Rules requiring building contractors to hold progress payments in separate trust accounts until subcontractors are paid are necessary in order to protect trade contractors from financial loss, subcontractor representatives say throughout Australia say.

The Northern Territory is debating new legislation which, among other things, would require building contractors to set up special trust accounts through which progress payments would be paid and from which contractors would be unable to draw until payments owed to their subcontractors had been made.

The proposed legislation is being welcomed by representatives of subcontractors throughout the country, who say such trusts are necessary in order to provide trade contractors with greater security with regard to payment for work performed.

“The escrows accounts are necessary to capture any retentions, stop or minimise the effects of intimidation [provide a level playing field], wrongful withholding of money, conjuring of disputes and defects, illegal phoenix trading and main contractor insolvency as well as securing the project and minimising adjudication applications,” Subcontractors Alliance president Les Williams says.

“The escrows will also stop the diversion of funds by contractors and developers to support other private developments, other projects or short-term investment at the expense of the contractual chain. Regardless of the objections escrow accounts will provide much needed stability in the market, value add to the industry by providing an orderly disbursement of funds through the contractual chain.”

Australian Subcontractors Association chairman Rick Green agrees, saying the trusts would help protect subcontractors against insolvent trading and pheonixing.

“History has proven through continual fallout from builders and subcontractors failing to get paid and being left with all the risks,” he said. “We feel it is a necessity. If the money is available for the project, there will be no problem and that’s the way it should be.

“Put it into a trust and give confidence back to subcontractors.”

The issue of construction trusts is being debated as part of a broader process of reform of building industry regulations in the Northern Territory.

Under one of a number recommendations contained in a report commissioned by the NT government and published last year by lawyer Cris Cureton, contractors whose payments typically made to suppliers and subcontractors exceed a given threshold (proposed to be $500,000 over a registration year) would be required to set up and run a separate subcontractor trust account.

All progress payments made by the client to a head contractor would be made through this account, from which the contractor would be able to draw only after all subcontractors had been paid with respect to the period in question.

The bottom line effect of this would be that all progress payments would essentially be held in escrow until subcontractors had been paid. The system would be designed to prevent situations in which money paid by the principal to the contractor which is intended to be passed through to the subcontractor is essentially used by the head contractor for their own business purposes.

While the concept of the trusts is supported by subcontractors, building industry lobby groups remain opposed.

In its submission in response to the report, the Housing Industry Association (HIA) argued that mandatory trusts distort commercial relationships, deprive the industry of cash flow and impose costly new administrative burdens upon builders

When a builder received progress payments, they were not holding client’s money but in fact their own, the HIA said.

Provided that payment to subcontractors – out of the progress payment money or any other money – is made in full and on time under the relevant subcontracts, the builder is indeed fully and legally entitled to use these progress claims as they wish, the HIA said.

In addition, the HIA argued that being forced to hold payments in trust would unduly impinge upon the cash flow of builders, adding that at any rate there was nothing to prevent unscrupulous operators from misappropriating or spending money purportedly being held in trust for purposes other than subcontractor payments.

While supporting the idea of trusts, meanwhile, Williams and Green say they should not be subject to thresholds such as that proposed under the Cureton review.

“My question would be why $500,000?” Green said. “If the infrastructure is there to accommodate trust accounts, surely the internal quality systems – i.e. policies, procedures and governing principles of the trust – should be able to cater for the smaller operations to help support and give opportunity to grow.”