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If you walk around any construction site across the country, it’s immediately apparent that sub-contractors are the backbone of Australia’s building and construction industry. They enter into contracts, do the work and have a fundamental legal right to be paid.

But in this industry, all small business owners are routinely subjected to lead contractors refusing to pay, the unpaid debt now totalling $20 billion annually! By its very definition this is fraudulent. Under Australian law it’s definitively illegal. And it’s also criminal.

Small business is the ‘construction industry’!

Sub-contractors are small business, and by far the largest employers of Australian workers. Consider the construction industry, worth a staggering $300 billion-plus annually and wholly reliant on some 350,000 small to medium size sub-contractor businesses. Those contractors undertake 85 per cent of all construction work.

Although flippantly referred to as ‘subbies’, many of these businesses are sizable enterprises employing 20 to 30 workers. It is these businesses, and not the lead contractors, who are the major industry employers.

Such small businesses are responsible for organizing and performing building and construction work, meeting compliance codes, appointing, training and supervising their employees, and accepting the ‘normal’ risks associated with running a business.

Structured to be shifty

Over recent decades, and not by chance, there has been a significant structural shift and perverted into this pyramidal structure are major imbalances of power in contractual relationships. At the top of the chain, the head contractors are the chieftains in control of contracts. And relegated to the bottommost rank, subcontracted into silence, sit sub-contractors.

This unfairly distorted market has resulted in the ever-deteriorating conduct of the chieftains. The 2015 Senate Inquiry into the abnormal levels of insolvency in construction highlighted widespread “harsh, oppressive and unconscionable commercial conduct” frequently combined with “unlawful and criminal conduct.”

Most significantly, this ‘business model’ was created by government at the behest of big business. Abrogating their obligations in defiance of the ‘law’ and against the public interest, our pollies proclaimed ‘non-payment of sub-contractors’ as policy. Shifty practices brokered via a bent bargain has greatly benefitted big business through “inequitably reallocating risk from the large contracting companies (who collect the clients’ money) to those who are least able to bear it, namely subcontractors, suppliers and employees.”

Ultimately, those who do all the work bear the full burden of risk, including not being paid!

In the war zone: wrongful withholding of money

Wrongfully withholding money owed to small business is the best business in town! Each year, the industry’s small contractors are ensnared to be defrauded of $17 billion!

It’s simple. Small contractors are ‘con-tracted’ to do mega millions of dollars of work, supplying all materials and skilled labour. By refusing to pay what they owe, head contractors use this money to finance other projects. As Queensland Housing Minister, Mick de Brenni stated, “Many subbies are being used as pseudo overdraft facilities!”

This is undoubtedly unethical, but there follows an additional payoff: head contractors get sub-contractors to complete all the work, collect the client’s money, then pocket what they are indebted to pay as stolen ‘treasure.’

Concentration of power in the hands of a relatively small number of head contractors has fostered a culture of corruption, with bullying, intimidation and terror tactics rife. Knowing that small business does not have the money to fight back, and subject to the threat of being refused future work if they lodge claims for payment, the lead contractors employ the “take it or sue us” line – criminal conduct the legacy of official licence to flout the ‘law.’

One witness in evidence to the 2015 Senate Inquiry equated the culture to that of the battlefield on the Somme, where sub-contractors “get mowed down and fresh bodies are just poured in.”

It epitomizes the life of expendable foot soldiers in a battle without any weapons to use in their own defence. Also it indicates the brutal battering inflicted upon sub-contractors because according to the Senate Inquiry, “head contractors are often more than willing to abuse their market power” to the detriment of everyone down the chain."

In short, it sums up the utter despair of the damaged small business owners - mere disposable pawns in this Machiavellian tragedy.

This not the first time such a dehumanizing analogy has been articulated. Commonly, building consumers and workers, who comprise the other major ‘construction’ parties, echo similar sentiments as they recount their vulnerability as the ‘enemy’ in this deadly ‘war.’

Fraud via insolvency and the ‘phoenix option’

The construction industry accounts for around 10 per cent of GDP, but disproportionally 25 per cent of all insolvencies. Here is the big "but": according to university research, insolvent non-corporations, such as small sole traders are not included in ‘official statistics’ - adding another 60 per cent to the total of construction bankruptcies, according to the 2016 study Construction Insolvency in Australia: Reining in the Beast. Thus, instead of construction insolvencies accounting for 25 per cent, they actually account for more than half!

ASIC and the ATO advised the 2015 Senate Inquiry into construction industry insolvency of an “emerging business model” involving company directors and their corporate and liquidator advisors organizing ‘restructuring’ of the business prior to insolvency. The Senate’ sanitised reference to ‘emerging’ is erroneous - the practices are entrenched - and frankly can only be classified as fraud. Business failure, badged as ‘insolvency’ has facilitated the theft of $3 billion annually from Australia’s 350,000 small business owners.

‘Phoenixing’ for the family

Illegal phoenix activity is the deliberate liquidation of a company after transferring the indebted company’s assets to a new company to avoid paying creditors, and after setting up a new company to carry out the same business. It’s called ‘doing it for the family.’

Often funds are transferred just as insolvency is declared; often the company has been trading insolvent for years; often the crooks are allowed to keep their building ‘licence’ and sometimes the ‘contractors’ hold executive positions on the MBA. It seems all of those applied in the case of Tagara Builders, whose insolvency in 2015 left 750 creditors owed $27 million!

There are literally mega thousands of such illegal ‘phoenix’ arrangements every year. They could and should be stopped. But to indulge big business, doing a phoenix defaults to ‘legal.’ The latest insolvency to hit the headlines is that of Senator Bob Day, with the enormity of the detriment to the sub-contractors and consumers still unravelling. Illegal or not, one thing seems clear: Bob the Builder put his family first.

Unsurprisingly, the Senate Inquiry concluded that the construction industry’s high incidence of illegal phoenix activity had become a way of doing business in order to increase profits. Further, it concluded that “some company directors consider compliance with the corporations’ law to be optional.” Of course they do!

The Senators explain: “because the consequences of non-compliance are so mild and the likelihood that unlawful conduct will be detected is so low.” Contempt for ‘non-compliance’ and ‘lawless’ conduct sanctioned!

Certainly the Senate Committee were on the money. The number of construction company directors prosecuted for insolvent trading, fraud and breaches of duties is almost nil. As for it being the fault of ASIC or liquidators’ reporting, this is true. There is clearly no commitment to protect those who are legally bound to be paid for their work. The ‘no penalty’ rule confirms the illusion of ‘laws’! And as for preventing impending harm, the guarantee of no consequences undeniably acts as NIL deterrence to future criminals.

Queensland: A case study

If we take Queensland as an example, building sub-contractors number 84,000. They have more than 250,000 dependents. A quarter of a million people! When sub-contractors are not paid, the fallout is catastrophic – for them and their families, their employees and their families, suppliers, local business, the entire community. That means millions of lives devastated every year.

Let’s briefly examine the so-called collapse of Walton Construction in 2013. It left 1,350 trade sub-contractors and suppliers across Australia owed $300 million (the Creditors’ Report  listed $90 Million) – 600 of these in Queensland. This ‘insolvency’ is not significant for its size - there were bigger ‘failures’ before it - and we’ve had another 120,000 since.

Walton’s insolvency represents more than a watershed moment. It provides concrete proof of how the bureaucratic chiefs abet law breaking for their buddies.

One Walton victim

Three years on from October 2013, Beau Hartshorn is still hurting. For his young business, this was to be the biggest ‘con-tract’ he had won. He could not know Walton’s ‘plan’, or  that government had decreed it ‘legal’ to ruin his life. Walton’s ‘insolvency’ left Hartshorn's landscaping business owed $600,000 for work on the $22 million Nambour Coles project.

As reported by Bill Hoffman in the Sunshine Coast Daily, this ‘knockout’ “killed his fledgling business, cost 10 employees their jobs and meant Beau was unable to pay suppliers he had come to count as friends. He still owes money to his grandparents.”

He was forced to sell his home and he has lost everything. He now works for a small wage and earns enough to put food on the table at his parents’ place where he lives.

“But nothing was quite as hard as telling his then 13-year-old daughter the two horses she had ridden and loved since she was four would have to be sold,” Hoffman wrote.

The postscript is that the Walton collapse was carefully contrived. From the moment Hartshorn was ‘contracted’ there was never any chance that he would be paid.

The solution: see a psychiatrist!

The solution from the Senate Inquiry is for small business owners impacted by non-payment to seek advice from ‘mental well-being’ organizations. Yes, as slave labour victims, they should go see a psychiatrist! Says it all, doesn’t it?

But there is a simple solution: just pay them. Enforce our ‘contract’ and ‘insolvency’ laws.

This sub-contractor scam is not just about a couple of ‘tradies.’ It is about the annual theft of $20 billion from 350,000 small Australian building and construction businesses. They who comprise approximately 20 per cent of Australia’s small business network, with the flow on effect to their 1.5 million employees, local communities and the economy.

At its core, this scam is about real people. It impacts sub-contractors first and then the domino principle comes into play. It leads to millions of individual lives shattered, broken families, suicides and much more - all these lives ruined through no fault of their own, all casualties of ‘certified fraud’ in this sneaky sub-contractor sting.

All victims of an industry where only money matters and people count for nothing.

 
  • Well said, Anne.

    The cheating of subcontractors is a national shame.

    Subcontractors need much better protection than they are getting now. National Security of Payments legislation would help but that is just the start.

  • Yeah nah. $hit flows one way, downhill. You forgot to mention about principals / developers not paying builders. Or the poor subcontractors not paying their illegal subcontractors that should be on the books but aren't because they're cheating the system trying to save a buck. You also forgot to mention that builders run on 5% margins or less. And subcontractors, with the help of the subbie favored security of payments act constantly rip builders off and have profits upward of 20%.

    • Mad Rooster – Yeah Nah – Lol! A sub contractor ripping off a builder!!!!!! Chickens lay square eggs!!!
      Why does every major contractor in Melbourne use so called Hire recruitment companies for their workers. A worker is charged out at $1000 a day and gets in his pocket $400. All these companies provide is legal separation from the principle contractor & a dodgy shelf company which can fold at a drop of a hat at any sign of stormy weather. No apprenticeships and purely commodities for big business. Investigate that with your government enquiry!!!

    • Mad Rooster you just dont get it do you. Builders run on 5% margins, show me where. Builders have moral and legal obligations to deliver a good product free of scams and other, look at the Lacrosse building first and then move to others. If the Authorities had backbones and keeping the Ambulance chasing filth(thats the Lawyers) out of it we would not have so many issues. I actually liked the incident when a famous bikie showed up at the Creditors meeting and the scum-bag builder quickly found money. Unfortunately the Lawyers chased it as preferential payment. The Subbies do their job on the agreement for payment. Builders and developers both small and big(and of notable name mind you) think it is fair game to destroy families and tradesmen who, in good faith, do their best and give loyalty as such. It is the Builders responsibility to ensure payment, they are the head contract. The sooner the proposed Queensland system gets legs and building trust funds are set-up the better. Just have to keep the filth away from this money though.

  • A very interesting article, this is something that I am personally witness to and have seen others in the industry sent broke as a result so can fully relate to what goes on first hand as a subby. It's easy to put all commercial builders under the same hat and likewise with the subbies, so I believe labelling all commercial builders as crooks is unfair. In my experience as a subby I actually prefer to deal with them as they are more professional than residential builders, sites are much safer for my staff due to safe-work procedures actually being enforced, and generally they have full time supervisors and safety officers roaming. If dealt with properly there is also more profit to be made on projects in commercial as opposed to residential. I have been burned by a handful of companies during my time as a subby but reflecting on those situations has made me realise it was more than likely my own fault and caused by naivety and inexperience. Commercial builders put a lot of practices in place to prevent their projects turning to crap because let's be honest, a lot of subbies they deal with probably have no idea about how to run business, which would have to be a large factor in the hi percentage of insolvencies as well. There could certainly be some systems brought in to protect subbies a bit more though because unfortunately most of the time when we learn the hard way it is a very expensive exercise and one that most don't recover from.

  • This is a scandal and a total disgrace to our society and the tragedy is that no government is prepared to clean it up. They are totally obsessed about keeping building no matter what. They dont care if people are ruined. We are supposed to be first world while we build slums for the future

  • Great Article. Until there's enforcement nothing will change and the "steal the shirt off your back" mentality will continue. The numbers here don't lie, even the most positive comment here refers to "naivety"! When you play Russian Roullette someone gets their brains blown out.

  • It saddens me to read anything about the construction industry. This issue is about real people as Anne says. People who work as workers or subbies deserve to be paid for their work and if not it is slave labor. The consequences because of not being paid are terrible for all those hurt. It is shameful that our governments and those who control the industry are ruining so many livea. To learn that it is more than one million people every year and all across Australia is very very frightening.

  • Good on you for pointing out this MAJOR problem in our building industry Anne.

    I wonder why the governments will not enforce far more frequent auditing of all companies so that businesses on the skids cannot hurt so many more innocent people as they scramble (and so often cheat with new contracts they cannot honour) just to stay afloat. It is such a commonplace scenario. So often just the banks get their money back. They call it (proprietary) LIMITED.

  • You read about these things all the time in newspapers current affairs shows here on Sourceable. of & on in Parliament but that is just to be seen to be doing something. The old pub that was bulldozed not being rebuilt now who thought it was it was trucked out. The Government wont interfere as it creates jobs you lose not them. Look at the new casino they will do what they want and there with no controling body but them. Look at the last casino no second tower built as / contract fines cancled by Kunnett. Until there is an independent body who has the ability and GUTS to do there JOB things will never improve. for what we have now is garbage departments. Plumbing dept excluded & Clint.. R. Jones.

  • Thanks for your article Anne. This is the life we live as Subbies. Some jobs and customers are a joy to work and others are like going to war. A solicitor told me once that being a subby in construction in this country was like turning up to a gun fight armed with a knife! That was before the scant protection we had under BCIPA was stripped away in 2014!
    The knowledge the work we do is building our country and making it better and knowing that because of us, other families can afford a decent life is small comfort when we are cheated and bullied by a big contractor. We are good people, making a valuable contribution to our society yet we live in constant fear that we won't be paid on our next job. The fear stems from the knowledge that we don't have to do anything wrong to deserve not being paid, it might just be our turn, again.
    It's past time the construction industry weeded out those companies operating on margins of 5% or even 0% and the developers who court them. They are the ones who cheat the Subbies – their business model makes it imperative for them to survive. Cull these parasites and free the industry up for those decent contractors and developers, who are fiscally responsible enough to run their business on realistic margins and pay properly for the work they commission.
    Imagine an industry based on fairness and decency, judgments made on right and wrong and an end to the corruption and thuggery!

  • Finally this issue is getting some exposure. As a subbie contractual theft is our biggest problem. One company in particular goes in under cost every time and rips off subbies for six figures each to make their cash. It is deliberate and targetted and they barely bother to hide their motives. Many happily approve variations then refuse to pay them, daring you go take them to adjudication and threatening that their lawyers will beat ours in any case. These grubs need to be stopped and penalised as well. Enough is enough. Subbies have been used as an interest free line of credit for far too long.

  • Just prior to the passing of the ABCC Bill one peak industry association donated $70,000 to the LNP and one large Melbourne builder $192,000 .

    Across the country subcontractors are being " ripped off" as Anne states . Protective legislation is denied in the same manner .
    Legislation and industry regulatory policy is geared to defrauding subcontractors and consumers .
    Recent insolvency law changes implemented under the guise of science and innovation due 01 September this year will make Phoenix trading legal. The targeting of subcontractors revenue will continue ,
    Subcontractors are portrayed as inexperienced and inept business people but it is builders who trade on 5% margins. They then steal on average 10% of the contract value from subcontractors .

    It is always the victims fault it would appear but it is not. This article from Anne has been researched and is accurate. Some people just can't handle the truth.

    I don't buy the " good builder " rubbish – they all have to wear the shame for creating a corrupt and dishonest industry – this is a national disgrace- an indictment on our elected representatives and highlights just how the public interest is completely disregarded – sold out for a few pieces of silver. Good article Anne

  • Great article. How can we expect to produce quality buildings when those with the skills to do so are not being paid? Is it a surprise that we have so many new buildings not fit for purpose when all the good trades refuse to build them because they've been burnt?

  • Shame on the Goverment agencies for doing nothing to protect workers or consumers.

  • Hi Anne,
    Thank you for your support on our petition, https://www.change.org/p/premier-colin-barnett-and-treasurer-mike-nahan-stand-up-for-wa-businesses-owed-millions-on-state-projects

    The points you make in the above article ring very true to Vortech, over the last 3-4 years we have lost nearly $2,000,000 working on government projects, we simply cant take it any more so have chosen to stop employing people.
    As long as the corporate head contractor bullies are allowed to cheat & steal by a weak toothless Government they will…

  • Les, I was shocked but not surprised to read your comment where you said that: "Recent insolvency law changes implemented under the guise of science and innovation due 01 September this year will make Phoenix trading legal." I have been speaking with people in the 'insolvency industry' who have confirmed just what you said – phoenixing will be 'legal' – and this under the pretext of 'innovation'! it is innovative for those in business who already are well practiced in the art of fraud through withholding payments and phoenixing. In reality, doing a 'phoenix' is actually legal now – there are no prosecutions for those who engage in this 'illegal' trickery – and the serial offenders laugh all the way to the bank with no regard for all those whose lives are destroyed as they make this their life's work. As you say; "The targeting of subcontractors revenue will continue" and consumers will be caught in chaos – many hundreds of thousands taking a huge financial loss every year. But there is no-one in the country in a position of influence who will speak out. What happened to the 'fair go' values that were supposed to underpin Australian society, and the 'laws', the codes of practice and business ethics? Sadly long dead!

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