For subcontractors within the construction sector in New South Wales, experiences such as that of Michael Ryan have become all too common in recent years.
According to an Illawarra Mercury report in 2012, Ryan first lost $280,000 on a contract to turn a Mittagong property into a wellness centre and subsequently lost $360,000 on a job through which he was contracted by now liquidated NSW building outfit Kell & Rigby to carry out earthworks for a $31 million equine centre at Moss Vale.
At the time of the report, Ryan – who was 57 – had been forced to sell his home, lay off his staff of 15 and move in with his newly married son in Sydney.
Sadly, he was not alone. According to media reports, creditors saw nothing of the $16.8 million owing when Kell & Rigby was liquidated in 2012 or of the $183 million owing when builder Reed Constructions went under in the same year. Following these and a string of other collapses, the New South Wales government was forced to hold a major inquiry into insolvencies within the building sector in that state.
Four years on, the government is reviewing a critical piece of legislation which is considered to be central to enabling contractors and subcontractors to maintain cash flow and support their business through receiving regular ‘progress payments’ for work delivered: the Security of Payments Act. A discussion paper canvassing issues such as how payment claims are made, due dates and schedules, the suspension of work when claims are not paid, retention funds and adjudication processes for disputes was released last year.
That leads to questions about whether or not the Act as it stands is delivering upon its objectives and what difference, if any, a range of amendments enacted in 2014 have made. Many believe the Act works well. Indeed, a newly introduced ability for subcontractors to serve notice on principals informing them about disputes the subcontractor is having with the head contractor and requiring the principal to withhold an amount of money from the head contractor equivalent to the extent of money in dispute until the matter in question is decided has given subcontractors an effective means of obtaining payment as well as useful leverage in payment disputes, Contractors Debt Recovery managing director Anthony Igra says. Where the matter is decided in favour of the subcontractor, he or she claims that money from the principal rather than the head contractor.
That, however, is where the good news ends. Indeed, not only do opportunities for improvement seem to have been missed, in at least two respects, things from the subcontractor’s perspective appear to have in fact been made worse.
“I think the key question is ‘is anything working better than it did before the 2014 amendments?’” Igra said. “The answer is no. It’s working the same.”
In terms of missed opportunities, critics say new rules imposing penalties of up to $22,000 in fines or three months’ imprisonment for head contractors who make false claims under a new requirement to include supporting statements outlining a schedule of which subcontractors have been fully paid and those with whom the head contractor is in dispute when claiming payment from principals are welcome. However, they say a lack of policing and enforcement in this area means contractors could potentially be making false claims and using money intended to be paid by subcontractors for their own purposes without being found out.
“The so-called policing provisions that are in the amendments are not policed at all,” Adjudicate Today managing director Bob Gaussen said. “We know of no one who has been appointed for that role, we know of no activity whatsoever in relation to that role.
“It does seem that if you are going to introduce a provision into an act which is regulatory and punitive for good reason, then you must have some way in which you are monitoring it, following it up and, if appropriate, prosecuting. None of that is happening.”
Another area which critics say thus far represents a missed opportunity revolves around construction trusts. In order to prevent money paid by principals to main contractors for work done by subcontractors or sub-subcontractors being used for the main contractor’s own purposes, the Collins Inquiry recommended that with regard to projects worth more than $1 million, such money indeed be held in a separate statutory trust account.
Thus far, however, the government’s response has fallen short. While it has initiated a trial of a trust scheme (the first in Australia), this applies only to retention money held as a safeguard against any future defects arising out of work which subcontractors may fail to remedy. Thus, it offers no protection whatsoever with regard to money that is paid by principals for work done by subcontractors other than that held for retention purposes.
In addition, while Collins recommended a project threshold of $1 million, the threshold for the trial is $20 million. According to a regulatory impact statement released at the time, this means the trust will apply to just four per cent of projects. Igra, therefore, refers to the scheme as it stands as being largely ‘inapplicable.’
“The big thing that came out of Collins was the need for trust accounts,” he said. “You need to stop leakage from the contractual chain.
“(Therefore,) I think the one thing you could say is that so far, the issue of insolvency has not been addressed.”
Beyond missed opportunities, some areas of the Act have actually become more problematic. The removal of a requirement that those who were claiming an entitlement to progress claims under the Act spell out that the claim is indeed a payment claim being made under the Act, for example, is creating confusion as to what is and is not a claim being made under the Act. Indeed, email messages of a relatively casual nature could now be constituted as a claim under the Act.
From a claimant’s point of view, this matters because section 8 of the Act limits them to one progress claim in relation to a given reference date (due date for payment). As a result, where a claimant inadvertently makes what is considered to be a claim by virtue of some form of casual email or written message, that would be his entire claim and any subsequent formal claim he or she wished to make in respect of that reference date would be invalid. This creates a situation in which a subcontractor’s claim could fall over by virtue of the fact that he or she sent an innocent email message prior to sending what was intended to be a payment claim.
This also creates problems for respondents, who may not realise that a claim is indeed being made and therefore may not provide a payment schedule. Where this happens, the Act allows the claimant to then go to either adjudication or court and forbids the defendant from bringing cross claims or raising any defences when in court. The upshot is that respondents can potentially be taken to court without any right of legal defence because they received a document which they did not realise was a payment claim. On the other side of the coin, respondents might become overly cautious and treat everything as a claim under the Act, thus wasting time and incurring additional administrative costs.
“The next issue associated with the removal of the endorsement is that it is now unclear what exactly a payment claim is,” Robert Sundercombe, a consultant at Sydney-based Security of Payment information provider Outcome Management said.
Hr added that an earlier issue revolved around claimants not having any option to opt out of making payment claims, which brought up technical issues regarding reference dates (due dates for payment) and time limits for payment claims.
“The threshold of a payment claim is that it has to indicate that the work has been carried out and state the claimed amount. If I send you an email saying ‘that plumbing work I did – you owe me ten grand,’ that is probably low end but meets the threshold of a payment claim," he said. "So then when I get organised and say ‘here’s your plumbing bill for $10k’, all of a sudden, I could potentially have two payment claims under the one reference date.
"You can only put in one payment claim per month. So we’ve had this conversation about you owing me some money because we’ve done some work and then later we put our invoice in - a hard reading of the Act is that the invoice is no longer valid because we’ve already used up our reference date when I sent you my little reminder email.
“That’s the low end of the market. At the more complex end, you have got subcontractors submitting various sorts of variation claims and things like that. So a variation claim may also be a payment claim.
“That’s just created confusion where they didn’t have to be confusion.”
Most problematic of all, however, are changes to payment dates. Prior to amendments enacted in 2014, common practice stipulations within contracts saw typical payment terms between principals and contractors of 30 natural days, 30 days ‘end of month’ (the end of the next month) or 35 days; those between contractors and subcontractors were 30 days or 30 days end of month. Where no contractual terms were in place (which, in case of contractor/subcontractor relationships is typically more than half of the time), the default payment term was 10 business days (14 natural days).
Whereas Collins recommended maximum contractor/subcontractor payment terms of 28 natural days (and no change to the default payment term), the government instead changed the default payment term from 10 business days (14 natural days) to 30 business days (42 natural days). While this change is obviously beneficial for the head contractor, it means that subcontractors under default payment terms now have to wait almost an extra month to either receive payment by the due date or alternatively commence adjudication proceedings – all the while having to pay their own employees weekly. Subcontractors also now have to wait an extra month before they are allowed to stop work as a result of the payment dispute, again having to pay their own workers during this period.
In order to rectify these issues, Gaussen, Igra and Sundercombe all want requirements for payment claims under the Act to be specified as such restored and for default payment terms for subcontractors to be restored to the original 10 business days. Gaussen says he would like to see the trust scheme expanded in scope, and there is also broad agreement on the need for better enforcement of rules regarding supporting statements.
Finally, Gaussen cautions against any moves to remove authorised nominating authorities (ANAs) from the payment dispute adjudication process. He says ANAs – who appoint adjudicators and provide administrative assistance to parties within the adjudication process – provide essential support in terms of the administrative processes of adjudication. He says in Queensland, where ANAs have been removed and adjudicators are instead appointed by the Queensland Building and Construction Commission, more than nine in 10 claims are failing to reach final adjudication outcomes (due to failure on the part of claimants to lodge forms correctly and other such issues) as claimants are not being given support in terms of administration processes and how from an administrative point of view to lodge their application correctly.
The spate of insolvencies which took place within the New South Wales construction sector wrought enormous levels of pain for subcontractors.
In the critical area of rules regarding prompt payments, at least, it seems that things have not improved.
If anything it’s gone backward.