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No licence, no problem…until now

28 August 2020

#Construction & Infrastructure

Published by:

Krystal Bentivoglio, Andrea Wilson

No licence, no problem…until now

Under the Queensland Building and Construction Commission Act 1991 (QBCC Act), an unlicensed person cannot legally carry out, or undertake (i.e., contract) to carry out, building work unless they hold a licence of the requisite class. If such a person is found to have carried out building work without the appropriate licence, their entitlement to payment is limited to specific amounts identified in the QBCC Act and no profit is claimable.

Unlicensed building work is an offence under the QBCC Act with a penalty up to:

  1. 250 penalty units ($33,362.50) for the first offence
  2. 300 penalty units ($40,035.00) for the second offence
  3. 350 penalty units ($46,707.50)[1] or up to one year’s imprisonment for a third or later offence or if the work is also a tier 1 defective work (and it’s also a crime).

In 2013, the QBCC Act was amended to provide that if you contract to carry out commercial building work without holding a licence yourself but you engage an appropriately licensed entity to carry out the building work, you would not breach the licensing requirement in section 42. This exemption effectively broadened the scope of entities to whom contracts and subcontracts for commercial building work could be awarded.

The exemption was frequently the subject of industry criticism and, according to some industry groups, encouraged bad behaviour because unlicensed parties could arguably avoid directions from the QBCC to rectify defective building work.

Although unanticipated, it is therefore perhaps unsurprising that new changes recently introduced by Parliament will return the QBCC Act to its original position by removing the exemption. From the date the amendments come into force, which has yet to be announced, industry participants can no longer legally enter into contracts to carry out, or undertake to carry out, building work without the requisite licence.

Why was the licensing exemption included in the first place?

The licensing exemption was originally introduced to help spur the development of the 2018 Commonwealth Games Village on the Gold Coast of Queensland. The Parliamentary Committee received submissions on the impact of the unlicensed contracting penalties contained in section 42 of the QBCC Act on commercial developments in Queensland, and considered the potential unintended consequences for the Queensland construction industry. The Department of State Development, Infrastructure and Planning advised the Parliamentary Committee that section 42 of the QBCC Act would impact the delivery of the Commonwealth Games Village, spelling chaos for one of the world’s most anticipated sporting events.

Economic Development Queensland advised the Parliamentary Committee that many of the prospective development partner entities and/or special purpose vehicles for the project would not hold builder licences themselves. Projects Queensland and the Queensland Treasury and Trade raised similar concerns in relation to public-private partnership (PPP) projects.

Accordingly, the Residential Tenancies and Rooming Accommodation and Other Legislation Amendment Bill 2013 proposed the insertion of Schedule 1A “exemptions from requirement to hold a contractor’s licence” into the QBCC Act. Schedule 1A provided a variety of exemptions, including the controversial ‘head contract’ exemption.

The explanatory notes to the amendment bill indicate that the changes were intended to facilitate commercial development (not only the Commonwealth Games Village construction) while ensuring that residential consumers remained protected. The exemption could have otherwise potentially stung homeowners in cases where an unlicensed party (having subcontracted all building work under the contract) became insolvent, as it would effectively prevent the homeowner from accessing the Queensland Home Warranty Scheme for incomplete work associated with the insolvency.[2]

It seems clear that the exemption in section 8 was intended to remove regulatory impediment and red tape to commercial development in Queensland, including for businesses seeking to tender for public infrastructure works. At the time of their introduction, Schedule 1A and its exemptions would have been considered essential for Queensland’s economic development and to enhance its prime position on the Commonwealth Games world stage.

Why, then, has the head contracts exemption been removed?

A return to the original licensing requirement

The amendments removing the head contract exemption originate in the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Bill 2020. First introduced on 5 February 2020 to overhaul the project bank accounts regime, the Third Reading of the amendment bill on 15 July 2020 introduced the exemption removal provisions.

Removal of the exemption was recommended by the Transport and Public Works Parliamentary Committee, which agreed with the view expressed by stakeholders and industry groups that if contracting directly with an owner or developer, head contractors ought to be appropriately licensed and bear the full brunt of the responsibility for building work. The Committee report recommending the amendments stated that the exemption “undermines the intent of section 42 of the QBCC Act to ensure that only licensed contractors carry out building work in Queensland. Under this provision, a person or company can contract with a consumer to carry out building work yet are not the entity that actually carried out that building work. This creates problems when defective building work is found as the entity that has the contractual responsibility to the consumer for that work is not an entity that the QBCC has the power to direct to rectify”.[3]

As Schedule 1A was originally included to facilitate PPPs and prescribed government projects, section 8 was determined to no longer be necessary as other exemptions under Schedule 1A will continue to apply in these circumstances.[4]

A commencement date for the licensing amendments has not yet been provided but the explanatory notes of the Third Reading of the amendment bill provide that enactment is awaiting the recovery of Queensland’s construction industry from the impacts of COVID-19.

What does this mean for you?

If your business is unlicensed and you intend to enter into a contract under which you undertake to carry out building work (even if you will subcontract a licensed party to do it), watch out for when these amendments are enacted as merely entering into the contract after that date may be unlawful. In particular:

  • developers and special purpose vehicles – you will need to check development agreements currently under negotiation with landowners and consider the timing for execution. Are you potentially undertaking to carry out building work under them? Do you have a plan B if you can’t sign the contract before enactment?
  • civil contractors – be especially careful about the nature of the work you contract for so that you do not inadvertently include building work as part of your scope. For example, while constructing or repairing a road is not considered building work for the purpose of the QBCC Act[5], you will need to ensure that you do not accept a variation for extra work that might be building work, e.g., construction of a retaining wall. Even if you subcontract that work to a licensed entity, you may be caught by the amended legislation
  • landlords – there is a chance for these changes to potentially capture agreements for lease or leases, e.g., where a landlord (being unlicensed) agrees to fit out the premises or have building work carried out for a tenant. Depending on the contractual terms, you could be caught out
  • subcontractors – be aware of who your head contractor is and what licence it should hold. Notwithstanding the prohibition on ‘pay when paid’, in practice, if a head contractor is not entitled to payment under the head contract because it is unlicensed, the reality is that this might cause a cashflow issue affecting you under a subcontract.

A variation could also be a danger if it inadvertently provides for you to undertake building work, which could end up infecting your right to payment under the contract as a whole – not just for the variation. If you are unlicensed, be vigilant about what work you agree to do or subcontract.

Ultimately, precise drafting of contracts and variations might help avoid an undertaking to carry out building work, but whether this is sufficient may end up being tested by the courts.

What now?

Now is the time to turn your mind to whether your business should obtain a QBCC licence or consider other pathways to ensure you remain compliant. Your first step will be to confirm whether what you undertake is or is not ‘building work’ for the purpose of the QBCC Act. The legislation excludes construction work in mining, for example.

If you elect to seek a builder’s licence, you will need to consider whether you need a company licence, ensure you meet the minimum financial requirements for licensing and have an appropriate employee on staff willing to act as the licensed nominee. This could be an issue for special purpose vehicles or smaller companies who may not be able to satisfy the minimum financial requirements or have a large roster of employees from which to draw a ready, willing and able nominee.

You will also need to ensure you allow enough time for this process as turnaround time from application to obtaining a licence can be lengthy, especially if done incorrectly.

For completeness, we note that the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Act 2020 provides for a qualified panel to review the role of developers in the building and construction industry and for a report to be tabled in the Legislative Assembly. However, it is yet to be seen what impact, if any, such a review would have on the issue at hand.

Authors: Suzy Cairney,  Krystal Bentivoglio and Andrea Wilson

[1] These amounts are current only at the time of writing.
[2] The Queensland Home Warranty Scheme, administered by the QBCC, applies to homeowners contractually by virtue of the contract they enter into with a licensed head contractor. If the head contracting entity is unlicensed, a homeowner cannot access the Queensland Home Warranty Scheme through the unlicensed head contracting entity or seek to access the Scheme through a subcontractor’s licence as the homeowner would not be a party to the subcontract.
[3] Transport and Public Works Committee Report No. 36, page 70.
[4] QBCC Act, Schedule 1A, sections 10 and 11.
[5] Queensland Building and Construction Commission Regulation 2018 (Qld), Schedule 1, section 14.

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Krystal Bentivoglio, Andrea Wilson

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