• John Lowry

Project Trusts will fix everything - No they won't!



Trusts will build TRUST in a fair and just industry, but help comes with Responsibility and Obligations.


You need to read, understand and prepare for this. Make sure you read the Key Take-aways at the bottom of this post.


The Queensland Government has now passed into law amendments to the Building Industry Fairness (Security of Payment) Act 2017 (THe BiF Act), following extensive consultation with the industry.

The following post is abbreviated and simplified for easy reference, but these changes are quite complex. if you want to see the full text, click on the above link.


These amendments have simplified the Project Bank Accounts initiative with the change to Project Trust Accounts. [Trust accounts are financial accounts that are managed by someone on behalf of someone else. The person who manages the trust is known as the trustee. In this case the main contractor is both the trustee and a beneficiary of the trust]


We reported earlier that the roll-out of Project Trust Accounts is delayed due to the COVID crisis.


The new rules simplify the trusts to the extent that Contractors will be required to create two trust accounts for each contract:

  • A Project Trust Account, and

  • A Retention Trust Account

The Act describes in detail:

  • Who is in and who is out;

  • Which contracts trusts apply to;


As a general rule, the system of payment through trusts will apply to contractors and first-tier subcontractors currently working under the existing BiF Act (Remember to check the roll-out dates).


Contracts of less than 90 days duration, residential construction up to 3 units, and maintenance contracts are exempt. Consultant agreements are not included.


The Act includes extensive rules for how trusts are established and managed. There will be a significant amount of administration, training, record keeping and auditing for contractors and the maximum penalties for a range of offences are severe (ranging from $6,600 to more than $66,000).


How Will it Work?

The Contractor establishes two Trust Accounts (with a bank or financial institution) for:

  • Payments

  • Retention

The Contractor gives its payment claim to its client (the Principal), PLUS a supporting statement, stating:

  1. All subcontractors have been paid the full amount that is owed to them;

  2. For every subcontractor not paid in full:

  3. Their name

  4. Date of the work

  5. Amount unpaid

  6. Details of the subcontract payment claim and reasons for withholding payment.

  • The Principal may serve a Payment Schedule

  • The Principal deposits approved payment claims or the Scheduled Amount into the Project Trust account;

Subcontractors and suppliers make their payment claims/invoices on the Contractor;

  • The Subcontractor delivers its payment claim to the Contractor, PLUS a supporting statement, stating:

  1. All subcontractors have been paid the full amount that is owed to them;

  2. For every subcontractor not paid in full:

  3. Their name

  4. Date of the work

  5. Amount unpaid

  6. Details of the subcontract payment claim and reasons for withholding payment.

(The penalty for failing to make this statement is up to $13,345.00)

  • The Contractor may serve a Payment Schedule

  • The Contractor pays the payment claims or the Scheduled Amount directly into the Subcontractor's nominated bank account by the due date for payment;

  • The Contractor deposits retentions into the Retention Trust Fund Account.

How Do You Get Paid?

  • The Contractor transfers the payment claim or the Scheduled Amount directly to the Subcontractor's nominated bank account. (No cash, no cheques).

  • The Contractor must not withdraw money from the trust account (pay itself) unless there is sufficient money in the trust account to pay what is owed to subcontractors.

BUT

If the trust account does not have sufficient funds at any time, subcontractors are paid equal proportions of what they are owed until the account is topped up.


Of course, it's a lot more complex than this, but this is the essence of it.


What are the Key Take-aways for Subcontractors?


  • Trusts do not mean you will be paid what you bill in invoices and payment claims;


  • Payment is 100% dependent on what you are entitled to under your contract;


  • You absolutely must ensure that you comply with all the conditions of your contract in relation to programming your works, claiming extensions of time, claiming variations for changed instructions, not starting work on variations without approval, and more;

  • Do not fall into the trap of appeasing the site supervisor who whinges about "the paper warfare". (TIP: You can explain, a) It is what your company has asked me to do, and, b) it's important for everyone, because the contractor finds out about all the issues around progress and budget before they become a BIG problem);


  • You must ensure that you have (and include in your prices) the systems and resources to comply with the conditions of your contract;


  • Get ready - Many subcontractors will have to make changes and lift their contract management game. You will lose if you don't start taking action soon;


  • You must ensure that EVERONE in your business understands and is trained in what they have to do to make sure you get paid. (There is nothing worse than having your people thinking their job working on site, invoicing and bookkeeping etc., is somehow separate from getting paid - IT'S NOT.

If you want to know more about payment management, systems and training, please contact me john@lowry.com.au














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