The recently released report from the Senate Economics Committee into Insolvency in the Construction Industry contains 44 recommendations to address the issue of insolvency.

One of them is licensing. This is consistent with recommendations coming out of the Collins Review in New South Wales. Queensland already has a functioning licensing regime in place.

The report has the following recommendation:

The committee recommends that each state and territory licensing regime contain three key requirements:

1. that licence holders demonstrate that they hold adequate financial backing for the scale of their intended project. This capital backing requirement should be graduated, with increased levels of proof required for more significant projects;
2. that on registration, licence holders provide evidence they have completed an agreed level of financial and business training program(s), including principles of commercial contract law, developed in consultation with industry bodies; and
3. that licence holders demonstrate that they are a fit and proper person to hold a licence.

To me, this makes some good sense. After all, if you want to drive a car you have a licence, but if you want to drive a bus you need a different type, and a truck, a different type again. This is because each of those vehicles are very different and require different skills to drive safely.

It is the same with running a contracting business. Running a $20,000 job is a far cry from running a $2 million dollar job, or even a $200,000 job. I can tell you from experience that amongst the many insolvencies are small companies that took on projects that were well beyond their ability to finance and to manage. As a result, everyone suffers.

Why shouldn’t there a requirement to demonstrate your credentials before being let loose to bid on larger projects? I think it’s a good idea.

One of the complaints from established contractors is that they are tendering on projects alongside tiny start-ups who have little experience and no money and who would struggle to complete the contract. But they can outbid the more experienced companies because they have a smaller cost base. On the other side of the equation is the client who doesn’t care too much and is buying on price. If the lowest bidder is a minnow, all the better; they’ll run them hard, string out the payments until they go insolvent and then get someone else to complete the work.

I once had a client, a young guy maybe 23 years old, who went out on his own as a flooring contractor and quoted a $50,000 job. This was way out of his league. He did not get paid and within a few months was in administration. Personally, he fell into a deep depression. Of course, the flooring suppliers did not get paid either.

Now if he had to be licenced, he would not have been allowed to undertake such a large job as his first contract. He would have had to do jobs at a lower amount, develop some experience and be required to show an understanding of business management and risk management. As he built up skills and cash-flow, he could then seek licensing to do larger jobs.

In a similar vein, many contractors will know that to tender on government work your company has to be financially assessed before you are allowed to tender. This is also directed at ensuring that the tenderers are financially able to carry the project. There is no reason I can see why this can’t apply to the broader industry.

The other aspect I like is the fit and proper person test. This addresses contractors who may have a litany of outstanding judgments against them, or numerous questionable liquidations behind them, or other such issues. This would mitigate a lot of behaviour that creates and adds to the problem of insolvency.

Overall, it’s not a bad idea, but as always the devil is in the detail. Let’s see what happens.