In Australia, both State and Federal governments have acknowledged the need to improve security of payment for EPC contractors and subcontractors. The consequent regulatory and legislative changes stand to benefit EPC contractors looking to enter the Australian market, but they must familiarise themselves with these changes. In this article, Ante Golem, Dan Dragovic, Jake Reynolds and Lauren Claxon of the Perth office analyse the key reforms introduced, including changes to legislation, the introduction of Project Bank Accounts (PBAs) and changes to the statutory adjudication process. They also discuss the further review and reform in security of payments laws expected in the coming few years.
In recent years, regulatory change has been a feature of the Australian EPC contracting market. Much of the change will be welcome news to EPC contractors either in, or looking to enter, the Australian construction market.
State and Federal governments in Australia have acknowledged the need to improve security of payment for EPC contractors and subcontractors alike. The legislative and regulatory response has largely been aimed at reducing the vulnerability of subcontractors to the actions of supposedly unscrupulous or
financially fragile contractors. As the changes almost invariably do not discriminate between small and multi-national contractors, large global EPC contractors stand to benefit from the wave of regulatory reform.
Given the pace of change in the market, it is imperative that global EPC contractors, particularly those looking to enter the Australian market, familiarise themselves with the recent changes. This article provides an overview of the key changes, an insight into the current regulatory environment and where it may be headed.
Underpinning much of the legislative reform in this area is the desire to ensure that contractors and subcontractors are paid in a timely manner. This is in response to some developments in the market emerging from both the construction boom and subsequent downturn, particularly in the resources sector. The boom led to the emergence of some 'unscrupulous' practices (eg “pay when paid” provisions) and the downturn led to some undesirable outcomes for subcontractors resulting from the insolvency of head contractors. The key reforms may be summarised as follows:
- ensuring reasonably prompt payment to contractors;
- use of project bank accounts on certain government infrastructure projects;
- improvements to the adjudication process;
- and educating the industry.
Ensuring that subcontractors are paid in a reasonable and timely manner
Pay when paid provisions have been prohibited in all Australian jurisdictions. In addition, New South Wales and Western Australia have recently amended legislation so that payment must be made within 30 days and 42 days respectively of a payment claim being made.
The Western Australian and Federal governments have both recently passed reforms which will introduce codes of conduct aimed at ensuring, amongst other things, compliance with relevant security of payment laws. The Western Australian Building and Construction Industry Code of Conduct 2016 aims to ensure compliance with the Construction Contracts Act 2004 (WA), whereas the Federal Code for Tendering and Performance of Building Work 2016 (Federal Code) applies across all State jurisdictions.
While both codes seek to ensure that subcontractors are paid in a reasonable and timely manner, they also seek to regulate industry conduct more broadly. This approach reflects the broader push to change the culture of the construction industry. A key aspect of this trend has been a recognition that more needs to be done to educate contractors and subcontractors about their obligations, rights and enforcement options when it comes to security of payment.
The broader use of project bank accounts for government construction projects
Some Australian jurisdictions have been trialling the use of Project Bank Accounts (PBAs) for selected government construction projects.
At a high level, PBAs are trust accounts from which payments are made by a principal directly and simultaneously to the head contractor and subcontractors involved in a project.
PBAs offer the following benefits to subcontractors:
- head contractors are prevented from delaying or withholding payment to subcontractors;
- and the trust status of a PBA protects subcontractors in the event that a head contractor becomes insolvent.
In November 2013, Western Australia commenced Australia’s first trial of PBAs on selected government projects. The success of this trial resulted in the Western Australian government announcing in late 2016 that it would adopt PBAs on a wider range of infrastructure projects.
Other States and Territories have since followed suit. In late 2014, the New South Wales and Northern Territory governments announced that PBAs would be used for selected government projects. Last year, the Queensland government announced that PBAs will be used on all government projects with a value between $1 million and $10 million from the start of 2018. The Queensland government has also stated that from 1 January 2019, every project over $1 million will be required to operate a PBA. The fact that the Federal Code mandates compliance with any State requirements relating to PBAs underlines this growing trend.
While there has been greater acceptance of the benefits that PBAs can provide, to date their use has been limited to government projects. Further, while the uniformly adopted language of ‘trial’ suggests that State governments may eventually mandate the use of PBAs for large private construction projects, to date this has not been the case. Nonetheless, contractors tendering for government projects in certain States of Australia should familiarise themselves with the differences in the payment process when a PBA is used, as opposed to an ordinary head contractor’s bank account.
A main contractor's commercial position against subcontractors is very different in a PBA project to the norm in the common law world.
The improvement of the statutory adjudication process under security of payment legislation in Australia has been, and continues to be, a key reform issue, focused on providing a rapid dispute resolution process for the industry to “keep the money flowing”. Both the Western Australian and Queensland governments have recently made such reforms to their respective legislative regimes, which have included:
- broadening the application of security of payment act provisions;
- increasing procedural timeframes;
- and simplifying the process for the enforcement of adjudication determinations.
The recent amendments to Western Australia’s Construction Contracts Act 2004 (WA) have shifted the balance further in favour of applicants. Applicants now have 90 business days to submit an application for adjudication, a significant increase from 28 calendar days.
The scope of the adjudication process has also been broadened in Western Australia, by narrowing the restriction on mining activities being considered construction works for the purposes of the legislation. Further, it is now simpler in Western Australia for the successful party in an adjudication, more often the applicant, to enforce an adjudication determination, with the requirement to seek leave of the court being removed.
The Queensland Government also made some amendments to its adjudication process, and although Queensland’s Building and Construction Industry Payments Act 2004 remains, on the whole, claimant friendly, the amendments passed in 2014 levelled the playing field somewhat by, amongst other things:
- extending the timeframes for contractors to respond to payment claims in excess of $750,000 (Complex Claims), which can be further extended at the discretion of the adjudicator;
- allowing the provision of additional information to an adjudicator for Complex Claims, including reasons for withholding payment;
- and allowing contractors a second chance to lodge a payment schedule in response to a payment claim.
These amendments serve to reduce security of payment for subcontractors, particularly for Complex Claims. Contractors can now delay payment for longer periods and adopt delaying tactics during the adjudication process.
Industry training and education
In recent years, entry of a number of smaller subcontractors in the Australian construction industry has opened the industry up to persons who may not have appropriate or adequate skills to successfully operate such businesses. Experience has shown that many of the issues which may arise for industry participants are caused by a lack of understanding of industry practices, key processes and provisions of the relevant contract and the legal framework.
As a result, there is a push for education and training to be used as both a complementary measure to legislative and policy changes and also to mitigate issues such as subcontractor insolvency and payment disputes. While there has been limited implementation of official education and training programmes in Australia to date, a number of reports and discussion papers suggest that it should be a key area of focus for the industry.
The Western Australian government has directed its focus to education and training through the Department of Commerce - Building Commission. The Building Commission currently provides resources for builders and subcontractors on its website with a description of the key pieces of legislation affecting these participants, focusing on the security of payment regime.
Watch this space
In recent times, reports, discussion papers and inquiries into the construction industry, both at the State and Federal level, have been part of the regulatory landscape. This is set to continue with the Federal government announcing in late December 2016 a further review of security of payments laws in the building and construction industry. The review is to deliver a final report by 31 December 2017.
The reports to date have largely identified the same issues with security of payment in the construction industry, namely:
- inadequate cash flow and poor industry payment practices;
- retention money being used by contractors to rectify cash flow problems rather than for defects;
- subcontractors and their employees bearing the brunt of insolvency in the industry;
- and a general lack of business acumen, financial management skills and legal knowledge in the industry.
While the measures discussed above go some way towards addressing these concerns, further changes are to be expected. For example, in New South Wales:
- recent regulatory amendments require that head contractors working on projects with a value in excess of $20 million maintain retention money in a trust account. These regulations, amongst other things, regulate how and when retention money is to be withdrawn as well as prohibiting these funds from being used by the head contractor to pay their own debts; and
- recent legislative amendments introduced a requirement for head contractors to attach a ‘supporting statement’ to every payment claim they submit. The supporting statement must set out proof of payments to subcontractors and effectively operates as a precondition to receiving next payment by the principal.
Global EPC contractors looking to enter the Australian market need to be aware of the recent regulatory developments in the Australian EPC contracting market. On the whole, the recent changes have sought to address some challenges facing vulnerable subcontractors particularly arising out of the actions of unscrupulous or financially unsound contractors. This is especially true of Government projects through the use of PBAs. Further changes are on the horizon with the Federal government’s review of security of payments laws in the Australian building and construction industry to be completed by the end of 2017. Given the changing regulatory framework in this area, advice on the state of the market remains essential.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020