Top 3 best practices for managing project trust accounts
The introduction of project trust accounts in the building and construction industry in Queensland has created compliance and financial challenges for many companies. This guide looks at ways you can best prepare for and manage the changed requirements.
Background to Queensland’s trust account framework
Under the Building Industry Fairness (Security of Payment) Act 2017, the Queensland government has established a new trust account framework for the building and construction industry. The legislation is designed to quarantine the payments owed to sub-contractors to ensure they get paid for the work they do, even if the builder was to become insolvent.
Phased rollout of project trust accounts
The Queensland Government has been rolling out the trust account scheme from 1 March 2021. Currently trust accounts are required for State Government and Hospital and Health Service projects valued at $1 million or more and local government and private sector projects valued at $10 million or more.
Over the next two years, more parties and projects will be impacted. Full implementation will see all projects with a contract price of over $1 million (except for small-scale residential work) requiring a project trust account. Furthermore, any parties withholding cash payments from these projects will require a retention trust account.
What are project trust accounts?
Project trust accounts are a type of statutory trust designed to protect payments to subcontractors. They must be set up and administrated by the head contractor for eligible projects, with each project requiring its own bank account to support the trust. The project owner or developer (Principal) deposits funds and progress payments into this specific account, which the head contractor uses to pay the project’s sub-contractors. When all the sub-contractors have been paid, the head contractor can pay themselves.
What are retention trust accounts?
Retention trust accounts are also a statutory trust, designed to protect cash retentions withheld from payment on eligible projects. Both the principal and head contractor for an eligible project need to have a retention trust with a corresponding bank account to support the trust. Only one retention trust is required per party and can be used to hold cash retentions across multiple projects.
The contracting party needs to transfer cash retentions withheld from payment to this trust account at the time they are withheld. These funds remain in the retention trust account until practical completion when a proportion of the funds can be released. The remaining funds are paid at the end of the defects and liability period if there are no omissions or faults in the contracted work.
How to manage project trust accounts
Consider the following best practices to comply with trust account legislation:
1. Prepare early
Many building and construction companies will need to set up and administer dozens of project trust accounts simultaneously. This adds practical complexity to how head contractors run their businesses and organise their staff, projects and cashflow.
Under trust laws, the penalties for non-compliance or mismanagement of trust funds can be severe. Further, no firm wants to fall behind industry standards or suffer financial penalties and brand damage for non-compliance. Therefore, it’s important to prepare early and anticipate all the requirements of the scheme, which include:
Trust accounts need to be set up with a financial institution approved by the Queensland Building and Construction Commission (QBCC). There are currently a small number of approved financial institutions to choose from. Head contractors may want to change who they bank with to enable easier account management and transfer of funds.
The head contractor needs to notify the QBCC each time they open a project or retention trust account so that it can be recorded on the trust account register. There are many other notifications required to support the operation of the trust account too, which must include certain information and be given within specific timeframes.
Those managing retention trust accounts (trustees or their nominees) need to undergo mandatory training within 20 business days of being nominated as a retention trust account administrator, OR within 20 days of an eligible retention amount being withheld.
All retention trust accounts need to be audited by a registered company auditor within 40 business days of the trust account’s year end (as defined by the anniversary of its opening date) and also on its closure.
Each head contractor needs to maintain detailed financial records for each project. These records need to be kept for a period of 7 years.
These compliance requirements present administrative challenges for most companies, as well as additional costs that they need to absorb. Firms need to consider the systems and processes they put in place to meet the new regulations.
2. Get professional help
Firstly, building and construction companies will need to establish whether their projects require trust accounts. The QBCC has created a Project Trust Account tool to assist firms with this. However, many may choose to get expert advice for clarity on what they need to do. Further, many companies may want legal help revising their contracts to take into account the new requirements.
Accountants also have an important role to play as this scheme rolls out. One of the key features of trust accounts is that project funds are effectively locked away and can only be spent on the project that they apply to. This can present problems for the head contractor with working capital as they’re required to pay themselves last and cannot move money between projects and other parts of their business as effectively. Expert financial management becomes even more important in this new context.
Head contractors can appoint their bookkeeper as their trust account administrator. However, it’s important to note that the legal liability for the project trust account remains with the trustee.
3. Consider the capabilities of your software
Many head contractors will need to consider updating their accounting software as they need to be able to account for and track payments per project, and not all accounting packages have the record keeping capability for this. Further, they need to be able to automate deposits and withdrawals across multiple project and retention trust accounts, maintain a ledger for each trust account, and keep detailed financial records for a period of 7 years. Without the right solution, this becomes an almighty undertaking – and one that’s at a high risk of non-compliance.
With the right software, much of the hard work is already taken care of. You can also pull off reports at the click of a button for your own purposes or for the QBCC, beneficiaries, principals, and external auditors.
Simplify complex compliance with MYOB
For construction businesses who need to meet QBCC trust account framework compliance obligations, MYOB Advanced Construction provides smart tools to support those requirements. Built with industry consultants, the platform helps you manage multiple ledgers, supports risk identification, and simplifies reporting across multiple accounts and projects.
At MYOB, we have you covered.
Disclaimer: This guide is intended to provide general information in summary form. It is only current at the time of publication and does not constitute legal advice. You should seek legal or other professional advice tailored to your circumstances rather than acting or relying on the contents of this guide.