The building and construction industry is the third-largest employer in Queensland and contributes $46 billion annually to the state’s economy.
Following a series of concerns regarding practices within the industry, the incumbent Queensland Government developed the Queensland Building Plan and, as a part of their plan, commissioned a review into the security of payments to subcontractors in the industry.
Outcomes of this consultative review confirmed systemic problems between head contractors and other parties carrying out construction or related work. Significant instances of noncompliance were also revealed with the existing legislation and contractual arrangements relating to the payment of claims. Upstream contractors were found to not have the appropriate processes in place to ensure timely payment of progress claims, and in some instances were found to delay payment in order to supplement cash flow, offset the costs of other projects, maximise interest or avoid financing costs when additional funds were required.
Introduction of the Building Industry Fairness (Security of Payment) Act 2017
As a result of the review, the Building Industry Fairness (Security of Payment) Act 2017 (‘BIF Act’) was introduced on 17 December 2018. The aim of the Act is to improve security of payment in the industry by:
- Introducing a suite of provisions requiring the use of specific project bank accounts for particular building contracts
- Granting entitlement to progress payments and establishing procedures for making and responding to payment claims
- Streamlining the process for adjudication of payment disputes
- Updating the rules governing subcontractors’ ability to make a charge for payment for their work.
These new regulations will require significant changes to current industry practices and may result in significant penalties for noncompliance if improved payment practices are not put in place.
Changes to subcontractor payment provisions
Chapter Three of the BIF Act introduces new rules and processes relating to progress payments. The Act supersedes the former Building and Construction Industry Payments Act 2004, and now applies to all payment claims, doing away with the requirement to provide an endorsement in the relevant contract in order to opt-in.
Who the progress payment provisions apply to
The progress payment provisions apply to contracts for a range of ‘construction work’ and ‘supply of related goods and services’, including:
- The construction, alteration, repair, restoration, maintenance, or demolition of buildings, roads and railways
- The installation of lighting, heating and air conditioning
- Landscaping, painting and related maintenance work
- Supply of goods or services relating to construction work including supply of materials and plant or engineering, design, surveying, soil testing and certain cleaning services.
This broad definition captures a number of subcontracts that may not traditionally be classified as a subcontract and requires attention to assure that payment of claims is being properly made for all legislatively-defined construction work or supply of related goods and services.
Process for making and responding to payment claims
The processes for payment of progress payments for construction work and supply of related goods or services under a valid payment claim are now mandatory under the BIF Act, which has also removed the ‘second chance’ provisions featured in the previous legislation dealing with subcontractor payments.
Once a valid payment claim has been issued after the contractual or legislative reference date, the respondent must issue a payment schedule providing reasoning as to why the amount being paid is less than the amount claimed. This needs to be lodged within 15 business days (or within a time frame otherwise agreed under the construction contract) or paid in full by the due date. The due date can be stipulated in the contract or will be imputed to be 10 business days after a valid payment claim is made at the end of the month where the work was carried out.
Impact of these changes
Failure to comply with this process may result in fines that could reach more than $10,000 per offence and means that the respondent to the claim cannot issue any response in any subsequent adjudication proceedings. Subcontractors can also elect to suspend carrying out construction work or supplying related goods or services and claim related losses or expenses after two business days of providing notice of their intention until payment is received. This can lead to significant project delays or schedule bottlenecks. Interest is payable on the unpaid amount at the higher rate stated in the contract or the rate prescribed under regulation for money orders (currently 6.75%). If the construction contract is also a ‘building contract’ under the Queensland Building and Construction Commission Act 1991, the relevant interest rate is 10% plus the Reserve Bank’s annual rate for 90-day bills if the contract does not provide for a higher amount.
The wide ambit of ‘construction work’, the ‘supply of related goods and services’, and also what is determined to be a ‘payment claim’, means that the Act can apply to contracts with, or invoices from, vendors that may not be traditionally thought to be a ‘subcontractor’. This can cause issues when legislative processes are not followed or payment is not prioritised accordingly.
Reform of subcontractors’ charges legislation
The BIF Act has also updated the requirements for subcontractors’ charges and has simplified the relevant procedures.
Subcontractors’ charges allow subcontractors who are not being paid to secure a claim over money owed to them by a contractor. A subcontractor can complete a notice of claim of a subcontractors’ charge, which can be used to claim a charge on both progress payments and retention money that may be payable by the principal to the head contractor or from the head contractor to a higher contractor. The contractor must then provide a response within 10 business days either accepting liability for the amount claimed, accepting liability to pay the amount but disputing the claim, or disputing the claim facing penalties reaching more than $20,000.
Once given notice of the claim, the principal must retain the money to be paid to the contractor until the court makes a decision about how the money is to be paid. A principal who fails to retain the money may be personally liable to pay the subcontractor the amount of the claim.
BDO’s experience with BIF Act compliance
BDO’s Contract Assurance and Advisory services team have recently been engaged to complete a number of compliance audits for several large Queensland infrastructure projects, as well as significant capital projects in relation to the new subcontractor payment requirements.
From these audits, BDO found instances where subcontractors were both inadvertently and systemically being paid after a payment became due and payable under the relevant contract and the BIF Act. Some head contractors were also unaware of their obligations under the new legislation or had not implemented appropriate procedures to ensure that progress payments were being paid on time.
It is important for project owners and administrators to understand whether their contractors are compliant with the mandatory requirements under legislation as well as the impact of delayed payments to subcontractors down the line.
Early engagement of BDO by contract principals across these infrastructure and capital projects has provided significant assurance that the successful operation of their projects, and the solvency of their contractors, is not being supported by practices that are noncompliant with legislative requirements, alleviating significant project risk.
If you are a project owner or contract manager, contact us today to see how BDO can manage risks across your large and complex projects.