Within 20 business days of entering into the first subcontract, the head contractor is required to set up 3 PBA’s for the project:
- general trust account
- retention trust account
- disputed funds trust account
A failure to do so may result in the head contractor incurring a fine of $63,075.
PBAs are externally administered bank accounts that operate as a trust account between the principal and head contractor. The head contractor and each subcontractor are beneficiaries of the PBA and will involve the following process:
- The principal deposits amounts payable to the head contract directly into the PBA;
- If a subcontractor is entitled to be paid under a subcontract with the head contractor, the head contractor will pay the subcontractor with funds from the PBA ($25,230 penalty or 1-year imprisonment); and
- The head contractor can only be paid from the PBA when it is owed money by the principal under the building contract and the head contractor is not liable to pay a subcontractor for the same work ($25,230 penalty or 1-year imprisonment).
If there is a shortfall in the PBA (eg. due to head contractor’s budgeting error or dispute with the subcontractor), the head contractor is required to deposit funds equal to the shortfall (including any disputed amount). Should the head contractor fail to do this and instead utilise PBA funds to pay itself penalties of $37,845 and 2 years imprisonment may apply.
This requirement may challenge head contractors already experiencing tight cash flow that may be reliant on subcontractor retention monies and/or delayed subcontractor payments.
To varying degrees, head contractors often rely upon a blended operating margin across multiple projects to ‘smooth out’ anomalies in monthly funding requirements due to budgeting errors or timing differences (a head contractor’s milestones with the principal may differ to those with subcontractors). The new PBA regime is therefore likely to be a ‘bumpy’ ride for head contractors’ working capital management (at least initially).
Principals may be comforted that the PBA regime will ensure their progress payments are quarantined for the benefit of subcontractors on their project (and not redirected to other projects in circumstances of a financially distressed head contractor). They are also likely to be pleased by the fact that they will have full visibility of the PBA and therefore the operating margin of their head contractors.
PBA funds are unable to be invested and head contractors will not be entitled to payment for administration of PBAs.
PBA regimes were introduced in Western Australia (Sept 2016) and NSW (May 2015) but with different thresholds ($1.5m and $20m respectively). Interestingly, the NSW regime requires that only subcontractor retentions be banked into a PBA and allows one common ‘Retention’ PBA to be utilised across multiple projects. The annual cost of auditing the Retention PBA alone ranges between $2k and $6k. One would expect that the administration and compliance costs of the Queensland regime (which is more complex and may ultimately apply to the vast majority of non-residential projects) and will be significantly more.
There appears little doubt that the PBA requirements will increase the administrative costs of head contractors, the test will be whether it improves outcomes for subcontractors and whether subcontractors, in turn, reduce their margins to reflect an improved environment of operational risk.
