Over recent times, there have been several reviews into the non-payment of subcontractors in Australia’s construction sector.

Of particular note was a  national review of Security of Payment Laws that was undertaken in 2017 by John Murray AM (final report available here).

There has also been significant legislative change aimed at improving subcontractor payment protection.

However, subcontractors continue to face problems in obtaining payment for work which they have performed.

These include:

• lengthy payment timeframes;
• failure to return retention money or undertakings; and
• non-payment where a head contractor becomes [1]

No Silver Bullet

There are various legislative protections that do seem to provide some benefit to subcontractors – provided that regulators enforce compliance with these provisions.

These include:

• Legislated maximum contractual payment timeframes;
• Payment of subcontractors as a condition of licensing;
• Rapid adjudication of payment disputes (in many jurisdictions) combined with the ability to lodge a judgment debt, caveat and withholding notice on a higher party in the contracting chain; and
• Retention trust

However, when a head contractor becomes insolvent, none of these are resulting in payments flowing to subcontractors. Even project trust accounts cannot protect money in cases where the money in question is not in the account (for example if a client legally withholds payment as a set-off).

Additionally, there are a number of payment platforms on the market that are commendable where they are adopted. While these should result in timely payments to subcontractors, these alone are not sufficient to address situations of insolvency. These also rely on buy-in from the client, financiers and head contractors. Some require payment from the subcontractors to use the platform.

What Needs to be Done

To address continuing payment problems (and in particular the issue of non-payment following insolvency), Master Electricians Australia calls for action in four areas.

In particular, Master Electricians is calling for:

• Australian jurisdictions to agree to implement harmonised security of payment legislation generally in accordance with the recommendations of the aforementioned Murray Review.
• Holding of retention money by a central authority – similar to the government rental bond schemes – with a simple process for payments in and out.
• Having Security of payment legislation include provisions that the contracted party may at any time elect to substitute a contractually required form of non-cash security with cash retention. Also, having legislation prohibit a prohibition on linking subcontractor practical completion to that of the head contractor.
• Having the Australian Government establish a scheme similar to the Fair Entitlements Guarantee whereby subcontractors unpaid by an insolvent construction contractor will be paid for work carried out – subject to reasonable limitations. Such a scheme could be funded (at least in part) by earnings on the centralised retention holding scheme noted in point 2 above.

Each of these are discussed below:

Under the first point, Australian jurisdictions would agree to implement harmonised security of payment legislation. This would be done generally in accordance with the recommendations of the Murray Review.

Such a measure would simplify compliance for head contractors and subcontractors alike. It would also take the best of state legislation that is working well to create a national system.

Under our second point, retention money would be held in a central government account. This would operate in a similar manner to government rental bond schemes.

As things stand, there are several challenges that are inherent with existing statutory retention trust accounts.

These include:

• The administrative cost and burden for businesses to establish the trust account and fulfil the obligations of trustee (including trust ledgers, audits, ).
• The lack of payment in a timely way to subcontractors of these retention amounts following head contractor insolvency.
• Head contractors demanding unconditional bank guarantees (or bonds) in lieu of cash retention to avoid the obligations of establishing a retention trust account, and the difficulties incurred by subcontractors in providing non-cash security including costs and non-return.

The concept of a central retention fund has been raised previously by others[2] and should be seriously considered.

This would save a party the administrative burden of establishing and operating a retention trust account and would provide greater likelihood of faster payments to subcontractors in the event of an external administrator being appointed to the contracting party.

Third, Master Electricians would like to see a range of measures incorporated into the harmonsied security of payment legislation referred to above.

These include measures to:

• permit contracted parties (e.g. subcontractors) to substitute any non-cash security (i.e. bank guarantee/ bond) with cash retention, at any time; and
• prohibit head contractors from linking subcontractor practical completion to that under the head contract.

Finally, Master Electricians is calling for the Australian Government to establish a scheme similar to the Fair Entitlements Guarantee (FEG) that would enable subcontractors to claim payments in respect of amounts which they are owed by insolvent construction contractors. As outlined below, this would be subject to reasonable limitations.

Despite the many measures taken across the country to improve security of payment, non-payment is still happening when insolvencies occur.

For small and micro businesses, these payments are akin to wages. Not receiving a payment can result in being unable to make a mortgage payment or pay household costs.

It has been estimated the additional cost of implementing project trust accounts is up to 3 per cent of the project cost[3]. This is ultimately passed on to the client (typically governments and large developers). Redirecting this money to a fund would be a better outcome for subcontractors.

A fund would have the added advantage of a federal regulator pursuing directors for amounts paid from the fund. This would in turn act as a very strong deterrent to directors of construction companies against leaving subcontractors unpaid. It would also help to reduce the rate of phoenixing activity.

Limitations on payments would be necessary. The following are suggested for consideration:

• Limits on the number of payment claims per subcontractor.
• Limits on the amount that can be claimed from the fund (e.g. $50,000).
• Requirements for subcontractors to obtain an adjudication decision determining the amount payable (with a capped fee to adjudicators for these assessments).
• Requirements for an early-stage independent assessment of the likelihood of the insolvent entity having funds available for payment of debts to unsecured creditors. This would enable subcontractors to elect to apply for a fund payment over pursuit of the unsecured debt. Consideration should be given to the federal government having a right of subrogation to pursue amounts from the insolvent entity.
• Disallowance of payments to related entities of the insolvent head contractor.

It would be imperative to fast-track the adjudication decision process following insolvency (and following the assessment of likelihood of payment to unsecured creditors) to ensure swift processing of payments from the fund.

While it is difficult to predict amounts that may be due to subcontractors following head contractor insolvency in any given year (compared to amounts claimed, and excluding retention amounts which would be separately payable under the proposal), it could be fairly assumed that if an amount of up to $50,000 was available from a fund, that a substantial portion of impacted subcontractors would receive a payment.[4] While this amount not be the full amount of losses incurred, it could be the difference for a small business being able to trade out of a bad debt event and becoming insolvent themselves.

At a time of workforce shortages and an enormous pipeline of work, Master Electricians Australia is calling on governments across the country to take bigger steps towards ensuring subcontractors are paid for their work performed.

[1] See for example Payment Times Reporting: 2H CY21 Construction focus 9 August 2022 identifying 42.8% of construction sector reported invoices were paid within a period greater than 30 days, compared with 34.2% all industries [sou rce: Compilation of data from the Payment Times Reports Register for the period 1 Jan 2021 to 30 June 2021 and 1 July 2021 to 31 Dec 2021; Australian Business Register].

In addition, the various State/Territory inquiries and consultations into security of payment concerns in the construction industry. Also, there have been Queensland instances of insolvency where project trust accounts were in place without evidence of payments flowing to subcontractors.

[2] Including Michael Chesterman, Helix Legal

[3] https://www.propertycouncil.com.au/news/rethink-required-on-project-bank-accounts

[4] The Victorian Building Authority data on use of the adjudication process showed that the most common amounts claimed were between $10,000 and $24,999, brought predominantly by trade subcontractor: Inquiry by the Victorian Legislative Assembly Environment and Planning Committee ‘Employers and contractors who refuse to pay their subcontractors for completed works’ November 2023.

By Kate Raymond, CEO Master Electricians Australia