What’s going to happen now? What financial standards will the QBCC require you to meet post 11 March 2020?

Michael Chesterman March 30, 2020
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We don’t want to be yet another voice telling you the sky is falling in, we want to provide you with actual tools to help through this time.  We recommend a sense of urgency in the construction industry but not the senseless urgency we have seen demonstrated in segments of our community.  At Helix Legal, we have committed as an entire team to use our knowledge and resources to help where we can.

As I have written about a number of times before, the Building Industry Fairness (Security of Payment) Act 2017 (BIFA) became law on 10 November 2017 and provided several SOP reforms, namely:

  1. The 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).
  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.

These BIFA reforms have been the subject of significant changes with the introduction of the Building Industry Fairness (Security of Payment) and other Legislation Amendment Bill (Amendment Bill) on 5 February 2020.

In Explanatory Notes for the Amendment Bill, it is stated that in relation to the MFR:

“A new framework for the Minimum Financial Requirements (MFR) for licensing was released in 2018 to restore financial reporting requirements. The changes have been implemented in phases, through the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018 (MFR Regulation).

Phase 1 began on 1 January 2019 and re-introduced mandatory annual reporting for all licensees, changed how decreases in net tangible assets are reported and clarified how assets are to be treated.

Phase 2 began on 2 April 2019 and introduced higher reporting standards for category 4–7 licensees, along with measures to improve data quality and availability for the QBCC.

The MFR framework also provided for the enforcement provisions of the QBCC Act to be further strengthened, including executive officer liability and escalating penalties, to help ensure all parties involved in running a licensed company are motivated to meet the new MFR. These changes will be implemented through amendments to the QBCC Act.

The first phases of the MFR reforms led to a capital injection of $1.2 billion into the Queensland building and construction industry, resulting in a stronger, more confident industry. The changes help support financially healthy businesses that are capable of sustained growth, as well as providing greater certainty that subcontractors will be paid for the work they do.”

However, the world changed on 11 March 2020.

On this day, the World Health Organisation classified COVID-19 as a pandemic.

Since then we have seen a series of urgent government-mandated health measures designed to prevent or slow the transmission of COVID-19, which in turn has resulted in the economy going into free-fall. One of these measures is the restriction or the prohibition of non-essential gatherings of people.

How has the construction industry been affected by these measures?

To date, construction sites have been classified as an essential service and are allowed to remain open.

However, storm clouds are gathering on the horizon in terms of the impact this crisis will have on the construction industry. So far in Australia, construction sites have been allowed to remain open, but we need to have our eyes open to more than just the prospect of a government-mandated shutdown.

In an article in the Financial Review entitled Building site shutdowns would spark a $2b monthly stoush, it is stated:

“A shutdown of building sites to curb the spread of COVID-19 would trigger stoushes over up to $2 billion per month in an industry that employs one million people, as contractors seek damages for site delays and clients make their own demands for damages to cover costs of projects not completed on time.

The closure of all commercial and infrastructure project sites – with an estimated value of $165 billion this year – could trigger monthly claims worth between $1 billion and $2 billion by builders against their clients and claims against those contractors, quantity surveying firm Slattery estimates.”

In an article in the Courier Mail entitled Builder collapses set to rise on virus fears, it is stated:

“QUEENSLAND’S building sector is bracing for more company collapses as home buyers and developers walk away from contracts due to the spread of coronavirus.

Master Builders Queensland deputy chief executive Paul Bidwell said builders were already reporting the loss of contracts as the economic uncertainty over the spread of the virus grew.

“We have home owners and developers walking away from contracts,” said Mr Bidwell. “We have not heard from any builders that they have closed their doors yet but if things don’t improve it could come about as conditions start to bite.”

Elsewhere in the article, Mr Bidwell outlined several initiatives that Master Builders Queensland would like to see the government adopt in addressing this crisis.

The Minister for Housing and Public Works Mick de Brenni responded by stating:

“Our reforms to Queensland’s security of payment laws are an important step towards this, however, we are in unprecedented times and the rapidly evolving impacts of the COVID-19 pandemic demand a measured but flexible response,” said Mr De Brenni.

“At the moment, our government is prioritizing legislation that deals with the immediate response to the coronavirus.”

Can the MFR reform rollout continue in this COVID-19 crisis?

There are five main facets of the MFR that contractors must currently fulfill, namely:

  • Have enough Net Tangible Assets (NTA) (calculation of a contractor’s assets minus their liabilities) to warrant a certain level of Maximum Revenue.
  • Comply with maximum revenue limitations. This is the amount of revenue a contractor can earn within a year.
  • Comply with a current ratio obligation. This is calculated by dividing a contractor’s current assets by current liabilities and must be at least 1:1. According to information on the QBCC website:

“a current ratio is worked out by comparing a licensees’ current assets to its current liabilities.  This helps to determine the businesses financial viability. Current ratio = current assets/ current liabilities. Current ratio must be at least 1:1. For every 1 dollar of current liabilities, you must have at least 1 dollar in current assets. Example: Current ratio = current assets/current liabilities = $52,000 / $30,000 = 1.73:1”

  • Pay all undisputed debts as and when the debts fall.
  • Satisfy mandatory annual reporting.

Section 35 (3)(a) of the Queensland Building and Construction Act 1991 requires that as a condition on a contractor’s licence, their financial circumstances must always satisfy the MFR.

How many contractors are required to comply with the MFR?

A discussion paper entitled The proposed improvements to the Minimum Financial Requirements for licensing in the building and construction industry, indicates that as at 4 July 2018, across the nine different licensing financial requirements, there were 70,825 contractors required to meet the MFR at all times.

There are two main types of licensees, builder and trade contractor, and they must satisfy the same MFR obligations.

Final thoughts.

In circumstances where the QBCC identify a builder or trade contractor who is not satisfying the MFR, the Commission may suspend or cancel the contractor’s licence for contravening section 35(3)(a) of the QBCC Act. This is a very important thing for contractors to be aware of. Just because they experience serious financial hardship as a result of this crisis and fail to meet the MFR at all times, it does not necessarily mean that the QBCC will immediately move to suspend or cancel their licence.

For example, in my view, the QBCC has adopted a very sensible position concerning the reintroduction of mandatory reporting for self-certifying and category 1-3 contractors.  Under the MFR, these contractors were required to provide an annual report by 31 December 2019.  Back in January 2020, it was reported in the Courier Mail that:

“UP TO 30,000 Queensland builders risk having their licences suspended if they fail to open their books for the state’s construction watchdog.

The Queensland Building and Construction Commission’s new minimum financial reporting laws, which came into effect on January 1, mean builders earning less than $30 million must lodge their ­financial reports with the ­commission.

The laws are designed to reduce the rate of builders going bust and leaving a list of creditors in their wake.

A spokesman for the QBCC said it was “pleased” with the 40,000 licensees who have already submitted their financial information, but about 30,000 are still yet to lodge.”

On the QBCC website, it is indicated that in the above circumstances the QBCC will only proceed to suspend or cancel a licence after implementing several follow up actions with the contractor designed to bring a resolution of the matter.

Unfortunately, however, I expect that during this COVID-19 crisis, many contractors will not meet another facet of the MFR, namely the current ratio obligation. As soon as a contractor has more current liabilities than current assets, they will not have a current ratio of 1:1.

My recommendation to all contractors who find themselves in this situation, and indeed every situation where they are not compliant with any facet of the MFR, is to ensure they obtain advice from trusted, experienced and qualified advisors.  Under no circumstances should they just ignore the problem(s) and hope things sort themselves out. Putting aside the potential regulatory issues contractors may have with the QBCC, they will also miss out on the opportunity to take decisive remedial action which could see their business in a far better financial position to survive this crisis.

In light of the insolvency laws which have been temporarily relaxed, I invite the same to happen in respect of the MFR. Furthermore, while the QBCC has adopted a risk-based approach to the new mandatory reporting obligations, contractors cannot assume that this will be the approach the QBCC will embrace in respect to regulating other facets of the MFR. These are extraordinary times and innovative regulatory measures are needed for the duration of this crisis.

Not intended as legal advice. Read full disclaimer.
Michael Chesterman March 30, 2020

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