Written by Peter Waller – Special Counsel – QLS Accredited Specialist – Commercial Litigation at MBA Lawyers

From 2022 certain provate secotr and government construction contracts will require a project trust account.Starting from 1 January 2022, certain private sector, local government and government construction contracts in Queensland, valued at $10 million or more, will require a project trust account.

It is timely for project owners, head contractors and contractors to review the trust account requirements, project administration processes and the terms of contracts for compliance.

Read on for our overview of the latest changes to the new trust account model being rolled out this year and into 2023, under the Building Industry Fairness (Security of Payment) Act 2017 (the BIF Act).

Background

Since March 2018, some Queensland Government projects have required Project Bank Accounts. On 1 March 2021, Project Bank Accounts were replaced with a new trust account framework. The trust account framework is being gradually phased into the private sector.

For further background information, see our previous article here.

The next phase of the new trust account framework started on 1 January 2022 and will, for the first time, be required for certain private sector contracts.

What is a Project Trust Account?

The trust account framework requires:

  • One project trust account to be established for each eligible contract;
  • One retention trust account per contractor to hold all cash retentions for contracts under a project trust account project. Each trustee only requires one retention trust account and this one account may hold cash retention amount across multiple projects.

A project trust account is an account through which project funds are received and paid:

  • The project owner (principal) pays progress payments into the project trust account for work completed in accordance with the contract;
  • The head contractor pays all subcontractors engaged only from this account; and
  • The head contractor pays itself only from this account

The trust account must be separate to the head contractor’s personal or business account and keeps the funds for the project separate from funds of other projects and the head contractor’s other cash flow.

Who is the Trustee?

The trustee is the contracted party for the contract that requires the project trust (i.e. the ‘project trust contract’) and is responsible for the trust. They are generally the head contractor.

Is a Trust Account Required?

A project trust is now required if:

  • The contracting party is:
    • an individual or private entity,
    • a local government,
    • a state authority,
    • a Queensland state government department or a HHS; and
  • The contract price is:
    • If the contracting party is a state government or a HHS or a state authority who has elected to require a trust account for the contract – $1 million or more;
    • For all other contracts – $10 million or more.
  • More than 50% of the contract price is for project trust work; and
  • There is at least one subcontractor engaged for all or part of the contracted work.

 

There are other circumstances which may impact on whether or not a project trust is required, such as contract variations and multiple contracts for the same or adjacent sites.

The QBCC has developed a project trust account tool to help contractors determine if a contract is eligible and requires a project trust account.

What is Project Trust Work?

Various kinds of work are prescribed under legislation to be ‘project trust work’. For example, the erection or construction, renovation, alteration, extension, improvement or repair of ‘buildings’, and related site work. Buildings are defined broadly to include any fixed structure that is wholly or partly enclosed by walls or a roof.

There are a range of exclusions and exemptions for particular sectors and types of work or contracts (for example, subcontracts, some contract administration work and some maintenance work).

The legislation should be carefully checked for the kinds of work included and the exemptions.

Retention Trust Accounts

From 1 January 2022, a separate retention trust account may also be required for the project trust contract.

A retention trust account is an account where eligible cash retention amounts withheld from contractors are now to be held until due to be paid.

The retention trust account is separate to the contracting party’s personal or business account and keeps the retention amounts separate from project funds and the contracting party’s other cash flow.

A contracting party who is withholding retention amounts from the contracted party’s/parties’ payments is required to have a retention trust account. For retention amounts withheld on or after 1 January 2022, the contracting party is both:

  • the private sector principal (e.g. owner or developer) who has engaged the head contractor to carry out project trust work and is withholding cash retentions from that head contractor; and
  • the head contractor for the project trust contract who is withholding cash retentions from first-tier subcontractors.

Other changes

Other changes include:

  • The new trust account framework reduces the number of trust account from three trust accounts under the earlier framework (general trust account, retention trust account and disputed funds trust account);
  • The disputed funds account no longer exists, but subcontractors will be better protected because the project trust account will cover a larger range of work.
  • There is a statutory charge over retention amounts held in trust. This charge makes the subcontractor a secured creditor in the event of bankruptcy or insolvency.
  • Principals no longer have viewing access of the trust accounts.

Once full implementation is reached, all subcontractors down the chain in a trust account project will have the benefit of a retention trust.

What needs to be done?

For head contractors the trust account requirements are extensive (presently for contracts of $10 million or more). The requirements include acting as trustee, opening project trust accounts (including retention trust accounts), and operating, administrating and managing the trust accounts.

Principals (for contracts $10 million or more) also have obligations under the BIF Act, including ensuring that a trust account is established if one ought to be making payments only into that account and operating and managing retention trust accounts.

Contracts will generally require some updating to deal with the trust account regime and new administration process are likely to be needed to manage the funds and the trust accounts.

Beneficiaries of the trust accounts, who will primarily be contracts and subcontractors should also understand the new trust account model.

There are penalties for not complying with the project trust account requirements by principals, head contractors, builders and subcontractors.

Having regard to the administrative cost of complying with the new trust accou8nt model, as well as the risk of penalties for not complying with the requirements, parties involved in the relevant projects ought to make sure they are prepared for the new trust account model.

With these changes being rolled out, it is timely to review the trust account requirements, your project administration processes and the terms of your contracts for compliance.

How we can help

Peter Waller of our construction law team at MBA Lawyers can help you with the trust account requirements under the Building Industry Fairness (Security of Payment) Act 2017, as well as other contract advice and claims.

 

For more information, get in touch with Peter Waller by calling 55399688 or email peter@mba-lawyers.com.au

Peter Waller, Special Counsel – QLS Accredited Specialist – Commercial Litigation