Project Trusts for Subcontractors
In this section:
What does a subcontractor have to do for a Project Trust?
The head contractor is required to give a written notice to all first-tier subcontractors that are beneficiaries under a Project Trust that a Project Trust Account will be used for the project. The information to be included in the notice and when it must be given can be found here (max penalty: 200 PU ($28,750) or 1 year’s imprisonment).
For a subcontractor under a Project Trust Contract, there is little difference between a Project Trust Project and a traditional project although the subcontractor is required to notify the Queensland Building and Construction Commissioner if the subcontractor beneficiary is a related entity of the head contractor using an approved form or the myQBCC Portal within 5 business days after entering into the subcontract (max penalty: 200 PU ($28,750)).
For subcontractors, the key to understanding Project Trusts is to understand that the subcontractor’s rights are not changed by a Project Trust i.e. the subcontractor’s right to payment comes from the subcontract; the Statutory Trust Framework does not create an additional right to payment. It simply provides a mechanism for how payments to the subcontractor beneficiaries are to be processed for that particular project.
If a subcontractor beneficiary believes that it is entitled to be paid an amount under a subcontract that the head contractor has not paid to it, the subcontractor must take action to prove that entitlement and to enforce payment. The Statutory Trust Framework does not change that position. However, the Statutory Trust Framework provides the subcontractor with an additional legal argument to raise (i.e. breach of trust by the head contractor) if it can prove that
- it was entitled to an amount from the head contractor under its subcontract on a particular day; and
- the head contractor withdrew money from the Project Trust Account to pay itself or other subcontractors on that particular day without leaving a sufficient amount in the Project Trust Account to cover the amount that the subcontractor was due to be paid at that time.
If the subcontractor beneficiary became entitled to be paid an amount after the head contractor withdraws money from the Project Trust Account, there is no breach of BIF2.
Breach of trust arguments are typically only helpful if the parties are involved in litigation so it is extremely important that subcontractor beneficiaries take action quickly if they believe they have not been paid what they are due to be paid under their subcontract – do not hold back on taking enforcement action simply because a Project Trust is involved.
Does a Project Trust apply to lower-tier subcontracts?
Unfortunately, a Project Trust under BIF2 only applies to first-tier subcontracts. However, under the final phase of the Statutory Trust Framework (from 1 January 2023), if a head contract is a Project Trust Contract, and cash retention is held under lower-tier subcontracts, then a Retention Trust Account must be opened to hold the lower-tier subcontract cash retentions. [Example]
FAQs
Yes ... but only to the extent that a subcontractor beneficiary is willing to take legal action against the head contractor if it believes that the head contractor has misused trust money. It is important to understand that a breach of trust is a legal argument to make if a beneficiary believes that the trustee has misused trust money.
Under a Project Trust, the head contractor is the trustee and is required to hold money for the benefit of its subcontractors in accordance with the terms of the subcontracts and chapter 2 of the BIFA. However, if a subcontractor believes that the head contractor has used money that was or should have been held for the benefit of that beneficiary, the beneficiary will still need to commence legal proceedings against the head contractor for a breach of the Project Trust. That action will involve the subcontractor proving that it was entitled to an amount under its subcontract at a particular point in time and that the head contractor was liable to pay that amount to the subcontractor prior to it withdrawing money from the Project Trust Account.
As the subcontractor is the only person who has been wronged by the head contractor, it is the only entity that can bring legal action against the head contractor for an alleged breach of contract and/or trust. Unfortunately, a Project Trust does not stop the head contractor from actually physically accessing the money and doing whatever it wants with it, including paying itself, so it is important that subcontractor beneficiaries do not overestimate the protection that can be provided by a trust even if the bank account is called a ‘trust account’. Further, a head contractor can lawfully withdraw money from the Project Trust Account even though a subcontractor may believe that the head contractor owes it money.
Any action that may be taken by the Queensland Building and Construction Commission for a breach of BIF2 will not prove that the subcontractor is legally entitled to an amount under the subcontract i.e. the subcontractor cannot take enforcement action against the head contractor just because the Commissioner succeeded in proving that the head contractor committed an offence under BIF2. This is because the legal arguments would be different i.e. the Commissioner would be arguing that the head contractor withdrew an amount from the Project Trust Account on a particular day and left an insufficient amount in the account to cover amounts that it was liable to pay to subcontractor beneficiaries, whereas the subcontractor would be arguing that the head contractor owed it an amount under the subcontract.
This page considers the situation where Project Trusts apply to head contracts. Unless noted otherwise, all references to a ‘subcontractor’ in relation to a head contract Project Trust refers to a subcontractor that is a beneficiary of the Project Trust.
If a subcontract also requires a Project Trust, the rules set out on this page are the same but the subcontractor is the ‘trustee’ and its subcontractors are ‘subcontractor beneficiaries’.