Developers Warned as Commission Cracks Down on Subbie Pay Scheme

The prosecution of a developer leading to a $150,000 fine has signalled that the Queensland Building and Construction Commission is coming down hard on non-adherence to its project trust account regime. The commission (QBCC) pursued the legal action in the Maroochydore Magistrates Court, which found the developer transferred funds owed under a head contract to an account that was not a prescribed project trust account. The publicly announced fine has prompted the industry to look again at the requirements of the project trust account regime, according to McCullough Robertson partner Strati Pantges. “It’s all about security of payment in relation to the contracting chain,” Pantges says. “There are a number of protections for contractors and subcontractors in the security of payment legislation, but the project trust account regime is primarily aimed at securing payments in a head contractor insolvency situation.” Developer prosecution According to the QBCC, the developer’s prosecution in April was the first of its type in Queensland. The commission said that the offending occurred on 12 occasions, from June, 2022 to March, 2023. Magistrate Raelene Ellis, while deciding not to record a conviction, said that the defendant had “continued to breach the Act after being notified of the issue”. But it was perhaps unexpected for the first prosecution to be a developer, Pantges says. ▲ McCullough Robertson partner Strati Pantges. “The bulk of the actual statutory obligations fall on the head contractor, not the principal or developer,” he says. “Developers only really have a handful of obligations under the regime and the key one, which this developer was prosecuted for not doing, is paying money owed to the head contractor into the designated trust account. “Once the developer has done that, the bulk of the statutory obligations fall on the head contractor.” QBCC interim chief executive Skye Bowie, said the prosecution “reflected direct action on the key industry issue of security of payments, which is a priority area in the QBCC’s Compliance and Enforcement Strategy”. ▲ The project trust accounts regime began rolling out in March of 2021 and has yet to complete. “This outcome reflects the QBCC’s risk-based enforcement approach and its role in ensuring all persons subject to the Act’s requirements are held accountable for non-compliance where serious risks are identified,” Bowie said. Given the delays to the full rollout of the regime, Pantges suggests that the move was to keep project trust accounts at front of mind for the industry. “It seemed to be a counterbalance to the message perhaps being sent by deferring the full rollout of the regime. The QBCC is saying that it is still serious about it,” Pantges says. Obligations and insolvency situations Perhaps unsurprisingly, given that many construction insolvencies are related to cash flow, the regime is purposely intended to tie up cash to protect contractors in the event of such an insolvency. “The regime requires a principal to pay its head contractor into a statutory trust account,” Pantges says. “And the golden rule is that the head contractor can only withdraw money out of that account to pay its subcontractors, and only when that has been done can money be withdrawn for other purposes.” One of the hallmarks of the new legislation is that it considers an insolvency situation, in which subcontractors tend to be at the bottom of the pile in recovering their payments. ▲ GDI Property ’ s 29-storey Drift Residences project was subject to a project trust account when its builder, GCB, went into administration. And this has become an even bigger issue since the legislation began rolling out. In the financial year to date there have been 2854 administrations in the construction sector, according to the Australian Bureau of Statistics. This is a considerable uptick already on the 2319 insolvencies in the sector in the 2024 financial year. “The utility of the regime from an insolvency perspective is that if the head contractor becomes insolvent, the money in the project trust account is protected,” Pantges says. “It cannot be dealt with in the same way as other assets of the head contractor by a liquidator, it is ring-fenced and can still be accessed by subcontractors.” ▲ St Hilliers ’ Bernborough Ascot Retirement Living retained a trust account, securing payments for subcontractors. In fact, two St Hilliers projects, five GCB Constructions including the $160-million Amaya at Broadbeach and two PBS Building contracts required project trust accounts when builders went under. The QBCC has considerable oversight on trust accounts, and is notified when an account is opened. As well, there are accounting requirements in relation to the account itself and when and how it should be audited. “Failure to do any of those things attracts a penalty,” Pantges says. “For a lot of the smaller players who have never done any of this before, this is a big step given the penalties and consequences.” Slow rollout The project trust account regime rollout has been sluggish, given that the framework was established in the Building Industry Fairness (Security of Payment) Act 2017 and it started rolling out in March of 2021. “At first, the regime was rolled out to more sophisticated players in industry,” Pantges says. “The government thought they were best-placed to handle the transition in the first instance because it’s a compliance-heavy regime with lots of administrative aspects to it, which less sophisticated players might find relatively challenging. “In parallel they were seeking to educate the industry on the operation of the regime and then introduce it more broadly on a staggered basis.” ▲ GCB was working on Amaya apartments at Broadbeach on the Gold Coast when it entered administration. Currently the regime applies to eligible state government contracts worth more than $1 million, and eligible local government and private sector contracts worth more than $10 million. But the full rollout has continued to be pushed back. “The regime ultimately envisages being rolled out to all eligible government and non-government contracts worth over $1 million, but this last phase has been deferred a couple of times,” Pantges says. “There still doesn ’ t seem to be a revised date for completion of the rollout, although the QBCC has advised that it has been paused, not cancelled.” The other aspect holding it back is the ongoing struggles of the construction sector, he says. “The industry hasn’t recovered fully from the shock of Covid and supply chain cost escalation, and insolvency levels in industry remain really high. ▲ Aria ’ s 34-storey Canopy House development was also being built by GCB. “There’s also a recognition that cash flow is so important to the industry right now and the effect of the further rollout would be to potentially restrict cash flow. “That also partly explains the delay, there’s a recognition that industry is still struggling, and that this may not be the best time to expand the operation of the regime.” But despite the delays, the latest prosecution means that trust accounts are still facing scrutiny. “Security of payment is still a big issue in the industry, and the regime is aimed at addressing this,” Pantges says. “A lot of the compliance work is probably something that can be frontloaded, and there’s an education component for smaller contractors particularly to understand the requirements and to get those accounting and reporting requirements set up. “While there’s undoubtedly work to do and teething issues are expected, if developers and contractors know what is required of them then they can be compliant from day one and avoid unknowingly being in breach.”

Developers Warned as Commission Cracks Down on Subbie Pay Scheme

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