If Consumers want quality construction, you need to ‘follow the money’.

Recent reports delivered to the NSW and Federal governments have recommended the establishment of deemed statutory trusts, so that payments down the contractual chain are protected by effectively being held in trust at each level. That way money cannot be used for any other purpose than to pay for the work carried out on the project.

This system prevents money leaking out of the chain on its way from the developer to the sub-subcontractors. It is protected and held in trust. If one party goes into liquidation the money cannot be taken by the liquidator but remains in trust until a new party is appointed as trustee.

Last year it was reported in the Australian Financial Review that Building Commissioner David Chandler has rejected the deemed trust system. He said he was “very anti-statutory trusts” because it would “embed the economy with huge governance and compliance costs for progress payments”. He goes on to say that the focus should be on quality so that the work is “worth being paid for”. He says that by creating a platform to hold all project-related documentation and certificates, that this would “become a foundation stone for payment”.

(Sourceable note: Mr Chandler’s comments were made in a personal capacity. These should be read as representing Mr Chandler’s personal views rather than any official views of the NSW Government.)

For the most senior person in NSW Construction to adopt this position is amazing, for two reasons:

  1. He appears entirely unaware of the detailed government reviews of the statutory trust model and their conclusions that there would be no great burdens in terms of costs or compliance.
  2. He fails to understand the intimate connection between building quality and the payment of those who do the building.

Do we need to remind ourselves of the adage ‘You get what you pay for’? Let’s be clear; quality follows payment. Not the other way around. This is Mr Chandler’s fundamental misunderstanding. If you want quality and compliance, you need to address payment.

Governments realise the critical role of payment in the construction industry, and commissioned two key reports in recent years. In 2012 the NSW Government released the Independent Inquiry into Construction Industry Insolvency in NSW conducted by Bruce Collins QC.  In 2017 the Federal Government released the Review of Security of Payment Laws conducted by John Murray OAM for the Department of Jobs and Small Business. Between those two, in 2015, the Federal Government’s Senate Economics References Committee [SERC] conducted a year-long inquiry that resulted in a huge report entitled ‘I Just want to be paid; Insolvency in the Australian Construction Industry’.

Such is the scale of the problem. So how do payment issues cause poor workmanship and incomplete work?

When contractors aren’t paid, they leave the job to go to one that pays.

When contractors aren’t paid, they are not motivated to do a quality job.

When contractors aren’t paid, they struggle to pay for the right materials for the job.

When contractors aren’t paid, they don’t finish the work.

Finally, in many cases a contractor will not issue any certificates until it is paid. It is their only piece of leverage and they will use it. Often many trades go entirely uncertified for this reason.

Enter Mr Chandler’s demand for quality.

When a person or business is unpaid for months there is little interest in quality. The contractor’s interest is survival; trying to pay its suppliers, employees, its tax, and keeping a roof over the kids’ heads.

And this is how and why we are where we are today; bad work that gets certified, and sold to the public.

The Collins and Murray reports both considered this issue and both recommended the establishment of a statutory deemed trust system that would provide real security of payment to all parties in the contractual chain. This is the very system now rejected out of hand by Mr Chandler because of its “huge governance and compliance costs.”

There are no great burdens or costs. As Mr Collins observes on p.309 of his report where he considers opposition to trusts “…the overwhelming evidence demonstrates that opposition to the introduction of the construction trust is born out of misunderstanding”. Of most relevance here is the submissions on pp:315-317 under the heading “The Old Chestnut: Administrative difficulties, burdens and costs”. This puts paid to Chandler’s rejection of the trust system. Collins quotes both a report by firm Ferrier Hodgson and a Canadian lawyer (Canada has had a trust system in place for years) that find that there are no additional costs of any significance, especially given the great benefits of such a system. Collins concludes that the purported administrative and cost burdens “were not supported by the evidence before the Inquiry and ought to be rejected.”

The Murray report also considered the trust system and at p.308 he also considers the issue of administrative burdens and cites the 2012 Collins Report, the 1998 WA Law Reform Commission, and Commissioner Cole all of whom concluded that there would not be any great administrative burdens.

Despite the findings of several lengthy and detailed government Inquiries and reports, Mr Chandler has rejected the Trust system. This leaves a very interesting question on the table; How does his suggestion of a ‘blockchain-based platform containing all certificates for all projects’ that will create “an immutable source of truth” do anything to advance the cause of quality? How does this idea create a “foundation stone for payment”? Or a system of ‘trustworthy certificates’?

If this platform idea is set to deliver reliable quality and payment, then why is it entirely absent from a string of inquiries going back over 20 years?

The Commissioner has got things very wrong here. He’s got them backwards. Only when a deemed trust system is in place, and payments are protected, will the focus of industry participants turn to quality. Only when construction contractors get the payment they deserve, will consumers get the quality buildings they have paid for.

Until then, it seems Mr Chandler has a lot of reading to do.