There is not a single subcontractor in Australia who has not been impacted by the toxic payment culture within Australia’s building and construction industry. NFIA is working with industry stakeholders to create a world where subcontractors get paid for their work on time and contracts are fair for all.
The construction industry operates on a pyramid structure, with the client at the top who enters into a head contract with the head contractor, and with the head contractor subsequently entering into a series of subcontracts with subcontractors, consultants and suppliers. Because of the pyramidal structure, the bargaining power between the parties is highly imbalanced between contractors and subcontractors.
This imbalance of bargaining power within the construction industry has had a devastating impact. Not only has the pyramidal structure caused the party at the lower end of the hierarchical chain to assume the risk of insolvency of the party higher up the pyramid, but it has also resulted in significant injustice, particularly where, as a result of the unfair contract conditions, the party who has carried out construction work has been unable to obtain payment for such work on time – or at all.
It is because of the toxic structure that, for many years, NFIA has fought for comprehensive reform that improves the area of payment security for subcontractors and unfair contract terms. NFIA is pleased that State Governments, particularly Queensland, and the Federal Government are starting to address this issue.
Security of Payment
Payment delays from head contractor to subcontractor are a regular occurrence in the building and construction industry. Although contracts often hold specific payment dates these are regularly not adhered to despite head contractors receiving payment from the principal on time. Non-payments are also a massive problem in the industry.
Payment delays and non-payments vary from project to project but any disruption can have a catastrophic effect on the subcontractor’s cash flow when they often have little or no cash reserves or credit to rely on. The effects of poor cash flow go beyond just not being able to pay staff, pay for resources and expand operations but it can also threaten the very existence of a business. Poor cash flow is one of the main reasons why 60% of small- to medium-sized businesses in Australia cease operations within their first few years.
Late payments and payment refusal can also lead to massive amounts of resources being eaten up to pursue debts. They also often result in subcontractors taking on further debt which attracts additional expenses. Late and dishonoured payments can also lead to poor mental health outcomes for small business owners who often report heightened stress and anxiety levels over payment delays. More broadly, late payments can also have a devastating impact across the economy as small businesses that are paid slowly, in turn pass on payment delays which impacts down the supply chain.
NFIA believes that reforms to address the inherent imbalance of power should achieve 5 key principles in relation to security of payment:
- People who actually do the work should get paid for the work they have performed;
- If a business goes bankrupt they shouldn’t be able to take other businesses with them;
- Trade Professional contractors should get paid at the same time as builders;
- One small aspect of work, which is the responsibility of another contractor, should not hold up payment for the overwhelming amount of work that has been properly completed on time; and
- Contractors should be fair and reasonable.
Thankfully, legislatures in the various jurisdictions have also felt it necessary to intervene and to provide assistance to the more vulnerable party. For example, the Queensland Government has introduced new reforms to improve security of payment in the building and construction industry. The Building Industry Fairness (Security of Payment) Act 2017 introduces a number of measures which are designed to strengthen security of payment:
- extend Project Bank Accounts to the private sector and rename them Project and Retention Trusts to more closely reflect what the accounts do;
- enable a claimant to make a withholding request if they aren’t paid an adjudicated amount;
- give head contractors more protection like being able to place a charge on land when they aren’t paid an adjudicated amount; and
- introduce a penalty for underpayment of a scheduled amount.
Project Trust Accounts will lead to a significant improvement to the status quo. It simply does not cost a lot of money to set up a bank account and the cost of 15 cents per transaction is a very small administration fee when considering the billions in unpaid debts within the building and construction industry in Queensland. NFIA is confident that the adoption of Project Bank Accounts will go a significant way to addressing the payment issues that subcontractors face on a day to day basis.
NFIA supports the mechanism whereby disputed funds for both the head contractor and subcontractor as well as retentions remain within the Account. NFIA supports the amendments to payment claim notices and the clarification in regards to reference dates. NFIA could not more strongly support the concept of a statutory defects liability period. We also support the extension of timeframes to make an adjudication application. We congratulate the QLD Government on removing the ability to raise new reasons in an adjudication response as to why payment should not be made. At NFIA we consider that the penalties for deliberately causing another party to a building contract to suffer significant financial loss should be of a size that strongly discourages a party from acting in this way. We strongly support the mechanisms contained in the Act to apply a penalty and possible imprisonment for persons who fail to release retention money.
In our submission we also suggested that it be strongly communicated that bank guarantees be treated the same as cash in all circumstances. NFIA urges the Government to implement a proactive compliance program managed out of the Queensland Building and Construction Commission. No reform can be successful without this element.
The Federal Government is also addressing the issue of payment delays by head contracting companies. It intends to introduce a Payment Times Reporting Framework (the Framework) requiring large businesses with over $100 million in annual turnover to publish information on their small business payment times and practices. The Framework will cover Australia’s approximately 2,500 largest businesses including foreign companies and government corporate entities. NFIA applauds the Federal Government’s attempt to make cultural change. Involving company decision makers and publishing payment timeframe results will go a long way to improve transparency and accountability.
Unfair Contract Terms
Often the head contractor will agree to contractual terms that will have all risks on key issues transferred to the head contractor because it knows that if it does not, then it is probable that the project will be awarded to one of its competitors who would be prepared to accept the principal’s terms. The head contractor knows that it will be able to pass on its onerous contractual terms to its subcontractors by insisting that subcontractors execute a back-to-back subcontract (i.e. where the subcontract incorporates the same terms as the head contract).
In this way, unfair contract terms and risks are transferred down the contractual chain with the sub-subcontractors at the base of the pyramid not only having the least capacity to bear the financial risks associated with the project but also being the least able to negotiate a set of more reasonable and balanced terms. In all instances, the party higher up the contractual chain will present its contract documentation on a ‘take-it-or-leave-it’ basis.
In our next article NFIA will examine the issue of Unfair Contract Terms in more detail. We will examine some common unfair terms and the Federal Government’s
Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act which extends the consumer Unfair Contract Terms protections to small business contracts.
By Wayne Smith, CEO, National Fire Industry
Wayne is the CEO of the National Fire Industry Association (NFIA) Australia. NFIA represents Australia’s community of Fire Protection contractors and their people, as well as their suppliers, friends and other stakeholders.
He has an extensive background in National and State-based Fire Protection Industry leadership over a long period, while also playing a significant leadership role in the wider Building and Construction Industry.
Wayne has been involved for many years in several community Care & Support organisations at Chairman, Board member and volunteer levels.