Queensland’s trust account framework is changing the way that construction companies operate.
The requirements currently apply to all private sector and local government construction projects valued at $10 million or more and all State Government projects valued at $1 million or more.
Eventually all construction projects valued at $1 million or more (except small-scale residential work), will need a project trust account. Additionally, any parties working on those projects that are withholding cash retentions will need a retention trust account.
The legislation is designed to strengthen the industry by adding protections around payments to builders and their sub-contractors. However, the new requirements create a level of complexity and cost that businesses need to accommodate. As a result, strong financial management and operational efficiency are now more important than ever.
Potential costs and impacts of the new legislation
- Getting legal advice
Many developers and head contractors may want to get independent legal advice to make sure they fully understand the requirements and are compliant across all applicable projects. They may also want to revise their contracts to ensure the best outcomes for themselves, while meeting the new regulatory requirements.
- New administrative requirements
The time spent on compliance activities represents a cost to the business: whether it’s setting up and notifying the Queensland Building and Construction Commission (QBCC) of new project and retention trust accounts or undertaking mandatory training to comply with the legislation and understand the new requirements – this is time that could otherwise be spent on revenue-generating activity. Further, businesses will need to fund the cost of an independent auditor each year reviewing their retention trust accounts.
- Implementing new software
As builders will need to set up a trust account for every eligible project, head contractors may find that they need to account for dozens of projects simultaneously. There are also strict record keeping requirements that not all accounting software is capable of meeting. Quite simply, this may mean that head contractors will need to implement new software. In this case, they’ll typically need to consider the cost of implementation, cost of ownership, and the cost of the time spent upskilling employees on how to use the new software.
- Penalties for non-compliance
The penalties for non-compliance include hefty fines, penalty points and even jail time, depending on the nature and circumstances of the breach. Invariably, penalties affect the bottom line, either through fines or lost sales and brand damage.
- Impacts on cashflow
The project owner (the principal) deposits progress payments into the project trust account that the builder has set up. The builder (head contractor) then uses these funds to pay the project’s sub-contractors and has restrictions on when they can withdraw funds to pay employees, supply costs and themselves.
Project funds are effectively quarantined in a separate account, meaning that the builder can’t apply income from one project to another. This helps to ensure the sub-contractors get paid for the work they do and don’t get short-changed by the builder.
Any cash retentions that are withheld from payment need to be held in a separate retention trust account and cannot be touched until they’re due to be paid or until the end of the defects liability period. This may mean that at a given time companies have less cash on hand than expected to meet their working capital, payroll and cash flow requirements.
With the potential impacts on liquidity and the additional costs of compliance, companies may need to consider making additional financing arrangements, as well as finding other ways to increase their available cash, such as raising their prices or changing their contract terms. Further, strong financial management and increased efficiency become more critical than ever to the business’ ongoing profitability.
Ways to improve profitability
It’s important to operate as efficiently as possible to maintain profit margins, especially when encountering additional compliance costs. This may mean optimising business processes and practices to achieve more. For example, you may want to consider:
- Automating project billing
It’s very important that project billing is accurate and that the accounts receivables process is as tight as possible. Therefore, it’s worthwhile automating this process so you remove human error and delays from payment collection. With automation, invoices go out on time, reminders are sent, and payments are tracked and reconciled when they’re received.
- Tracking KPIs for inventory management
Overspending on inventory, storage and transportation costs will certainly squeeze the industry’s already slim profit margins. With an enterprise resource planning (ERP) platform designed for the construction industry, you can automate ordering at certain trigger events and set and track key performance indicators (KPIs) to continuously fine-tune processes and improve inventory management.
- Strengthening project management
Strong project management is essential to managing every project to time and to budget. If the project owner requires a change order, this needs to be handled quickly and efficiently. A poor process here can mean that things are missed (causing delays and rework) or price variations are not invoiced, which can mean lost income. Strong project management ensures the success of the build. In turn, high levels of customer satisfaction positively impact on brand perception and future sales.
- Increasing sales activity
When costs rise, it’s critical to increase revenue to maintain profitability. While you don’t want to take on too many projects and stretch yourself too thinly, you want to operate as close to your company’s capacity as possible. Therefore, you may want to tender for more contracts, reach out to contracting parties, book business development meetings, follow up on enquiries, undertake marketing activities and more to attract new sales.
Become more efficient with MYOB Acumatica Construction
MYOB Acumatica Construction is a cloud-based ERP platform that allows you to connect workflows for your projects, suppliers, customers, employees, finance, accounting and tax. With MYOB, you gain complete visibility across your entire business and all active projects. Further, you can simplify and automate key tasks and activities to improve efficiency and set and track KPIs across different areas to continuously improve performance.
For construction businesses who need to meet the QBCC’s trust account framework compliance obligations, MYOB Acumatica Construction also 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.
You can view our MYOB Acumatica Construction QBCC Trust Account Fact Sheet here.
Get in touch to find out more about MYOB can support your current and future business needs.