In Queensland, the revised regulation on the management of project finances is now in effect for enterprises engaged in building and construction. The Security of Payments Act of 2017, developed to protect payments and retentions in the construction and building industry, was modified to include a more streamlined approach to its account requirements. The Project Trust Account framework aims to strengthen the security of payments to subcontractors in Queensland’s building and construction industry.
The framework applies to eligible contracts of entities under the state government, hospital and health services, local government, and private sector. It requires head contractors to hold the money paid by the project principal in a separate trust account for the benefit of the subcontractors.
The eligibility of contracts will be based on a set of criteria. If the contract qualifies, the contracted party (i.e., head contractor) is required to have a project trust account. The framework ensures that all parties get paid for their work.
Trust accounts are not a new thing. They have been required on some construction projects since 2018. But the framework has recently been revised so that companies can apply them easily and protect the interest of more subcontractors.
The new requirements are being implemented gradually, starting in March 2021. Once all phases are complete, all subcontractors of eligible projects will benefit from trust account coverage and protection.
A trust account is an arrangement wherein a third party, say a bank, holds the fund for another party. It has two general types – the retention trust account and the project trust account.
A retention trust account is where eligible cash retention amounts are withheld until they become payable. This retention cash is set in a different fund to protect the employer from a contractor’s defective or nonconforming work. The trustee can have one retention trust account, which can hold retention money from multiple projects. But they can also have multiple retention accounts.
On the other hand, a project trust account is a type of financial account where money is paid and held in trust for head contractors and subcontractors until payments for a building project becomes due. Under the project trust account framework, an account must be opened for each project. Subcontractors can only be paid from the money held in the project trust account. Head contractors also pay themselves from this fund.
Generally, the project trust account framework applies to projects where more than 50% involve project trust work and where at least one subcontractor is engaged for part or all of the corresponding jobs. The regulation defines project trust work as the erection, renovation, extension, alteration, improvement, or repair of buildings. Moreover, there are exemptions for specific contracts and types of works, like projects exclusively for maintenance.
The first phase of the framework roll-out commenced in March 2021, which provides for the coverage of a small range of state government contracts. Over the years, its scope will grow to include more contracts and contractors. Starting on January 1, 2022, the framework also applies to eligible contracts with:
- The state government or hospital and health services, with a value of at least AUD $1 million, or
- The private sector, local government, statutory authority, and government-owned corporations, with a value of AUD $10 million or more.
The government recently declared that smaller industry contractors would have more time to prepare for the framework’s final phases of expansion. All eligible contracts valued at AUD $3 million or more will be included in these final two phases starting on April 1, 2023 (originally July 1, 2022). Additionally, all eligible contracts valued at AUD $1 million or more will be covered starting on October 1, 2023 (originally January 1, 2023).
Head contractors are subject to a variety of administrative requirements under the regime. Principals and head contractors who violate the framework will be subject to penalties. Building and construction companies must be sufficiently equipped to manage the additional load that these new regulations place on the industry.
Under the framework, a project trust account when any of the following events occurs:
- The contracting party (i.e., the one requesting the work – developer, owner, principal) pays the contracted party (normally the head contractor) an amount stated in the arrangement
- The contracting party pays the subcontractor for work performed under the contract
After signing the first subcontract, the contracted party or the trustee must open a project trust account within 20 business days. A project trust account cannot be a virtual or subordinate account, and it must be opened at a financial institution that the QBCC has approved for storing trust accounts. The trustee must also make sure their name and the word “trust” are included in the account name when opening the project trust.
Moreover, each subcontractor must get written notice that payments made to them will be made out of a project trust account. The contractor will also have to maintain specific records relating to the trust account.
The Queensland Building and Construction Commission has oversight responsibilities, which include, among other things, the ability to conduct special investigations. They have the leadership over the upkeep and compliance of project trust accounts and the authority to instruct a head contractor to forbid account withdrawals.
As the framework coverage expands, more construction companies will have to adjust their record keeping to follow the trust account requirements. For example, they will have to keep a trust ledger, a record of deposits and withdrawals, a trial balance, a statement bank reconciliation, and other reports. Creating and managing these files can be challenging, especially if it is done manually or through a general system. One disadvantage of these practices is the risk of making errors and missing out on certain regulatory requirements.
Fortunately, construction companies can rely on a builder’s software like Bizprac when handling these records. Bizprac is one of the software that supports companies in their compliance with the new project trust account framework.
The program enables the company to keep an individual and separate account ledger for each eligible project. It can chronologically record all trust account deposits and withdrawals, with additional transaction details. Additionally, preparation of the trial balance and bank reconciliation within the required period is easier with the solution’s automated data capture from other records. It can also maintain other documents, such as contract amendments, payment schedules, account review reports, and payment claims, in the format prescribed by the authority.
Request a free demo today or contact us at email@example.com to learn more about how the software can help with your trust account compliance.