Project Bank Accounts (PBAs) are a hammer in search of a nail. That’s the punchline of the latest report released by the Australian Constructors Association – Trust deficit.

Challenging the widely held belief that underpayment is rampant in the construction sector amid the industry’s increasing insolvency rates, the report reveals that payment performance among construction firms is on par with the rest of the economy. Moreover, the report argues that attempts to single out the industry with additional regulation like PBAs would further hinder, not help.

So what are PBAs? In essence, they take the common statutory trust scheme used across the legal, accounting and real estate sectors, and apply it to the construction industry. In effect, they force builders to treat project payments as trust monies. PBAs generally prohibit a builder from using project revenues for any purposes not related to that specific project.

PBAs have been trialled in several Australian jurisdictions and have been implemented most fulsomely in Queensland. There is talk of a federal scheme being introduced.

ACA’s report argues that PBAs fail on many grounds, but let’s start from first principles.

The fundamental assumption underpinning PBAs is that a building contract is like a common trust arrangement. It assumes that builders are like a solicitor in a property transaction – holding money from one party ‘in trust’ on behalf of another who is the ultimate beneficiary. On this view, the builder is just a ‘middleman’ between client and subcontractor, merely performing project management services.

Anybody familiar with a construction contract knows this is not how the vast majority of them work. When a developer lets a project, the builder assumes full responsibility for delivering the entire project, along with all the attendant risks. The builder alone is responsible to the client for the delivery of the contract and bears full accountability for the outcome.

Nothing about this is like a trust arrangement. Project revenues belong to a builder as much as the money going through the till of a restaurant belong to a restauranteur. Of course, it goes without saying that both builder and restauranteur are obliged to meet the terms of their supply contracts. That every business must meet its obligations to suppliers is non-negotiable under law; how they do so is entirely a matter for each business.

The idea of forcing a company to match its revenues to specific expenses is anathema to the normal everyday practices of a free market. What makes building so special that it justifies such a heavy-handed intervention into legitimate trade practices?

The answer, we are constantly told, is that builders chronically underpay their subcontractors. The influential Murray Review repeated this myth without offering any concrete evidence. That evidence exists, but it tells a different story.

Data from a number of sources show payment delays in construction are similar to other industries. According to Federal Government data, the construction industry pays almost 70 per cent of its invoices on time, aligning closely with the economy-wide average. Industries such as health and social assistance, IT and retail are less likely than construction to pay their suppliers on time.

The only valid reason to impose additional regulation like PBAs on head contractors would be if the industry’s payment performance was systematically worse than others – and it isn’t.

Putting aside these wobbly foundations, it is clear that PBAs fail to even achieve their intended outcome. This is evidenced by the first test case of the Queensland Government’s PBA scheme, introduced in 2017. The large national builder, PBS Building Group, entered administration in March 2023 owing $169 million across 500 creditors. The company’s PBAs reportedly held less than 10% of the funds owed to subcontractors.

PBAs fail to address root causes of payment failure in connection with payment-related disputes between a client and builder and client insolvencies. PBAs only address the proximate source of subcontractor payments – the builders – while ignoring the ultimate source – clients. By design, PBAs cannot expedite or resolve any payment delays or failures arising from the insolvency of a client, or a dispute between client and builder. PBAs offer subcontractors little protection from builder-client disputes or client insolvency.

Furthermore, PBAs perversely increase the risk that builder-client disputes will cascade through the supply chain. This is because PBAs remove the discretion of builders to use funds from one project to offset cashflow constraints on others. Cross-subsidisation is routinely employed across all industries to smooth cashflows. By prohibiting this practice, PBAs greatly limit the ability of builders to minimise the impact of client-side payment delays on subcontractors, while increasing the risk of insolvency.

Another root cause of payment failures and solvency risk in the construction industry that PBAs fail to address is liquidity challenges resulting from adversarial and inequitable approaches to contracting, and decision-making that values the ‘lowest price’ above all other factors.

In fact, the construction industry’s financial issues stem from a focus on the lowest bid price, leading to slim profits and high insolvencies. To address liquidity challenges, policymakers should reform commercial models, sharing risks fairly. Punitive PBA schemes limit builders’ options without balancing risks. Alternative models, like the ‘Managing Contractor’ approach, can safeguard subcontractor payments without PBAs. Transparent methods like ‘open book’ frameworks exist, making PBAs unnecessary.

Despite myriad legislation, Parliamentary reviews and independent inquiries, the case for PBAs is yet to be convincingly made. By contrast, data suggests that PBAs constitute a significant regulatory over-reach. The Australian Constructors Association is working with government, industry and unions to find better ways to improve liquidity and create a more sustainable industry that will be needed if we are to deliver the pipeline of work ahead of us.

Opinion piece by Jon Davies, Chief Executive Officer, Australian Constructors Association

Originally posted via Sourceable.net 27 October 2023.