Building Businesses: QBCC contractor financial fails
Opinion by: Michael Chesterman
We at Helix Legal are looking forward to hosting the upcoming Building Businesses: a conversation with the QBCC event.
In my previous article, I advised that on 26 September 2019 the Queensland Building and Construction Commissioner, Brett Bassett, and a number of senior QBCC staff will be participating in a Q&A style event hosted by Helix Legal.
In this article I stated:
“This event will present attendees with an opportunity to have a ‘conversation with the QBCC’ regarding a number of industry reforms that have progressively been coming into effect over the past 18 months.”
One of these reforms is the Minimum Financial Requirements for Licensing (MFR’s) that came into effect on 1 January 2019 and designed to:
- strengthen reporting requirements;
- provide clarity about what can be included when calculating a licensee’s assets and revenue;
- improve data quality and availability for the QBCC.
In a government information bulletin, it is stated that these reforms:
“will ultimately enable the QBCC to more effectively detect and minimise the impact of potential insolvencies and corporate collapses.”
There is no doubt the MFR’s are challenging for contractors to satisfy but the biggest area of vulnerability is in ignorance. We want to encourage contractors to pull their collective heads out of the sand and come and have a conversation with the regulator about what they can do to be proactive — not reactive.
Just how tough the MFR’s are was brought home to me the other day when I read an article on the financial position of Adani’s Carmichael coal mine. In the article it is stated:
- The company responsible for the Carmichael coal mine has current liabilities of more than $1.8B versus current assets of less than $30M
- The auditors signed off on the company being a “going concern” because of a 12-month guarantee from the Indian parent firm.
Furthermore, Professor van der Laan, a forensic accounting specialist who heads the discipline of finance at the University of Sydney was quoted in this article as saying:
“effectively on paper they are insolvent. I wouldn’t be trading with them.“
If this company was a building contractor, it would not satisfy the MFR’s based on having a financial position as outlined above.
In making this comment I am in no way making a case one way or the other as to whether Adani’s Carmichael coal mine should proceed. I am merely highlighting how tough the regulatory environment is in which contractors operate. However, these very high regulatory requirements are designed to address the adverse impact insolvency and company collapses can have on subcontractors, business owners, employees, suppliers.
The QBCC sent an early signal of its intention to decisively enforce the new MFR’s, with its decision on 8 March 2019 to suspend the licence of Laing O’Rourke Australia Construction Pty Ltd (Laing O’Rourke) for failing to satisfy these requirements.
In an article entitled Laing O’Rourke licence suspension. Lessons Learnt I outlined 7 lessons learnt as a result of the decision by the QBCC to suspend the licence of Laing O’Rourke, namely:
The QBCC will expect all relevant licensees to adhere to the MFR’s. In a Discussion Paper (appendix 5) it is indicated that as at 4 July 2018, there are 70,825 licensees required to meet the MFR’s. Furthermore, if necessary the QBCC will take enforcement action to protect subcontractors, suppliers, investors and homeowners from financial hardship as a result of dealing with licensees in financial distress.
On the basis of the matter being resolved as reported in the Financial Review, contractors are going to have to explore and settle to the QBCC satisfaction financial restructuring actions in order to address identified MFR’s issues.
If a contractor operates a substantial business the QBCC will monitor their operations after any MFR’s issue(s) have been addressed.
The QBCC has the necessary powers, upgraded systems and sufficiently trained staff to effectively enforce the new MFR’s.
It will not only be builders that should carefully note what has transpired in this matter. Subcontractors running significant businesses will be treated in exactly the same manner. The MFR’s do not distinguish between builders and subcontractors. They are all licensees.
The QBCC will afford contractors sufficient opportunity to address any identified issues, providing they are acting in a responsible and honest manner. I note that in this matter the duration of the QBCC investigation was 11 months.
It is one thing for contractors to have a good technical understanding of the MFR’s. The QBCC has good information on its website. However, it is entirely a different thing for contractors to understand and appreciate the determination of the QBCC to enforce the MFR’s and the means they now have at their disposal to achieve its compliance objectives in this regard.”
However, it is very apparent to me that some contractor’s and their accountants are still grappling to understand the specific accounting and general requirements of the MFR’s and in some instances, may have also underestimated the commitment of the QBCC to enforce them.
In an article in the Courier Mail entitled Watchdog QBCC suspends Simonds Group’s Queensland licence it is stated:
“The QBCC licence of Simonds Queensland Constructions was suspended after it failed to show it had enough assets to support its revenue of more than $350 million.”
Another example of a contractor experiencing challenges with the MFR requirements is De Luca Corporation. In an article in the Courier Mail it is stated that the QBCC suspend the companies licence because:
“De Luca was a large value licensee with an annual turnover of more than $230 million but it currently had a net asset position of negative $3.2 million.”
More recently the biggest residential developer in Cairns, Kenfrost (1987) Pty Ltd has had its licence suspended. In an article in the Courier Mail it is stated:
“The biggest residential developer in Cairns has had its licence suspended as the building industry watchdog investigates its financial position.
Kenfrost Homes workers have been forced to drop tools after the Queensland Building and Construction Commission suspended the company’s building licences amid a crackdown on builders with questionable financial viability.”
In an article entitled An effective licensing regime is not a silver bullet for the problems of the industry “ …..but we must have one I stated:
“The MFR’s are necessary and I support the changes being introduced but if they are relied upon by industry as the silver bullet to cure insolvency in the industry — there will only be widespread disappointment. We should also recognise that the MFR’s play a very important role in ensuring as much as possible, only financially viable contractors are operating in the Industry in Queensland. While it is not the silver bullet it is better than what exists in most other States and Territories throughout Australia.”
However, the time is over for debating the relative merits or otherwise of the changes. As of 1 January 2019, the new MFR’s have become a reality and they are biting.
Building Businesses: a conversation with the QBCC
If you are interested in attending the abovenamed event and finding out more about the new MFR’s and how the QBCC is administering them, please click on the link below.
If you are a contractor, any insight you may obtain could be very beneficial to your business.
If an accountant or insolvency practitioner, anything you learn may assist you in advising contractor clients. Furthermore, as a cautionary note for all accountants, the QBCC has indicated an intention to pursue any accountants who provide inaccurate information to them on the financial position of contractors.
In an article in the Courier Mail entitled QBCC takes aim at accountants keeping struggling builders afloat Mr Basset is quoted:
“Accountants need to be aware that if their client enters financial difficulty, we will also be looking closely at their own activities,” Mr Bassett said.
“If accountants are knowingly or unknowingly providing incorrect information, we have forensic accountants and experienced investigators who will uncover any attempt to do so, and the QBCC will be taking action.”
The article goes on to say that “two accountants are currently listed as not acceptable to provide financial reports to the QBCC.”
Insolvency practitioners would also benefit from attending this event.
Numbers are limited so if you or any of your colleagues or contacts are interested in attending this event I would recommend that you promptly register.
We look forward to hosting the inaugural event for the Building Business Series at Helix Legal on 26 September 2019.