The new project trust regime to commence in Queensland on 1 March 2021

Who should read this

All principals, head contractors and subcontractors performing building and construction work in Queensland.

The things you need to know

In February 2020, the Queensland Government introduced the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020 (Qld) (BIF Amendment Bill), which included replacing the existing project bank accounts (PBAs) regime, with the concept of ‘project trusts’, which are intended to simplify the regime. The BIF Amendment Bill received royal assent on 23 July 2020, culminating in the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Act 2020 (Qld) (BIFOLA Act). The BIFOLA Act provides for the replacement of Chapter 2 in the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) with a new statutory trusts regime, consisting of ‘project trusts’ and ‘retention trust accounts’, and removing the requirement for a disputed funds trust account. Additional oversight powers are also granted to the Queensland Building and Construction Commission (QBCC) via the BIFOLA Act.

On 27 August 2020, the Queensland Government proclaimed the commencement dates for various provisions in the BIFOLA Act. Notably, the new statutory trusts regime in Chapter 2 will commence on 1 March 2021, but initially it will only apply to the existing PBA cohort (i.e. eligible State Government building contracts valued between $1 million and $10 million). The new statutory trust regime will then be rolled out in phases across 2021, 2022 and 2023, progressively expanding to cover all eligible contracts valued at $1 million or more.

What you need to do

In preparation for commencement of the new statutory trusts regime on 1 March 2021, you should carefully consider how you will adapt your current financial and project administration procedures to ensure compliance with the inbound changes. You may also wish to consider whether any corresponding amendments are required to your contracts.

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In late 2017, Chapter 2 of the BIF Act introduced the concept of project bank accounts (PBAs) for certain building contracts in Queensland.  The requirement for PBAs initially only applied to Queensland Government projects valued between $1 million and $10 million tendered after 1 March 2018.  PBAs were intended to be rolled out across a broader range of projects in the Queensland construction industry in phases over the coming years.

Following a review of the PBA regime, in February 2020, the Queensland Government introduced the BIF Amendment Bill, which included changes to the existing PBA regime, replacing it with the concept of ‘project trusts’, which are intended to simplify the regime.  The BIF Amendment Bill received royal assent on 23 July 2020, resulting in the BIFOLA Act, which provides for the replacement of Chapter 2 in the BIF Act with a new statutory trusts regime.  On 27 August 2020, the Queensland Government notified by proclamation that the commencement date for the replacement of the existing PBA regime is 1 March 2021.

This article summarises the new statutory trusts framework, which includes project trust accounts (PTAs) and retention trust accounts, and the oversight powers granted to the QBCC.  We also flag the changes made to improve the recovery of adjudication debts for claimants, however, this topic will be the subject of a separate focus alert.

New statutory trust accounts framework versus PBAs

The PBA regime required head contractors to establish three PBAs (general trust account, retention trust account and disputed funds account) for each project, from which the head contractor could only withdraw monies that it was not otherwise liable to pay to the first tier subcontractors.  The intention was to increase security of payment for subcontractors performing building work in Queensland by granting the first tier subcontractors primary beneficial interest in the monies held in trust in the PBAs, and providing for simultaneous payment from the PBAs to the first tier subcontractor and head contractor.

Under the new statutory trust account regime, a head contractor will only need to establish one PTA (rather than three trust accounts) for each ‘eligible contract’ for ‘project trust work’.  Separate to the PTA, a head contractor will also need to establish a single trust account for any retention monies held across all of the head contractor’s eligible contracts.  However, the requirement for a disputed funds account is being removed, and instead new offences for non-payment of adjudication debts will be introduced.

Where a project trust is required, the principal is still required to pay any monies payable to the head contractor (including adjudication debts owed to the head contractor) into the PTA rather than directly to the head contractor, and first tier subcontractors must still be paid directly from the PTA.  However, the BIFOLA Act will reduce the obligations on principals with respect to the administration of these trust accounts (aside from notifying the QBCC of subcontracts between the head contractor and its related entities, and instances where a head contractor has failed to open a PTA).  Instead, the QBCC will be given greater oversight and auditing powers with respect to new statutory trust accounts.

As with the PBA regime, significant penalties and in some instances, imprisonment, apply for non-compliance with the requirements for project trusts.

When is a project trust required?

Project trusts are required for all ‘eligible contracts’ entered into on or after the commencement of section 12 of the new Chapter 2 of the BIF Act (i.e. after 1 March 2021), which are not ‘exempt contracts’, and where the head contractor enters into a subcontract for all or part of the work it was contracted to carry out.  If the tender process for the relevant contract was started before commencement of the new section 12, the existing PBA regime will apply to that contract.

‘Eligible contracts’ and ‘exempt contracts’

An eligible contract is one where:

• the ‘contracting party’ (i.e. the principal) is the State (excluding State authorities, unless they opt in);
• more than 50% of the contract price is for ‘project trust work’; and
• the contract price is $1 million or more, but not more than $10 million.

Further ‘eligible contracts’ may be prescribed by regulation in the future.  It is also important to keep in mind that a contract entered into with the State for ‘project trust work’ with an original contract price of less than $1 million can become eligible if the contract price exceeds $1 million as a result of an overall price increase of 30% or more.

If the same parties enter into two or more separate contracts for project trust work at the same or adjacent sites, those separate contracts will be treated as a single contract for the purpose of determining whether a project trust is required.  This is the case even if one or more of the separate contracts is an ‘exempt contract’.  This means that parties cannot avoid the requirements for project trusts by dividing the works and entering into multiple contracts with lesser values.  However, if the separate contracts were entered into as a result of separate tender processes, they will not be treated as a single contract.

The new statutory trust account framework will not apply to the following ‘exempt contracts’:

• contracts solely for advisory work or design work carried out by architects, registered professional engineers, building designers or landscape architects, or contract administration carried out by such persons for the construction of a building wholly or party designed by them;
• contracts solely for ‘maintenance work’, which includes testing, taking samples and restoring samples to site or ongoing work required to prevent deterioration or failure of a thing, restore the thing to its correct operating specification or replace components at the end of its working life;
• contracts for small scale residential construction work (i.e. for less than 3 living units);
• contracts with less than 90 days until practical completion; or
• contracts between the State and a state authority.

Similarly, project trusts will not be required for subcontracts unless the subcontractor is a related entity to the head contractor, or the subcontract is prescribed by regulation to require a project trust.

‘Project trust work’

As noted above, one of the criteria for an ‘eligible contract’ is that more than 50% of the contract price is for ‘project trust work’.

‘Project trust work’ is broadly defined in section 8A of the new Chapter 2 of the BIF Act to include a wide variety of activities related to the erection, construction, renovation or repair of a building, and is not limited to ‘building work’ as defined under the Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act).  It includes many types of work which are excluded from the definition of ‘building work’ for the purpose of licensing requirements under the QBCC Act, for instance, earthmoving and excavating works, electrical works, the erection of scaffolding, and works performed by architects and professional engineers.

‘Project trust work’ also forms part of the definition of ‘protected work’ in section 8B of the new Chapter 2, which picks up an even broader range of construction activities (similar to the definition of construction work and related goods and services in the BIF Act), and only excludes mining and related works (i.e. drilling for, or extraction of natural gas, or minerals).  ‘Protected work’ is relevant to determining when a first tier subcontractor will become a beneficiary of the project trust.  Where a project trust is required for a head contract, a first tier subcontractor to that head contract will be a beneficiary if its subcontract is for ‘protected work’ and the subcontract price is at least the minimum contract price (which will be prescribed by regulation).  In effect, this means that a first tier subcontractor can be a beneficiary even if its works are not ‘project trust work’ (so long as they are ‘protected work’).

How do PTAs work?

First tier subcontractors are the primary beneficiaries to the PTA, whereas the head contractor is both a trustee and beneficiary of the PTA, and is required to open and administer the PTA that holds the project trust monies.

The head contractor must open the PTA within 20 business days after it enters into the first subcontract, and the head contractor is only required to open one PTA for the project trust.  The PTA must be opened at an approved financial institution and there remains a requirement that the word ‘trust’ appear in the title of the account that is opened as the PTA.  Significant penalties apply for failure to comply with both of these requirements.

As with the existing PBA regime, the principal pays monies owed to the head contractor directly into the PTA and all payments to first tier subcontractors must be made from the PTA rather than direct from the head contractor.  If an amount is paid to the head contractor in contravention of this requirement, the head contractor must deposit the amount into the PTA as soon as practicable.  A failure to do so will attract significant penalties, including up to two years imprisonment.

Retention trust accounts

As part of the review into the existing PBAs regime, it was recommended that a single and separate trust account be created for cash retention held by ‘the contracting party’ (i.e. a principal to a head contract, or a head contractor to a first tier subcontract) across all of its eligible contracts.  This recommendation was adopted in the BIFOLA Act, and Part 3 to Chapter 2 of the amended BIF Act will prescribe that retention trusts be established over cash retentions held under head contracts and first tier subcontracts where a project trust is required for the head contract.

Retention trust accounts must be separate from PTAs and opened before any retention can be withheld from any progress payment.  Again, the word ‘trust’ must appear in the account name and may only be held at an approved financial institution.  Only one retention trust account will be required for all cash retention held by the contracting party across its eligible contracts.

The contracting party is both the trustee and beneficiary of the retention trust account.  However, in its role as the trustee, it:

• will be liable for any shortfall in the retention trust account;
• will not be entitled to payment for the administration of the trust or trust fees from the funds held in trust; and
• cannot invest the cash retention funds.

The person nominated as trustee will be required to complete training (to be prescribed in the regulations), and will be responsible for the training costs.

Removal of disputed funds account

The BIFOLA Act does away with the requirement for a disputed funds account and contains guidance for the closure of disputed funds accounts that were opened during the initial phase for PBAs under the BIF Act.

The rationale behind the disputed funds account was to protect subcontractors by securing monies the subject of disputes.  To address this concern, the BIFOLA Act introduces greater protection to head contractors and subcontractors via new offences and remedies for the non-payment of adjudication debts.  These include:

• Head contractors will be required to provide a supporting statement with its payment claims to the principal that states all of its subcontractors have been paid, and if they have not been paid, state reasons for non-payment.
• If a head contractor has not been paid an adjudicated amount awarded in its favour by the principal, the head contractor can:
  • lodge a payment withholding request against the principal’s financier; and/or
  • request a charge over the property owned by the respondent (or its related entities) on which the construction work and related goods and services were performed that relate to the adjudication debt.
• Where a subcontractor has not ben paid an adjudicated amount awarded in its favour by the head contractor, the subcontractor can lodge a payment withholding request against the principal for monies otherwise payable to the head contractor.

These are extraordinary additional protections afforded to claimants to adjudications under the BIF Act, which will commence from 1 October 2020.  The new protections afforded to claimants via the BIFOLA Act will be addressed in further detail in a separate focus alert.  Be sure to sign up to receive our building and construction focus alerts moving forward to find out more.

QBCC oversight of project trusts

The BIFOLA Act establishes greater oversight powers for the QBCC, which will require the QBCC to maintain a register of project trusts and retention trusts.  The QBCC will also have new powers to compel the provision of information and documents from trustees and beneficiaries of project trusts and retention trusts.

Additionally, if the QBCC reasonably suspects that PTAs or retention trust accounts are not being used as required under the BIF Act, the QBCC will be empowered to direct that an amount not be withdrawn from the relevant account without the QBCC’s written approval.  Non-compliance could result in a fine of up to $13,345.

The QBCC will also have the power to appoint a suitably qualified person as a special investigator to investigate whether parties have complied with the requirements of the BIF Act in relation to project trust and retention trust accounting.

Timing

On 27 August 2020, the Queensland Government notified by proclamation that the new statutory trust regime would commence on 1 March 2021.  Initially, these only apply to contracts that already required a PBA under the BIF Act (i.e. eligible State government contracts with a contract price between $1 million and $10 million).

In a further proclamation on 28 August 2020, the Queensland Government notified of the commencement dates for the various phases of the new statutory trust regime:

• Phase 1: from 1 March 2021, the new statutory trust regime will apply to State Government eligible contracts with a value between $1 million and $10 million (i.e. the same as the existing PBA cohort), plus any contracts with a State authority valued over $1 million where the State authority has decided a project trust is to be established;
• Phase 2A: from 1 July 2021, project trusts will expand to include both State Government and health and hospital service eligible contracts of $1 million or more;
• Phase 2B: from 1 January 2022, the requirement for project trusts will be extended to private sector, local government, statutory authorities and Government owned corporations eligible contracts worth $10 million or more;
• Phase 3: from 1 July 2022, projects trusts will further apply to any eligible contracts valued at $3 million or more; and
• Phase 4: from 1 January 2023, the requirement for project trusts will be further extended to all eligible contracts valued at $1 million or more.

Between now and 1 March 2021, it is important for all participants in the building and construction industry familiarise themselves with the new statutory trust regime.  However, it is particularly critical for head contractors to consider:

• how their head contracts will address both the current PBA regime and the transition to the new statutory project trust regime; and
• how their personnel will manage the administration of PTAs and retention trust accounts, including who will be the trustee.

For further information on any of the issues raised in this alert, please contact members of our construction team below.