COVID-19 delays, increased material and labour costs as well as extreme supply issues are affecting the construction industry across Australia. In this update, we focus on the amendments to subcontracts that we consider to be the most essential in the mitigation of risk under head contracts for these issues.
“Back-to-back” with head contract
First and foremost, head contractors should ensure subcontract conditions are back-to-back with the head contract conditions, so that where possible, any risks that have been assumed by the contractor under the head contract are passed down the line to subcontractors. This is particulary important when subcontractors have a design obligation.
For back-to-back provisions to work effectively, specific clauses must be drafted into the subcontract. It is not enough to refer to the terms of the head contract.
COVID-19 and Force Majeure
COVID-19 has affected construction sites all over Australia. Many subcontractors are asking for EOTs (and even delay damages) for delays or shortages of labour and materials caused by COVID-19. Up to now, this was mainly dealt with in a force majeure (act of god) clause that also included delays by war, invasion, pandemic, Government intervention etc. But we are now seeing specific COVID-19 event clauses. No matter which version is used, the clause should provide that an EOT will only be grated if the event was:
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- beyond their reasonable control of the subcontractor;
- caused default or delay in performance of the subcontract works;
- was without the fault of the subcontractor;
- could not have reasonably been prevented, and the subcontractor has attempted to mitigate the delay;
- was the result of a state-wide or national legislative direction; and
- there is no other claim available for that delay.
Cost Escalation
In commercial contracts, cost escalation clauses allow for increases in the cost of materials, labour and other costs, usually by providing a lump sum and a schedule of rates. There are normally two types of schedules – costs based or formula based. Such a clause, if agreed, needs to provide that the subcontractor must demonstrate they have unavoidably suffered increased costs of selected materials or trades greater than allowed for in the lump sum and:
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- are as a direct consequence of an Agreed Event;
- the subcontractor has made all reasonable attempts to mitigate any cost increases;
- there is a time and monetary cap; and
- the clause is not applicable if the costs have been recovered under a COVID-19, insurance or similar clause.
Project Trust Account
The QLD Government has now implemented the Project Trust Account (PTA) model to apply to the private sector. The next PTA phase roll out are as follows:
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- phase 2B commencing 1 January 2022: private-sector construction projects that are valued at $10 million or more will require a PTA if more than 50% of the contract price is for ‘project trust work’ and at least one subcontractor is engaged;
- phase 3 commencing 1 July 2022: private-sector construction projects that are valued at $3 million or more will require a PTA if more than 50% of the contract price is for ‘project trust work’ and at least one subcontractor is engaged; and
- phase 4 commencing 1 January 2023: all building and construction projects that are valued at $1 million or more will require a PTA if more than 50% of the contract price is for ‘project trust work’ and at least one subcontractor is engaged, completing the rollout.
It is critical that head contractors are aware of the obligations in the event a PTA is required including:
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- The head contractor must open one PTA per eligible project with an approved financial institution, within 20 business days after the head contractor enters into the first subcontract.
- If applicable, the head contractor must open a Retention Trust Account (RTA) to hold cash retentions which can be used on multiple projects and subcontracts.
- The head contractor may only withdraw from the PTA for payment to subcontractors, depositing an amount into the RTA (if applicable), paying themselves for the work under contract, rectifying a payment error, or payment for an adjudication decision or decision of a court. The subcontractor beneficiary must be given 5 business days notice after making the withdrawal.
- In the event there are insufficient funds to pay the subcontractors, the head contractor must use its own funds to top up and cover the shortfall into the PTA, and then pay the subcontractor beneficiary from the PTA. Failing to do so is an offence and will require notification to the QBCC, therefore, no ‘out of pocket’ payments can be made.
- Ensure all notification requirements are in the approved form and within the time frame required by the BIFSOPA.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader’s specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances, please contact one of the named individuals listed.
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