SOP questions you should be asking

Background

The government commenced a review of Security of Payment (SOP) laws by releasing a Security of Payment discussion paper on 17 December 2015.

“The initiatives contained in BIFA are commencing on a staged basis. At the earliest, BIFA will not be fully operational until March 2019 when Project Bank Accounts will take affect in the private sector. This means that approximately 3 years and 3 months after this formal review of security of payment laws commenced, the legislative response will be fully implemented.”

However as I pointed out in a recent article entitled BIFA delay. SOP confusion, in a press release dated 12 June 2018 the responsible Minister, The Hon Mick de Brenni stated:

“following industry consultation on the next tranches I will introduce BIF Act amendments into the House to progress the next stages of reform.”

Furthermore the Minister stated that in accordance with relevant BIFA provisions he has appointed a:

“Building Industry Fairness Reforms Implementation and Evaluation Panel to work with government and with the building industry to assess the implementation of this legislation.”

The terms of reference of the Panel (Panel) is to determine:

Current position

In progressing the “next stages of reform” I hope that the industry get answers to at least the following nine questions.

1. For evaluation purposes, what are the objectives or purpose of BIFA?

The starting point for any evaluation of BIFA is to access it against its objectives or purpose. To that extent I have noted three different positions, namely:

“(1) The main purpose of this Act is to help people working in the building and construction industry in being paid for the work they do.

(2) The main purpose of this Act is to be achieved primarily by —

(a) requiring the use of project bank accounts for particular building contracts; and

(b) granting an entitlement to progress payments, whether or not the relevant contract makes provision for progress payments; and

(c) establishing a procedure for —

(i) making payment claims; and

(ii) responding to payment claims; and

(iii) the adjudication of disputed payment claims; and

(iv) the recovery of amounts claimed; and

(d) enabling the use of a statutory charge in favour of subcontractors for payment of the work they do.”

My main takeaway out of this legislative position “is to help people in the building and construction industry in being paid”.

“The objective of these reforms is to improve the security of payment for subcontractors and support long term industry growth and efficiencies.”

In my view, this position significantly differs to the section 3 of BIFA purpose because it factors in “support long term industry growth and efficiencies.”

“The guiding objective behind the suite of reforms that are contained is this bill is to ensure that subcontractors are paid in full and on time”

This is a more specific and targeted objective in that the words “to ensure subcontractors are paid in full and on time” are used.

2. What will be the total regulatory costs of BIFA having regard to all its initiatives?

In my article of 9 October 2017 entitled SOP reforms…..something does not add up I stated:

  • regulating contracts between contractors and subcontractors by mandating certain provisions and prohibiting others;
  • controlling and directing the flow of money between subcontractors and builders with the establishment of PBA;
  • redefining in favour of subcontractors the operations of the Building and Construction Industry Payments Act 2004 (BCIPA) through a number of procedural changes.”

“Given the disparity between the government’s analysis and that of the HIA, MBQ and Industry Participants, it is simply not possible to determine with any confidence the costs the industry will incur in the establishment of PBA.”

Elsewhere I stated:

“I am of the opinion that the government needs to undertake a more broadly focused analysis of the costs builders and subcontractors will incur if the four SOP initiatives outlined in the BIF Bill were to be enacted.”

I continue to hold the view that a detailed analysis of this nature should be carried out.

“The Deloitte report has identified that 7 additional hours will be incurred each month per project for head contractors who manage a project bank account contract.”

However it should be noted that in an article entitled Testing the waters of the wrong ocean I raised a number of concerns about the value of relying on the evaluation of government PBA projects as a reliable means to gauging the impact they will have in respect of private projects. I stated:

“ I say this for the following three main reasons.

1. DHPW, on behalf of the Queensland Government, administers a system of prequalification for contractors in the building and construction industry known as the Prequalification (PQC) System. Contractors must first be prequalified and appropriately registered on the PQC System to be eligible to compete for any Government building project estimated to exceed $1,000,000 in value. These PQC requirements are over and above the QBCC licensing requirements and are very comprehensive. One major point of difference is that the PQC financial requirements are much tougher than the QBCC licensing financial requirements. This means that contractors that will be tendering for government projects where PBA’s will be applicable are not representative of many other licensed contractors.

2. DHPW stipulate that only certain widely used standard form contracts will be utilised in relation to the operations of PBA’s on government projects. Obviously, this will not be the case with private sector projects.

3. DHPW will select superintendents to administer PBA’s projects that understand their responsibilities to act in a responsible manner when deciding payment entitlements of contractors. Again, this will not necessarily be the case with private projects.”

3. Will confusing and inconsistent language used in BIFA be reviewed?

I addressed this issue in detail in my article entitled QLD Security of Payment is a minefield… but it might surprise you who is in danger where I identified six BIFA ‘unintended consequences’, one of which relates to confusing and inconsistent language used in BIFA.

“While wording changes may seem a trivial matter that will not affect subcontractors, this is simply not the case as uncertainty of interpretation will cause more issues not less for subcontractors. If there is some uncertainty as to the correct position, unsuccessful parties will be more likely to apply to the Supreme Court to overturn adjudication decisions. While all this is happening, normally the subcontractor will not be paid the adjudicated amount”.

4. Will contractual uncertainty caused by section 76 of BIFA be addressed?

In my article entitled BIFA delay. SOP confusion I outlined in great detail section 76 issues. This is a very significant issue.

5. What will be the new Minimum Financial Requirements for licensing?

The Minister in his 12 June 2018 press release stated “an approved regulation for Minimum Financial Requirements will operate from 1 January 2019.”

6. What will be mandatory and prohibited conditions in a building contract?

I addressed this issue in my article entitled BIFA delay. SOP confusion where I stated:

“The Parliamentary Committee that reviewed BIFA made a recommendation (number 5) to the Government that:

“The committee recommends the Minister consult with the building and construction industry when developing the regulation that will mandate and prohibit certain conditions for building contracts and with regard to any subsequent amendments to the regulation”.

The Government responded by accepting this recommendation and indicated that ‘provisions that will mandate and prohibit certain contract conditions will be developed in consultation with the Ministerial Construction Council’”.

I also addressed these contract initiatives in an article entitled What will building contracts look like after Project Bank Accounts (PBAs) come into effect?.

7. Will there be additional details prescribed by regulation as to what will constitute a valid BIFA payment claim?

Section 68 of BIFA states:

“A payment claim, for a progress payment, is a written document that —

(a) identifies the construction work or related goods and services to which the progress payment relates; and

(b) states the amount (the claimed amount) of the progress payment that the claimant claims is payable by the respondent; and

(c) requests payment of the claimed amount; and

(d) includes the other information prescribed by regulation.”

Unlike BCIPA, there is no requirement for a claimant to have to endorse a payment claim as been made under BIFA.

8. What will be the continuing professional development requirements for adjudicators?

Section 165 of BIFA states in part:

“Conditions of registration

(1) Registration as an adjudicator is subject to the following conditions —

(a) the adjudicator must comply with this chapter and chapter 3;

(b) the adjudicator must complete continuing professional development as prescribed by regulation;

(c) other reasonable conditions the registrar considers appropriate to give effect to this chapter and that are stated in the certificate of registration or in an information notice given under subsection (3).”

I am of the view that enshrining CPD requirements as a condition of registration of adjudicators is a very positive action on the part of the government. The need for adjudicators to remain up to date with legislative and contractual developments is vital.

9 . How will the QBCC go about its business in ensuring ensuring compliance with BIFA?

The current published QBCC Compliance and Enforcement Strategy version 2 (as at 31 July 2017), (CES) states:

“This compliance plan sets out short to medium term compliance priorities for the QBCC in terms of regulating the building and construction industry. This is a ‘live plan’ meaning that the planned priorities are proactive and could alter during the year based on changes to the environment such as legislation reform, a shift in resources or because the QBCC identifies a risk that needs a concentrated focus. It is recognised that the QBCC has finite resources. As such, like most law enforcement agencies, the QBCC cannot act on every complaint received. It will, however, take on cases and act in accordance with its risk management framework and enforcement priorities.”

In the Parliamentary Committees report (pages 66–76) 55 new or amended BIFA offences are outlined. This represents a significant expansion of the compliance and enforcement role of the QBCC, a fact the Minister addressed in detail in his speech introducing the Bill where he stated:

“The bill provides that a regulation may prescribe increased financial reporting by QBCC contractor licensees. The bill also increases penalties for acting unlicensed under the QBCC Act. The current offence provisions attract a maximum penalty of 250 penalty units. Amendments to the QBCC Act in the bill will provide for a graduated penalty regime, which includes:

• first offence — maximum 250 penalty units

• second offence — maximum 300 penalty units

• third and subsequent offences — maximum 350 penalty units or one year imprisonment.

The bill also provides a penalty for undertaking reckless building work that results in significant financial loss because the person deliberately avoids complying with, or failing to comply with, the contract.

An important amendment in the bill is increased rigour around the ‘excluded individual’ provisions, so that a person who was involved in a company failure in other jurisdictions, or who was the director of a company up to two years prior to a failure, will be excluded from obtaining a QBCC licence.

Also the definition ‘influential person’ in the bill is intended to capture a person in a position to substantially influence or control the company’s affairs but who is not a director or secretary of the company. In short, our new laws will allow a ban on anyone who has been secretly involved in running a construction company that goes bankrupt or has its building licence revoked. Anyone who receives a ban under these new laws will face major penalties if they try to run another building company, either in their own name or by, once again, giving secret directions from behind the scenes.”

Significantly a number of these changes came into effect on 10 November 2017 .

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