The final instalment of this BIFA refresher series will summarise the requirements and obligations for Project Trust Accounts and Retention Trust Accounts under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIFA).
Similar to the tools discussed in Parts 1 and 2 of this series, the statutory trust framework is just another mechanism under BIFA to strengthen the security of payment to subcontractors. As stated in BIFA, their main purpose is ‘to ensure that funds paid to the contracted party for particular contracts are held in a trust to protect the interests of subcontractors’.
In addition to the below, Chapter 2 of BIFA extensively outlines the obligations and requirements associated with the operation and administration of Statutory Trusts.
A Project Trust Account is an account (which is primarily for the benefit of Subcontractors) through which payments for a project are received into and paid out of (most relevantly, amounts which are paid by the Principal to the Head Contractor under the contract, and amounts which are paid by the Head Contractor to a Subcontractor).
A Project Trust Account under BIFA is required for each contract (entered into after the commencement of this process), where:
- The contract is eligible for a Project Trust Account under BIFA;
- The contract is not exempt under BIFA – contracts which are exempt include: subcontracts (generally, noting certain subcontracts as specified in BIFA are eligible for a Project Trust Account), contracts between the State and a state authority, contracts for small scale residential construction works, maintenance work, professional design, advisory or contract administration work, and short contracts (less than 90 days to practical completion)); and
- The Contractor (being the “contracted party” under the contract) enters into a subcontract for all or part of the works.
A contract which is eligible for a Project Trust Account will change as this process is gradually rolled out. However, currently under BIFA, a contract is eligible for a Project Trust Account if:
- The Principal is the State Government, a state authority, a local government, an individual, a private entity or a health service;
- More than 50% of the Contract Price is for “project trust work” (which is extensively defined in BIFA, and includes construction work relating to a building, related site works (eg, earthmoving, soil testing and scaffolding); specialist work (eg, works by architects, engineers and surveyors), inspection and advice (eg, building inspection and certification)); and
- The contract price is, where the principal is the State Government or a hospital health service, $1M or more; otherwise, $10M or more.
Further, a Project Trust Account will be required for a contract, if after an amendment the contract becomes eligible for a Project Trust Account (where it did not require one previously).
Where a Project Trust Account is required, the Head Contractor must open the account (which must be held at an approved financial institution) within 20 business days after the Head Contractor enters into the first subcontract for the project. If the Principal knows (or ought reasonably to know) that a project trust is required for a contract and an account has not been opened as required, the Principal must report the matter to QBCC.
The Project Trust will then be established upon the earliest of, payment of an amount from the Principal to the Head Contractor under the contract, or from the Head Contractor to a Subcontractor beneficiary for subcontracted work under the contract, or an amount being deposited into the Project Trust Account (which includes an amount paid by the Principal to the Head Contractor in connection with the contract, or an amount paid due to an adjudication or binding resolution process). These amounts must (except in specific circumstances outlined in BIFA) be deposited into the Project Trust Account. Once deposited, payment is taken to have been made by the Principal to the Head Contractor, and the Principal is discharged of the liability to pay that amount to the Head Contractor.
Under a Project Trust Account, the Head Contractor is both the trustee and the beneficiary, where its beneficial interest is the amount in the Project Trust Account after all Subcontractor beneficiaries have been paid. A first tier Subcontractor may also be a beneficiary where its work under the Subcontract is “protected work” (as that term is extensively defined in BIFA), where its beneficial interest is the amount it is entitled to be paid under a subcontract.
A Project Trust will end if there are no longer any Subcontractor beneficiaries for the trust, or the only remaining work to be carried out under the contract is maintenance work.
Payment from Project Trust Accounts
Amounts cannot be withdrawn from a Project Trust Account for any purpose other than:
- Paying a Subcontractor an amount which the Head Contractor is liable to pay (noting a Subcontractor can only be paid from a Project Trust Account, by depositing that amount into a financial institution as nominated by the Subcontractor);
- Paying itself (the Head Contractor) an amount which the Principal is liable to pay (to the extent that the Head Contractor is not liable to pay the Subcontractor for the same amount). However, a Head Contractor must not withdraw an amount to pay itself unless there would be a sufficient amount remaining to pay all amounts it is liable to pay a Subcontractor at the time of withdrawal;
- Depositing a retention amount into a Retention Trust Account;
- Rectifying an error; or
- Making payment in relation to an adjudication or as ordered by the court.
This obligation to pay an amount to a Subcontractor (under paragraph 1 above), exists regardless of whether the amount to be paid is currently held in the Project Trust Account. Where there are insufficient funds in the Project Trust Account, the trustee (Head Contractor) must immediately deposit the balance into the trust account. However, this obligation does not apply to a retention amount withheld from payment to a Subcontractor if the amount is deposited into a Retention Trust Account (of which the subcontractor is a beneficiary), or a retention amount to be released to a subcontractor from a Retention Trust Account.
Retention Trust Accounts
A Retention Trust Account is an account where cash retention amounts are withheld until they are due to be paid. Unlike a Project Trust Account (which is required for each eligible contract), a business only requires one Retention Trust Account which can be used for multiple contracts / projects.
A Retention Trust Account is a trust (which is primarily for the benefit of the party who will be entitled to the retention amount) where retention amounts are withheld in the form of cash under particular contracts, or where deposits are made in the Retention Trust Account as required under BIFA.
A Retention Trust Account under BIFA is required for a retention amount which is withheld from payment under a contract, if:
- That contract is a head contract or a first tier subcontract for a head contract;
- Where the Principal (for example, as the contracting party) withholds retention in the form of cash; and
- A Protect Trust Account is required for the head contract.
A Retention Trust Account, however, is not required if the principal is the State Government, the Commonwealth Government, a state authority, or a local government.
Where a Retention Trust Account is required, the Principal must open an account (which must be held at a financial institution) before withholding the retention amount from a payment. However, a Principal only needs to establish one Retention Trust Account for all retention amounts withheld under any number of contracts for which it is the Principal.
A Retention Trust Account is then established by the Principal withholding the retention amount from payment.
Under a Retention Trust Account, the Principal is both the trustee and the beneficiary, where the beneficial interest is the balance amount in the Retention Trust Account after subtracting the Head Contractor’s beneficial interest. The Head Contractor is also a beneficiary under a Retention trust Account, where its beneficial interest is the retention amount which has been withheld from payment to it.
A Retention Trust Account ends if all of the amount being held, has been released to the parties under the Contract.
Payment from a Retention Trust Account
Amounts cannot be withdrawn from a Retention Trust Account for any purpose other than:
- Paying the Head Contractor; or
- After the defects liability period, paying the Principal for the purpose of correcting defects or omissions in the contracted work (or otherwise to secure, wholly or partly, the performance of the contract).
Further, in addition to the Retention Trust Account, the retention amount is also subject to a charge in favour of the Head Contractor for securing the release of the amount when it becomes entitled to it.
As currently forecast:
- From 1 April 2023, a Project Trust Account will be required for contracts valued $1M or more where the principal is a Queensland State Government Hospital and Health Service (opt-in available for state authorities), and contracts valued $3M or more for contracts where the principal is a state authority, local government, or private entity / individual;
- From 1 October 2023:
- A Project Trust Account will be required for contracts valued $1M or more where the Principal is any type of party; and
- A Retention Trust Account will be required for any contracting party (including principals, head contractors, and subcontractors down the contractual chain) where a Project Trust Account is required for the head contract (but Commonwealth and State Governments, state authorities and local governments will still be exempt).
Lamont Project & Construction Lawyers
Our Team have the industry knowledge and experience to assist both Principals and Contractors in all major projects and payment disputes. If you would like to discuss any matters raised in the above article or this series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Lili Hoelscher
Phone: (07) 3248 8500
Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064
Postal Address: PO Box 1133, Milton Qld 4064