Governments around the country are embracing project bank accounts as an act of faith rather than a result of considered analysis.
The most recent example is the Bill before the Queensland Parliament that mandates project bank accounts on government jobs valued between $1 million and $10 million from 1 January next year with the requirement extending to all public and private building work over $1 million a year later.
Project bank accounts involve the establishment of trust accounts into which the project owner makes all the contractual payments and out of which the builder and subcontractors are paid. In the Queensland case, there are three trust accounts for each project: one for progress claims, one for retentions, and one for amounts claimed by the subcontractors that are disputed by the builder. This will involve the opening of around 10,000 trust accounts in Queensland each year with all the attendant legal deeds.
The project bank account trials underway on government projects in some states have the considerable advantage of contractors knowing that the prospects of the building owner (the government) not being able to pay are extremely remote. The proposed private sector extension of the accounts in Queensland provides no security to the builder that the owner can pay for the project; owner insolvency can trigger subsequent failures down the contractual chain.
From a subcontractor’s perspective, a fundamental limitation on the effectiveness of a project bank account in securing their payment is that a well-managed account should only have funds sitting in the account for a very short period. Once the builder’s progress claim has been paid into the account, the trustee of the account (typically the builder) would draw on the funds available as quickly as possible, leaving no real additional security for the subcontractors beyond the builder being potentially in breach of trust obligations (which would penalise the builder but provide no additional funds for a potential liquidator to distribute).
In proposing project bank accounts, governments have grossly underestimated the administrative load that will be placed on building owners, builders and subcontractors. Large commercial builder Hutchison Builders has estimated that they will need more than 40 additional staff to administer the security of payment measures in the Queensland Bill and increase their off-site overheads by nearly $4 million a year. The cost for the industry will be way out of proportion to the benefits, if any, that subcontractors might get.
The work undertaken for the Queensland Government by Deloitte relies on subcontractors reducing their prices where there is a project bank account to deliver a modest positive cost-benefit result. This assumption is fanciful, as if it were true it could have been expected that subcontractors would be buying substantial volumes of trade credit insurance. This is not the case.
HIA has also estimated that once activated in the private sector, project bank accounts would add around 16 million additional business transactions a year to the Queensland building industry; a costly exercise.
Securing payment across the contractual change is an important issue which governments and regulators have been grappling with for decades. A durable and efficient solution lies in better dispute resolution systems. Governments have under-sold the considerable improvements that have been made in this area in recent years leaving many practitioners unaware of the payment tools that are at their disposal.