Queensland building legislation labelled 'not fit for purpose'

Measures taken by the Queensland Government to stem the bleeding in the construction industry that has inflicted so much pain on building subcontractors have been branded ineffective by a construction payments platform with first-hand experience of the legislation’s alleged shortfalls.

Aware that insolvency is higher in the construction industry - a $360 billion dollar sector - than in any other industry in Australia, the Queensland Building and Construction Commission (QBCC) introduced the Building Industry Fairness (Security of Payment) Act 2017.

The necessity for the Act is underlined by Australian Securities and Investments Commission data showing 2,170 construction businesses went into administration in the 2022-23 financial year alone, 69 per cent more than in 2021-22, and 20 per cent more than the previous high of 1,802 in 2013-14. There are few signs that the health of the building industry is markedly improving.

The QBCC’s fairness Act mandates that project funds are ‘siloed’ into dedicated trust accounts with strict rules surrounding payment practices and the threat of penalties or fines for non-compliance.

But six years after its introduction, the legislation has been labelled not fit for purpose.

Speaking to API Magazine, Paul Reid, Head of Strategy and Operations at IPEX, said the rules governing construction industry payments and project funds were overly complex, contain too many loopholes ripe for exploitation, and encourage behaviour that runs contrary to the stated objective of protecting subcontractor payments.

“The legislation is 232 pages long, which is evidence in itself of the complexity and, if it’s not properly understood, how can we expect compliance?

“This complexity also gives rise to gaps in protection, for example, the legislation may allow for a window between the builder receiving a progress payment and the subcontractor entitlement being recognised,” Mr Reid explained.

“This means a builder can withdraw project funds from the trust account, then later deposit the amount required to cover due invoices back into the account and remain compliant.

“Timing is everything; it’s common for administrators to be appointed shortly after a progress payment is received, precisely when this window may apply to a project.

“Essentially, the Act is ineffective at the point at which it is most needed to protect subcontractor payment.

“In addition, the QBCC has fixed the beneficial entitlements for subcontractors only; the legislation excludes consultants and suppliers, so this means it’s an offence under the Act to pay these parties directly out of the project trust account, requiring that builders transfer funds from the project account into their operating account to pay these invoices.

“Aside from being inefficient, this raises the question as to why suppliers and other third parties have been ignored despite facing many of the same risks.”

Queensland offers nation’s ‘strongest protections’

A spokesperson from Queensland’s Department of Energy and Public Works (DEPW), which is responsible for building legislation changes and security of payment reforms, defended itself from the criticisms, telling API Magazine that Queensland has the strongest subcontractor payment protections in the nation.

“Although business is booming in the Sunshine State, some major builders have felt the financial pressure from rising materials and labour costs,” the spokesperson said.

“Our trust account framework – together with minimum financial requirements – has helped cushion the devastating financial flow-on effects of construction company collapses.

“Since phased implementation of Project Trust Accounts commenced in 2018, trust accounts have secured funds under more than 1,200 building contracts to the value of nearly $20 billion.

“As beneficiaries of Trust Accounts, building industry subcontractors (including consultants, building work service providers and construction workers) are like ‘secured creditors’ and are prioritised for payment in the event of insolvency.

“Supplementary suppliers have access to other statutory protections to recover payment. These protections are not regulated by the QBCC.”

Mr Reid acknowledged QBCC’s assertion that it had invited significant industry feedback when developing the legislation but said it was time for another review of the legislation.

“The rules have become convoluted and ultimately, the legislation fails to adequately protect subcontractor payments, particularly when the risk is at its highest,” he said.

“The process itself also places additional administrative burden on all builders, including those managing funds responsibly.

“Unfortunately, the legislation relies on trust to function; trust that the legislation is understood and trust that builders will comply at all times, even if under extreme financial distress.”

But DEPW argued that effective deterrents to misappropriation of project funds were already in place.

“By law, head contractors/trustees are prohibited from paying themselves from the project trust account if they are also liable to pay those amounts to subcontractors,” the spokesperson told API Magazine.

“The head contractors/trustees’ liabilities arise when they give a payment schedule and, in addition to trust account protections, failing to pay the scheduled amount by the due date is also an offence under the BIF Act – up to 100 penalty units apply.”

Building industry consultations underway

DEPW said Queensland’s security of payment framework was developed to help ensure everyone in the building industry contractual chain is paid for the work they perform, adding that trust accounts are designed to work alongside existing contractual and payment processes – they do not change how or when a subcontractor is entitled to payment.

“It is important to note that the balance of a Project Trust Account will (intentionally) fluctuate significantly throughout a project’s cycle, as well as within any given months.”

The spokesperson said the DEPW and QBCC were actively engaged in consultation around potential further improvements in the security of payment for all contractors along the chain.

“We are now looking at further ways to simplify the trust account framework and exploring ways to make it easier for contractors to comply.

“In fact, we are working with almost 30 leading software providers who are developing automated solutions that make trust accounting simpler and more cost-effective,” the spokesperson told API Magazine.