The Australian government has baulked at recommendations to afford greater protections to subcontractors and suppliers on Commonwealth government projects.

In its recent response to the Small Business and Family Enterprise Ombudsman Inquiry the government supported with amendment the adoption of shorter time frames for government payments to small business contractors.

But it merely ‘noted’ a number of other critical recommendations which would have extended protection to subcontractors and suppliers who are engaged by head contractors to work on Commonwealth Government projects.

These include recommendations for the Commonwealth to:

  • Require head contractors who work on Commonwealth projects regarding payment policies to adopt Commonwealth Procurement Rules which set out basic rules which apply to procurement activities on Commonwealth projects.
  • Extend Commonwealth payment policies across all Commonwealth agencies and entities
  • Mandate Project Bank Accounts in public works and construction projects

In its final report into payment times and practices published in April, the Australian Small Business and Family Enterprise Ombudsman said late payments are compromising the ability of small business throughout Australia to generate cash flow and grow their business.

As part of its 10 recommendations, the Small Business Ombudsman said action is needed for Commonwealth and other governments to become a ‘model client’ in six key areas.

Among these, the Ombudsman said the government should consider requiring its head contractors to adopt Commonwealth payment time frames and practices of procurement through its supply chain.

This would mean that protection under Commonwealth Procurement Rules in respect of payment time frames and terms on Commonwealth projects would be extended to cover not only principal contractors but also consultants, subcontractors and suppliers.

At the moment, Commonwealth Procurement Rules protect principal contractors in respect of payment time frames and policies but do not protect anyone with whom the principal subsequently deals.

Nevertheless, the government has merely ‘noted’ this recommendation.

In response to a similar recommendation from another Joint Select Committee report into government procurement, the government in November said its Finance department would introduce a ‘clause bank’ of standard conditions which entities ‘can use as appropriate’ for contracts above $200,000.

As for wider application of the rules beyond this, the government said Commonwealth Procurement Rules do not extent to the procurement or contracting practices of suppliers (including when these are principal contractors).

Instead, it says, principal contractors are able to organise their own commercial arrangements as they see fit.

The end result is that those who subcontract and supply to head contractors on Commonwealth projects will be unlikely to enjoy greater protection compared with what they do now under current laws.

In addition, the Commonwealth simply ‘noted’ a recommendation that Commonwealth extend its payment policies to cover all entities.

At the moment, these policies apply in the case of non-commercial ‘core’ government functions.

Less strict rules under the Public Governance, Performance and Accountability Act apply to government departments, agencies and entities who carry out commercial activities.

Thus, as things stand, contractors employed by commercial entities which are owned by the government do not enjoy payment protections which are as stringent as those enjoyed by contractors engaged to carry out core government functions.

In its response to the inquiry, the government defended existing arrangements.

The reduced stringency and greater flexibility which is afforded to commercial contractors in this space reflects the greater commercial emphasis of the operations of these entities, it said.

Finally, the Commonwealth merely noted a recommendation to mandate project bank accounts on Commonwealth Contracts.

Use of PBA, the Ombudsman noted, would have prevented a number of sub-contractor insolvencies related to the insolvency of one of the main contractors of the Chifley Building in Canberra.

In its response, the government said consideration of PBAs would form part of a best practice review into Security of Payment Legislation being conducted by John Murray AM which is due to conclude by December 31 2017.

The government did, however, support with amendment a recommendation to tighter time frames for payment on public projects.

By July 2019, the government has announced that all non-corporate Commonwealth entities will be required to pay all invoices for contracts up to $1 million within 20 calendar days – down from 30 calendar days now.

As it does now, interest will apply to payments which are not made within the required time frame.

Speaking on these last moves, Prime Minister Malcolm Turnbull described the changes as a win for small business.

“This will put money back in the pockets of small business, helping them invest, grow and employ more workers,” Turnbull said. “It is a major win for the 6,800 Australian small businesses that work with the Commonwealth.”