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Late payments, non-payments and insolvencies have been long standing blights on the Australian building and construction industry. Fire protection contractors have been in the front line of wearing these industry scourges for generations now, and the same applies for any other subcontractor performing services or structural work in the industry.

These issues particularly impact subcontractors who rely on the contractors above them for payment and in the main, their financial sustainability.  The impact of late payments, non-payments and insolvencies ripple right across the community – loss of employment, family insecurity, individual stress and even depression, projects delayed or lost, reputations burnt, subcontractor businesses closed.

Over the past 20 years, much work has occurred across all states to try and improve the industry’s financial stability, particularly the payment flow between developer, builder, and subcontractor. We tend to categorise this work as Security of Payment. The Federal Government in 2002 defined the problem as “consistent failure in the building and construction industry to ensure that participants are paid in full and on time for the work they have done, even though they have a contractual right to be paid.”

Fast-forward from 2002 to 2017; arbitrary devaluation, late payment and/or non-payment or progress claims have declined as a consequence of Security of Payment legislation in various forms within individual states.

While Security of Payment has improved things, the reality is that it came off a pretty low base of regulation in the first place and still has a long way to go.

Reform

As a national Australia-wide employer organisation, NFIA sees first-hand that the lack of consistency between jurisdictions on the issue of security of payment causes confusion and leads to inefficiencies. A co-ordinated effort by the Australian and state/territory governments to create a harmonised Security of Payment framework would be a powerful tool for improving the security of payment for construction contracts in Australia, and would improve again the timely payment of contractors.

However, in lieu of a national framework, most jurisdictions have either undertaken reviews of their respective legislation in recent years or are in the midst of a review.

The NSW Government has responded to the Collins Inquiry into Insolvency in the Construction Industry and, in recent years, has passed the most significant amendments to the Security of Payment legislation in more than a decade. Key changes include trust accounts, relaxing of payment claim notifications, response requirements, statutory payment terms and supporting statements.

The WA State Government has announced amendments to the Construction Contracts Act 2004 (WA) which include mandatory project bank accounts (PBAs) and a code of conduct for state government run projects between $1.5 million and $100 million.

The Queensland government has also proposed improvements which will improve the speed of payment to subcontractors, particularly when applied to progress claims. Submissions in response to the discussion paper are due end of February 2017.

NFIA and the Queensland subcontractor community generally have welcomed the Queensland government’s public commitment to “making sure that subcontractors got paid on time and in-full every time.” The key element of the government’s improvement package is the creation of PBAs whereby progress payments will be held in trust independent of the head contractor and principal. To kick off these improvements, the state government proposes to implement PBAs for government building and construction projects (excluding engineering projects) valued at between $1 and $10 million from January 1, 2018.

The proposed model will require the head contractor to establish and manage the PBA (including the account and trust arrangements with subcontractors) and will extend to the “first layer” subcontractors only. It is not proposed to extend PBAs beyond subcontractors that contract directly with the head contractor.

The effect of the PBA is to “quarantine” progress payments, ensuring subcontractors get paid for work completed. The principal has no control over the PBA, or any viewing rights of the PBA. The proposal calls for two separate accounts – one general account to process progress payments and the other for retention funds.

We await the final form of the Queensland legislation and look forward to another step forward in improving subcontractor financial security.

While gratified by the Security of Payment improvements over more recent years, it’s by no means as good as it should be. For every step forward, someone, somewhere seems to find a new angle by which to again load up the subcontractor with disproportional financial risk and construction liability. We need to be a vigilant subcontractor community ready to shout out and challenge this behaviour.

 
  • Queensland proposes to use an "Escrow" account administered by an independent body to ensure subcontractors
    (a) receive contractual payments and progress payments without undue delay
    (b) Head contractors and clients have actually allocated the funds to pay sub contractors rather than find spurious reasons for non-payment.
    (c) Circumvents Architects and Contract administrators which are seen by many sub contractors as compromised in terms of independence.
    (d) Eliminate the practice of "Back Charging" sub contractors spuriously as a form of ransom for proper contract payments.
    (e) Ensure subcontractors are paid in a timely manner and have the cashflow to pay their suppliers and employees.
    These reforms are long overdue and to be applauded. However implementation in 2018 after the next Queensland Election, means that these reasonable measures may not be supported by the incoming government, and will come too late for many vulnerable sub contractors their employees their suppliers and families.

  • The non-payment of subcontractors in the construction industry has gone on for too long.

    Australia needs to do a better job to protect the small businesses who make up this important part of the building sector.

  • Wayne thanks for this update. You have nailed the key issue for sub-contractors and that is their contractual right to be paid. You mention changes in some states re withholding payments. We will have to wait and see on these , but given that subbies lose $20 Billion annually and given that they remain without a voice in Governments, one is naturally skeptical about meaningful change. You refer to the plight of sub-contractors and the blight on the building industry caused by what has become normal practice and the consequences of for those impacted and their families through late payments. The prevalence of non-payments demonstrates who has the power and influence and the insolvencies punch the biggest blow. The reality is that this 'business' of ignoring the law and creating havoc for business operators and their families has created other 'business' sectors. The one that continues to grow fastest is based on the increasing numbers of 'insolvencies' – and the most popular is the 'phoenix trick'. Most disturbing, there is no plan to rein in this beast. Worse, it seems it is about to be further encouraged by the federal Government under its proposed legislative changes to the Corporations Act. The parasitic businesses that make mega fortunes feed off and assist big business to "get-out-of-trouble", to ignore their legal contractual obligations and in so doing to fuel what would otherwise be a 'non-business' industry.
    Your reference to the LOW base of regulation is the critical point I believe. There really is no will to use enforcement to deliver compliance or to ensure that small and medium business operators are paid. And 'doing a phoenix' is now an accepted and entrenched strategy for lead contractors to 'legally' avoid their debts and their supposed duty to honour their contractual commitments. I think it is unlikely this beast will be reined in any time soon.

TecBuild – 300 X 600 (expires December 31, 2017)
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