps in this regard.

Step 1. High level SOP reforms and consultation process

The release of a Security of Payment Discussion Paper on 17 December 2015, with consultation closing on 31 March 2016.

Step 2. Broadly defined SOP reforms and consultation process

Based on feedback obtained through stage 1, a refined suite of proposed security of payment reforms were outlined as part of the Queensland Building Plan, which was released on 30 November 2016 and subject to consultation up until 31 March 2017.

Step 3. Review of Insolvency Inquiry

Consideration was given to the results of the Senate Economics References Committee’s 2015 inquiry into insolvency in the Australian construction Industry.

Step 4. Substantial SOP reforms disclosed

On 22 August 2017 the Minister for Housing and Public Works and Minister for Sport tabled the Building Industry Fairness (Security of Payment) Bill (BIF Bill). The Minister’s speech introducing the BIF Bill and explanatory notes are provided for the benefit of readers.

Step 5. Parliamentary process

On 15 October 2017 the Public Works and Utilities Committee (Committee) report into the BIF Bill was tabled in parliament.

During debate of the BIF Bill there were 143 amendments during its initial consideration and then several late additional amendments.

The BIF Bill passed through parliament on 26 October 2017, became law on 10 November 2017, thereafter becoming the Building Industry Fairness (Security of Payment) Act 2017 (BIFA).

Step 6. PBA trial

Commencing 1 March 2018, projects tendered by the government will use PBA on projects (excluding engineering projects) valued between $1 million and $10 million (including GST).

False step

In a press release dated 1 March 2018 the responsible Minister, The Hon Mick de Brenni (‘Minister’) stated:

“The second phase of the reforms takes effect from 1 July 2018 and includes new procedures for payment claims, responses and adjudication of disputed claims”.

This turned out not to be the case.

In a press release dated 12 June 2018, the Minister stated:

“In the interests of business confidence, we will commence these reforms in tranches, and following industry consultation on the next tranches, I will introduce BIF Act amendments into the House to progress the next stages of reform. I intend for these provisions to commence from 17 December 2018”.

Step 7. Establishment of Building Industry Fairness Reforms Implementation and Evaluation Panel (Panel)

On 12 June 2018 the panel was established to assess the implementation and effectiveness of these reforms.

The panel’s terms of reference requires it to evaluate:

  • The effectiveness of the government’s implementation of the suite of building industry reforms;
  • The effectiveness of the legislative framework in achieving policy intent;
  • Opportunities to realise improved security of payment outcomes for industry prior to the commencement of project bank accounts in the private sector; and
  • The indicative economic impacts and outcomes of the building industry reforms.

According to  information published on the Department of Housing and Public Works website the panel:

will conduct evaluation and consultation activities, including stakeholder engagement activities for each building reform, and make recommendations to the Queensland Government in a report.”

Step 8. BIFA amendments

The Plumbing and Drainage Bill 2018 (Qld) introduced a number of amendments to the BIFA. It was assented to on 11 September 2018.

In an article entitled Some clarity for BIFA and NCBP – but still more to come…, my Helix Legal colleague Sarah Shirley outlined these amendments. One of the amendments was in relation to the time for providing a payment schedule in response to a payment claim. This amendment addressed a late additional parliamentary amendment outlined under step 6 that was viewed as problematical.

Step 9. Panel releases a Discussion Paper

In November 2018 the panel released a Discussion Paperto obtain feedback from building and construction industry stakeholders on the Building Industry Fairness reforms introduced by the Queensland Government in 2017”.

Written submissions closed 15 February 2019.

Step 10. Significant BIFA reforms commence

On 17 December 2018 the delayed BIFA reforms commenced, entailing the following significant changes as outlined under a QBCC website post:

  • There is no longer an endorsement required for an invoice to be considered a payment claim;
  • If a person or company receives a payment claim and they do not intend to pay in full by the due date, they are now required to respond within 15 business days (or earlier if the contract provides); and
  • Claimants may apply for adjudication sooner and have more time to do so.

Step 11. Phase 1 of MFR reforms

On 1 January 2019 the new MFR regulation commenced which entails:

  • The re-introduction of mandatory annual reporting;
  • Larger, higher risk licensees must report decreases in Net Tangible Assets of 20 per cent or more;
  • Clarification concerning a licensee’s assets and when to include PBA funds;
  • By 31 March 2019 all category 4,5, 6 and 7 licensees have to provide specified financial information  to the QBCC for review; and
  • By 31 December 2019 all self certifying licensees and those licensed in categories 1,2 and 3 have to provide specified financial information to the QBCC for review.

The QBCC has developed a MFR online portal to assist licensees to submit financial information electronically.

Step 12. Panel to deliver its report to the government

According to information published on the Department of Housing and Public Works website, the panel is due to deliver its report to the government sometime in a one month period commencing 19 March 2019.

Step 13. PBA to apply in the private sector

According to information published on the Department of Housing and Public Works website, the application of PBA in the private sector ‘will not occur before 1 March 2019.’ However, I am of the view that this initiative will not be implemented before the government has had the opportunity to carefully consider the report by the panel (see step 12).

Step 14. Phase 2 of MFR reforms to come into effect

According to information published by the Department of Housing and Public Works:

“Phase 2 will implement the remaining reforms to raise the standard of reporting, particularly for larger, high risk licensees. A later commencement for Phase 2 on 1 April 2019 will allow industry to get ready for the changes. This phase will also provide stronger enforcement provisions under the Queensland Building and Construction Commission Act 1991 (the Act).”

Step 15. Contract reforms to come into effect?

In an article published 27 September 2017 entitled What will building contracts look like after Project Bank Accounts (PBAs) come into effect?, I stated:

“If the implementation of PBA’s is conditional on the government having to produce regulations mandating and prohibiting contract provisions to ‘create a fairer and more accountable industry, then it would appear that building contracts are about to be significantly changed and redefined by the government.”

In the recent Discussion Paper published by the panel, it is stated:

“Improving the fairness of contracts. There is a new requirement for building contracts to include ‘mandatory conditions’ prescribed by regulations. The content of these new regulations is under development.”

Final thoughts

Over four years have now elapsed since this SOP reform process commenced. Unfortunately a lack of real and substantive progress is now a major challenge for the government because subcontractors’ expectations were raised that significant changes would occur, but the facts are:

  • There has not been a PBA roll out in the private sector;
  • Full implementation of new MFR has not occurred; and
  • No information has been disclosed in respect to fairer contracts.

I am of the view that the following shortcomings and missed opportunities are evident in relation to these reforms, namely:

“aside from PBA, the initiatives in the BIFA are recycled ones. Over the years these initiatives have been modified or changed, but fundamentally they seek to deliver SOP to subcontractors through a combination of long established payment, contractual and licensing initiatives”.

In conclusion, it needs to be recognised that  by the time of the next state election on 31 October 2020, almost 6 years will have elapsed since this reform process commenced. In my view, SOP initiatives developed relative to industry characteristics in 2015 will only be of limited effect by then because of technological advancements and other disruptive forces that will have significantly changed the way the industry operates.

In making this statement I am assuming that the government will have by that time fully implemented these initiatives without any significant changes and introduced no new major ones.

Do you have any fresh ideas for combating the security of payment challenges of the industry?  I would be interested to hear your views on my views!!

Not intended as legal advice. Read full disclaimer.
Michael Chesterman
Michael Chesterman February 27, 2019

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