The BIF Act passed through Parliament late last year but (with some limited exceptions) has not been proclaimed. When proclaimed, it will:
- Implement project bank accounts (PBAs) for Government projects between $1M - $10M (Chapter 2, BIF) to be extended at a later time to all projects ≥ $1M (public and private sector) (Chapter 9, BIF).
- Reform the security of payment legislation currently in the BCIPA (Chapter 3, BIF).
- Consolidate into the one statute those provisions with the Subcontractors’ Charges Act (Chapter 4, BIF).
- Introduce a number of significant changes to the QBCC Act (Chapter 9, BIF)
The Minister outlined the timetable for BIF taking effect:
Phase 1 - Reform: PBAs for Government projects between $1M - $10M - Chapter 2, BIF - Commencement Date: 1 March 2018
Phase 2 - Reform: Security of payment (progress payments and adjudication) - Chapter 3, BIF - Commencement Date: 1 July 2018
Phase 3 - Reform: Changes to the QBCC Act - Chapter 9, BIF - Commencement Date:To be announced
Phase 4 - Reform: Extension of PBAs to all projects greater than $1M (public and private sector) and to second tier sub contracts - Chapter 9, BIF - Commencement Date:1 March 2019 (subject to review)
BIF will have significant ramifications for the industry.
I had the opportunity to speak to the forum following the Minister. While improvements to the new regime were required (and this will be addressed in the review period from 1 September), the industry’s focus now needs to be on dealing with the reforms in practice.
Contracts and subcontracts need to be reviewed to address the changes. Many have turned their minds to this. However, there were three critical areas which I labelled as “sleepers”, meaning that they were issues which were not on the radar of many.
PBAs – Directors’ personal liability
Building companies were by reason of the legislation being thrust into the role of being a corporate trustee. As such, they are exposed to claims from beneficiaries for conduct which is a breach of trust (eg. dealing with trust monies other than is permissible – whether or not intentionally
Directors of those builders have a duty to act in the best interests of the company as a whole (ie. they must therefore properly manage the trust property).
If directors permit a breach of trust by their company, the company may seek compensation from the directors through a derivative action initiated by shareholders or, more likely, by a liquidator.
Personal Liability - What steps can directors take to protect themselves?
There are a number of possible avenues, but with the legislative framework as it is (eg. s. 200 which prohibits contracting out of BIF; Directors’ duties in Corporations Act), one option could be to seek an indemnity from the company against liability to the company for breaches of trust (which can be used as a claim of set-off).
Pricing with PBAs
The impact of the PBAs is that all subcontractors’ retention money will be quarantined in a separate trust account. Therefore, for every PBA contract, 5% of the value of subcontracts will be stripped from a builder’s cashflow.
For the first year of the operation of BIF, that will be 5% of every subcontract on a Government project between $1M - $10M. At some point in time (currently 1 March 2019), that will be 5% of every subcontract over $1M.
It is likely that the project on which PBAs are used will have a negative cash flow in the first few progress claims [see attachment]. When builders’ preliminaries are considered, the overall impact on cash flow will be substantially negative.
PBAs - What steps can you take?
Possible steps are to:
- Provide security to the Principal in the form of bank guarantees resulting in the Principal releasing your retention money (assuming that you have the asset base to support the bank guarantees).
- Increase your debt facility to provide funding while the negative cash flow effect on projects has its effect (assuming again you have the asset base to support the increased facility and bearing in mind that an extension of your facility will impact on your Net Tangible Assets and your Allowable Annual Turnover).
- Improve your net asset position (easy to say…).
- Front load your contracts (so that you have the cash flow from projects early to cover the quarantine of subcontractor’s retentions).
Establish processes for dealing with changes effected by Chapter 3
The changes effected by Chapter 3 to the current BCIPA process are many and significant. You will no doubt be familiar with the following:
- Removing the need for the current endorsement “This is a claim under the BCIPA.”. From proclamation, all claims will be claims for which a payment schedule is required and which can proceed to adjudication.
- Removing any “second chance” if you fail to give a payment schedule on time, meaning that you are liable for the amount of the claim.
- Giving your 25 business days to give a payment schedule and for payment, meaning that you can give a payment schedule and make the payment on the same day.
BIF Chapter 3 - What should you do?
- You may be entering into subcontracts now (or will shortly) which will have effect after 1 July 2018. The Chapter 3 provisions will apply to all construction contracts from the date of proclamation (irrespective of whether they were entered into before or after the date of proclamation). Subcontracts should have terms which contemplate and specifically provide for the application the new Chapter 3 provisions. For example, the subcontract should provide for you to be able to give a payment schedule within 25 business days of a payment claim (even though you may elect to give one sooner).
- Processes should be established for ensuring that payment claims and due dates for payment schedules are logged so that no due date is missed (given the impact of not giving a payment schedule on time). Other steps to assist the payment schedule process include streamlining responses (with standard forms and responses which can be tailored).
The time for opposing the reforms has passed. The Minister has clearly flagged that BIF will be proclaimed as passed (or at best with limited changes).
The time for dealing with BIF has arrived. Steps need to be taken now to be “BIF ready”.