Electricians throughout Australia are calling for Commonwealth and state governments to deliver greater subcontractor payment protection against building company collapses.

But debt collection experts say that a new scheme which is proposed will not be the best way to protect subcontractors.

As construction industry insolvencies continue to rise, Master Electricians Australia (MEA) has called for four measures to protect subcontractors from the fallout of builder insolvencies.

These include:

• creation of a national scheme which enables subcontractors to claim amounts which are owed to them in the event of builder insolvencies similar to the Fair Work Entitlement Guarantee Scheme (FEG) which is in place for employees
• implementation of a nationally consistent and harmonised approach to Security of Payment legislation in line recommendations of a national review on existing Security of Payment legislation conducted by John Murray AM
• legislation of retention trust accounts in a manner that permits authorised third parties such as industry associations to act as a trustee and to provide a low-cost solution for businesses who withhold retention funds; and
• allowing contracting parties such as subcontractors to substitute non-cash security such as bank guarantees or bonds with cash retentions.

At the core of MEA’s calls is the creation of a national scheme from which subcontractors would be able to claim amounts owed to them for work which has been completed in the event that a builder or construction contractor becomes insolvent.

The scheme would operate in a broadly similar fashion to the current FEG scheme, which allows employees of insolvent companies to claim amounts which are outstanding in respect of unpaid wages and entitlements.

The scheme could be funded through either a modest project levy on large non-residential projects or through dividends which are earned on retention trust accounts.

It would be subject to reasonable limits, such as restrictions on the number of payment claims or the amount which would be paid from the fund to individual subcontractors (potentially $50k).

To access payments, subcontractors would need to obtain an adjudication decision which determines the amount that is payable.

The latest call comes as a significant number of businesses across Australia are experiencing viability challenges amid substantial increases in construction costs which have occurred since COVID.

In 2023/24, a record 2,977 construction firms entered external administration across Australia, according to data from the Australian Securities Investments Commission.

Where builder collapses happen, subcontractors are unsecured creditors and are often able to recoup little if any of the funds which they are owed.

Over the years, a number of reviews have been carried out in regard to reform of security of payment laws.

In place throughout states and territories, these laws aim to ensure that subcontractors are able to receive timely payment for services provided as works progress throughout a construction project.

In 2015, a Senate Committee report found that the construction industry is burdened by almost $3 billion every year in unpaid debts including subcontractor payment.

In December 2016, the Australian Government commissioned John Murray AM to conduct a national review on existing Security of Payment legislation across states and territories.

Released in May 2018, his final report contained 86 recommendations. Of this, the overriding recommendation involved the need to achieve national harmonisation of security of payment legislation.

The call also comes as the Master Builders Association has teamed up with a platform known as Paid to manage payments between builders and subcontractors.

In a policy paper released in May, MEA acknowledges that some positive changes have been made since the Murray Review.

However, it says that subcontractors are still facing payment problems whilst many do not receive payment at all in cases where head contractors become insolvent.

It says that the Queensland system of introducing project bank accounts has failed to deliver subcontractor protection.

Whilst technology solutions such as the aforementioned MBA offering can be useful, MEA says that these do not in themselves deliver the level of payment protection which subcontractors need.

At any rate, some apps may require subcontractors to pay a percentage of their payment through the platform. This means that subcontractors need to forgo part of their margin to simply receive payments which they are owed.

Also, such platforms typically see payments flow through only if the owner pays the builder and the builder verifies the payment as owing to the subcontractor.

Such an approach could lead to a ‘pay when paid’ scenario and could leave subcontractors waiting months for owner milestone payments to become due in order to be paid what they are owed.

In a statement, MEA CEO Kate Raymond says that there is a need for action.

“MEA is deeply concerned about the increasing number of insolvencies that are occurring in the building industry and the number of electrical subcontractors not receiving payment for work conducted,” Raymond said.

“What is required is a better system and assurance of payment to subcontractors who have undertaken work but not been paid following builder insolvency …

“… A FEG-like scheme for payments following insolvency, combined with a retention trust scheme with rapid adjudication frameworks and a harmonised set of security of payment legislation that is consistent across Australia would go a large way to addressing the very serious issue of subcontractor non-payment.”

However, debt recovery experts disagree that the proposed FEG-like scheme is the best way to protect subcontractors.

Anthony Igra, Managing Director of Sydney based debt collection firm Contractors Debt Recovery, said that the proposed fund would be unlikely to have anywhere near the capacity to cover the amount which is owed to subcontractors and suppliers in the event of insolvency.

Instead, Igra supports a recommendation in the aforementioned Murray review for the introduction of deemed statutory trusts.

Under this recommendation, all amounts that are received by head contractors or subcontractors for work completed under a construction contract would be statutorily deemed to be trust funds which are required to be held for the benefit of subcontractors, workers and suppliers.

Head contractors would not be able to use that money to finance their own working capital or operations until all money owing to subcontractors and suppliers is paid.

Under the recommendations in the Murray Review, such an arrangement would apply to projects of $1 million or greater in value.

This, Igra said, would be a better and more comprehensive way to protect all amounts which are owing to subcontractors.

“The suggested fund would not go anywhere near covering what subbies are owed,” Igra wrote in a written response to questions from Sourceable.

“The MEA suggest a cap system on payments, but this is of limited help. The last estimate of unpaid construction work in Australia was around $3 billion (annually as at 2015). What fund can come anywhere near that? And if the idea is that ‘something is better than nothing’ then it is a small benefit that will be costly and awkward to set up. And how will the fund work in with the Corporations Act and the entitlements of creditors and so on? Does a beneficiary of the fund sign away their entitlements to the rest of what they are owed? Would the industry agree or be able to fund such a plan? It is also open to abuse where debtor businesses would be induced into going in liquidation so that it can share in the payouts of the subbies and may setup businesses as both builder and subby to create their own payouts. This is risky territory.

“A subbie might be out $250,000. If the fund pays out $40k, that does not offer the kind of systemic industry-wide solution that is required.

“The Murray Review supports a deemed trust model. This provides security across ALL the money owed to subcontractors and provides a seamless process for protecting and paying out moneys owed down the contractual chain.

“The industry’s energy is better spent getting that system in place than a fund that offers minimal payouts that won’t stop subcontractors going under themselves.”

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