A leading debt recovery expert has blasted a new scheme by the New South Wales government which will require contractors working on construction projects to hold any money they receive in respect of work performed by their subcontractors in a separate trust account.
Sydney based Contractors Debt Recovery managing director Anthony Igra says the protection offered under the proposed scheme, which was announced by Fair Trading Minister Matthew Mason-Cox on December 8 as part of the government’s response to the Collins Inquiry into the cause of construction industry insolvencies in New South Wales, would be minimal as it applies only to projects with regard to which the dollar value of the contract between the principal and the head contractor is worth more than $20 million, and does not apply to residential projects.
Citing figures from the regulatory impact statement accompanying the draft regulations through which the scheme would be implemented, Igra said that while the general idea of construction trusts was sound, this particular scheme would not provide subcontractors with any extra protection at all in the case of the majority of projects as they will not meet the threshold above which the scheme will apply. According to the impact statement, in 2012/13, only 1,000 or just over four per cent of the 23,778 non-residential construction projects approved by local councils exceeded over $1 million in value, and that even then only a portion of these projects would exceed the threshold of $20 million.
“This change will capture so few projects and such a tiny number of subcontractors that you really have to ask yourself what the point of it is,” Igra said, adding that the government had not explained why or how the threshold had been arrived at or whether this is a trial exercise or the final version of the scheme. Previously, the government had indicated it would trial a version of the scheme on government projects only.
Igra added that the scheme “does not come close to what was envisaged by the Collins Inquiry, and will ultimately help very few subcontractors.”
“The real unanswered question here is why the relatively few subcontractors working on the very few $20 million plus projects are afforded a greater level of security than the tens of thousands working on smaller projects," he said. "These subcontractors miss out, and yet they are working on, by the governments own guesstimates, over 95 per cent of projects.
“The rationale of this policy is hard to follow, and remains mostly unexplained.”
Under the proposed new scheme, head contractors working on non-residential construction projects worth more than $20 million will be required to hold any money associated with retention payments - money which is payable under contract to their subcontractors for materials or services performed but which they retain as security until the subcontractor performs their obligations - in a trust account with an authorised deposit taking institution.
Contractors who do not comply would face penalties of up to $22,000, while the government is also set to consider imposing personal liability on company directors.
In a statement, Mason-Cox said the new scheme would end what he says is a widespread practice of head contractors using what is effectively money owed to subcontractors for their own working capital, and that having such money held separately in a trust would mean subcontractors would still have access to this money in the event of head contractor insolvency.
He added that the scheme would make New South Wales the first state in Australia to protect payments for subcontractors in this way.
“At the end of the day, this money belongs to subcontractors and it’s about time it was protected as such,” Mason-Cox said.
He noted that the new scheme represents part of the government’s response to the Collins Inquiry and that the new regulation was expected to start in 2015 following a public consultation process.
The government is slated to conduct a comprehensive review into the Security of Payments Act next year.