Hospital and Health Services - Are you ready for Project Trusts?

Introduction

Since project bank accounts (PBA) were introduced on a ‘trial basis’ in 2018 under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act), they have largely applied to Queensland Government building projects between $1 million and $10 million. However, it is the Queensland Government’s intention that the roll out of PBAs will apply to other organisations (both public and private sector) and a broader ambit of building contracts pursuant to the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020 (Qld) (BIF Amendment Bill).

It is proposed that from 1 July 2020 it will be mandatory for Hospital and Health Services’ (HHS) building projects to comply with the proposed project trust account regime (to replace the current PBA regime) under the BIF Act, as amended by the BIF Amendment Bill. While the proposed BIF Amendment Bill has not yet been passed by Parliament, and remains under review, it is worthwhile recapping the key features of the new regime as they are proposed to apply to HHSs and also identify some key issues to be considered in its application.

Key takeaways

1. HHSs will need to understand the impacts the BIF Act will have on their contracts for carrying out building work and related services.
2. Building contracts will need to be amended to address the substantive issues arising from the BIF Act.
3. HHSs should take measures to ensure they appoint contractors that can demonstrate compliance with the BIF Act and other key legislation, in anticipation of the Queensland Government’s Ethical Supplier Mandate applying to HHS procurements.

What are eligible contracts?

A project trust account will need to be established by a contractor engaged by a HHS where:

• a contract is for ‘project trust work’;
• the contract has a contract price of $1 million or greater;
• the head contractor has or will engage at least one subcontractor (with anti-avoidance rules in place to deal with contracting to a related entity); and
• more than 50% of the contract price is for project trust work.

Project trust work

Unlike the current BIF Act and the application of PBAs, the BIF Amendment Bill broadens the concept of what work will be caught and which beneficiaries will benefit from establishing a project trust. Importantly:

• a ‘building’ is defined non-exhaustively by reference to ‘including a fixed structure’. Previously the concept was limited to a fixed structure that had a roof and walls;
• project trust work’ is defined very broadly by reference to a list of activities and building work, and is broader in scope than the definition of ‘building work’ under the Queensland Building and Construction Commission Act 1991; and
• subcontractors entitled to be a beneficiary of an established project trust include entities that have been contracted to perform ‘protected work’ (which is defined to include project trust work) as well as the supply of ‘related services’ such as design, quantity surveying and building advisory services related to protected work.

Although maintenance services and building work services are not project trust work, a long term maintenance contract may be caught by the project trust regime where at least half of the contract price relates to other project trust work such as asset lifecycle renewal or capital works expenditure.

Establishing the project trust account

HHSs are not responsible for establishing and administering the project trust account, which is the obligation of the head contractor as the trustee. That said, head contractors face serious consequences if they do not comply with these and other project trust requirements, including fines, loss of QBCC licence, demerit points under the Queensland Government’s Ethical Supplier Mandate and jail.

However, as the principal under eligible head contracts, HHSs have a number of residual responsibilities, including:

• all payments must be made by the HHS to the project trust account, unless an exception applies (eg. the amount was due to be paid before the trust was established, or an amount is paid directly to a subcontractor in connection with a subcontractors charge); and
• HHSs must report to the QBCC where a project trust has been established, and the subcontractor is a related entity of the head contractor, or where a project trust account has not been opened in accordance with the requirements of the BIF Act.

The requirement to establish a project trust account substantively applies to new contracts entered into by the HHSs after 1 July 2020, however there is limited retrospective operation of the trust account requirements for existing contracts where there has been a variation to those contracts, including where the contract prices has increased by more than 30%.

Retention trust accounts

The BIF Amendment Bill also includes a new regime for the establishment of a retention trust, which is a trust over retention amounts withheld from a contracted party. This will include retention monies withheld by a principal from a head contractor as well as retention amounts withheld by head contractors from first tier subcontractors. This broadens the current regime under the BIF Act in establishing a project bank account for retention monies.

Importantly, the need for a HHS, as the principal under a head contract, to establish a retention trust account is specifically exempted under the BIF Amendment Bill.

What’s next?

While the BIF Amendment Bill remains under review and has not been passed by the Parliament, it is broadly considered this will occur in due course. In the meantime, HHSs should carefully review compliance with the current BIF Act as well as the proposed BIF Amendment Bill. This might include:

• ensuring your building contracts address the current project bank accounts regime and the future project trusts regime. This includes:

• ensuring appropriate restraints are imposed on contractors that might seek to appoint agents or delegates under the project bank account regime (eg a nominee to manage trust accounts established);
• allowing access to records of the head contractors required to be kept by head contracts under the BIF Act, including auditing rights for the HHSs;
• providing that HHSs are reimbursed for costs incurred in dealing with project bank account matters and breaches of the requirements; and
• establishing requirements for regular statutory declarations from the head contractor which confirm compliance with the BIF Act;

• training for personnel responsible for HHS’s procurement and building projects to ensure that the application of the BIF Act and the BIF Amendment Bill is properly understood;
• reviewing current tender documents and processes to ensure it incorporates the need for bidders to demonstrate they fully comply with the requirements of the BIF Act, as well as other key legislation including the QBCC Act, national heavy vehicle legislation and WHS legislation; and
• monitoring the application of the Queensland Government’s Ethical Supplier Mandate to HHS’ procurements. Currently the application of Mandate to HHS’ remains to be set for a date to be determined this year. Once applicable, HHS’ procurement frameworks will require compliance with the Mandate, including the various reporting obligations (such as the obligation to report failures to comply with the BIF Act so that demerit points can be determined).

The construction team at Norton Rose Fulbright will keep you informed of developments regarding the proposed project trust regime and other construction industry reforms. Should you wish to discuss how these developments will affect HHS procurements and projects, please contact us.

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