Safeguarding against subcontractor non-payment: Does the QBCC legislation actually work?
By Paul Reid (pictured), Head of Strategy and Operations at IPEX.
Insolvency is higher in the construction industry – a $360billion dollar sector – than in any other industry in Australia. According to data from the Australian Securities and Investments Commission (ASIC), 2,170 construction businesses went into administration in the 2022-23 financial year alone, 69% more than in 2021-22, and 20% more than the previous high of 1,802 in 2013-14. Based on current trends, last FY’s high will be surpassed in the current financial year.
In an attempt to reduce the contagion effect of insolvency – subcontractor non-payment – The Queensland Building & Construction Commission (QBCC) introduced the ‘Building Industry Fairness (Security of Payment) Act 2017’. The legislation mandated that project funds be ‘siloed’ into dedicated trust accounts with strict rules surrounding payment practices and the threat of penalties or fines for non-compliance.
While positive in intent, six years later the legislation is not fit for purpose and in some ways, QBCC policy actually encourages behaviour that runs contrary to the stated objective of protecting subcontractor payments. But what is the legislation? What are the pros and cons? How are loopholes being exploited? And what is the solution?
QBCC: The good and the bad
The fact that the trailblazing legislation exists in the first place is hugely positive. The Queensland Government has acknowledged that the industry has a problem, and that it can be part of the solution. The legislation compels builders to ‘silo’ funds on a project-by-project basis, which is designed to reduce the likelihood of subcontractor non-payment if a builder becomes insolvent. There are, however, flaws.
The legislation runs to 232 pages, clearly demonstrating the complexity. If it’s not understood, how can it be followed, actioned and enforced? When there is so much complexity, there are always going to be grey areas. For example, the legislation may allow for a ‘window’ after the builder receives a progress payment and before the subcontractor entitlement is recognised.
In practice, this means a builder can withdraw project funds from the trust account, then later deposit the amount required to remain compliant. Timing, though, is everything. Administrators are often appointed shortly after a progress payment is received; precisely when this ‘window’ may apply to a project. Essentially, the legislation is ineffective during the time it is most needed to protect subcontractor payments.
What’s more, the QBCC has fixed the beneficial entitlements for subcontractors only. The legislation excludes consultants and suppliers. Essentially, it’s an offence under the legislation to pay these parties directly out of the project trust account, meaning that builders transfer funds from the project account into their operating account to pay these invoices. Aside from being an inefficient and laborious process, it raises the question: why are suppliers and other third parties ignored despite being exposed to the same risks?
The legislation relies on ‘trust’, understanding of complex legislation and compliance to be beneficial; trust that the legislation is understood and trust that builders will comply at all times, even if under extreme financial distress. There is a solution and a source of trust, though. The IPEX framework ring fences funds intended for a specific project, ensuring that progress payments can be used only to pay approved subcontractors and suppliers linked to that project. Fewer loopholes, more clarity and transparency.
Builders are incentivised to pay third parties quickly and in full, because this is how they receive their entitlements. Meanwhile, developers have visibility over who has been paid and when. We’re helping to restore trust between all stakeholders – from developers and lenders, to subcontractors and suppliers – whilst also strengthening the position of any financially secure builder and improving builder liquidity.
Insolvency cannot be eradicated entirely, but the risk and damage of the contagion effect – non-payment of subcontractors and suppliers – can be reduced. The QBCC legislation set out to do that. While it’s not there yet, we’re committed to working with policymakers and industry to provide the safeguards and security that will bring stability back to the construction industry.