Contractors and subcontractors in Western Australia are set to enjoy greater protection for payments owed to them as the second stage of new security of payment legislation in that state has now come into force.

But there are concerns that payment protection may still be lacking in some areas.

From last Wednesday, the second stage of the Building and Construction Industry (Security of Payment) Act 2021 (the Act) came into force.

Under the latest changes to come into force:

• Retention money which is owed to contractors or subcontractors must now be held in a separate trust account; and
• Regulators now have greater powers to exclude practitioners with a history of non-payment from operating in the state’s building industry.

Passed into law in 2021, the Act aims to provide contractors and subcontractors in Western Australia with similar protection in respect of payments as that which is enjoyed by those in eastern states.

The first stage of Act provided contractors, subcontractors and suppliers with a statutory right to receive at least monthly payments for work performed on construction projects (certain types of projects are excluded).

The first stage also introduced several measures to improve the fairness of contracting practices. These included voiding unfair time bars, prohibiting ‘paid when paid’ provisions and requiring certain contracts to be in writing and to meet minimum standards.

Now, the latest provisions to come into force have established a mandatory trust scheme for the payment of retention money.

Retention funds are funds which are owed  to contractors or subcontractors for services performed but are withheld as security in case a contractor or subcontractor’s business collapses during construction or the contractor/subcontractor fails to fix defects during any defect liability period which may apply.

They are typically held by the principal against the head contractor and by the head contractor against subcontractors.

Typically, these represent five per cent of the contract value.

Problems can occur, however, where principals or head contractors use retention money for their own cash-flow purposes.

To prevent this, the new provisions require money that is withheld as retention to be held in a separate trust account.

For now, the requirement will apply only to large contracts valued at $1 million or more.

From February next year, their application will be extended to a greater number of contracts valued at $20,000 or more.

In addition, the latest provisions will also afford more powers to regulators to ensure good commercial behaviour within the building sector.

Greater powers will enable the Building Services Board to exclude people with a history of financial failure from starting or continuing a building service business.

As well, building service contractors who fail to pay court and adjudication debts to subcontractors can now be denied registration or can receive disciplinary action.

WA Commerce Minister Sue Ellery said the changes will help to improve subcontractor protection.

“Subcontractors and tradespeople are the lifeblood of the building and construction sector and they deserve to receive timely and efficient payments for their work,” Ellery said.

“These improved financial practices will help to ensure that money owed to building and construction subcontractors remains secure and the industry stays strong, even if a building service provider goes insolvent.

“Consumers will also benefit from tougher measures to weed out unreliable or unscrupulous building industry participants and encourage better financial conduct across the sector.”

The changes have received a mixed response from debt collection experts.

Anthony Igra, General Manager of Sydney based debt recovery services firm Contractors Debt Recovery, applauded the government for its introduction of the Act.

However, Igra said the provisions have two weaknesses.

First, exclusion of smaller construction contracts from the application of the retention trust provisions means that contractors and subcontractors will not have protection for retention money on smaller contracts.

Instead, he says retention trust should be mandatory for ALL construction contracts including smaller contracts.

Beyond that, Igra says the aforementioned powers of regulators to exclude construction companies or building contractors will be of limited effectiveness in practice.

Instead, he says industry payment practices should be improved by making it easier for contractors and subcontractors to make payment claims and to bring disputed claims to settlement.

On this score, he says there are several shortcomings in the current Act.

Under section 23 (4) of the Act, for example, contractors or subcontractors who make a claim for progress payments need to do so within six months of the work to which the claim relates being performed.

This, Igra says, is too short. A timeframe of twelve months would instead provide adequate time in which to prepare claims.

Another section which Igra says is problematic is Section 16 of the Act. This stipulates that notice based time-bar provisions which require claimants to provide notice of a claim within a certain time will have no effect if the time-bar provisions are considered to be unfair.

Whilst this aims to protect claimants by preventing respondents from using unfair time-bar provisions to avoid making payments, Igra says this will have the opposite effect as the section is full of vagaries that will in fact enable parties to get out of payment for work.

“The W.A Government has done a great thing to bring in a version of the Act that has worked so well for the rest of the country and it brings W.A into line with those Acts,” Igra said.

“As a whole this will work far better for subcontractors and indeed anyone using it to recover payments. The Act includes provisions for separate retention accounts. This also brings it into line with the NSW Act. However, until this applies to all construction contracts, it will have little effect. Retention mostly goes unpaid on those smaller contracts and mostly those between builder and subcontractor. Like NSW this is yet to be rolled out to lower value contracts. Only then will the effect on the industry reveal itself. But I cannot fault the intention (of the legislators and the Act).

“The Act also contains provisions at Part 5A that allow directors of construction companies to be either temporarily or permanently “excluded” from being a building contractor if their companies go into liquidation on repeated occasions within certain timelines. This will not change anything. It is common practice to rotate directorships between family members. This can go on for decades. Similar provisions exist in other states and the problems are the same. Namely, who will police all this? Probably nobody. Who will pay money to prosecute a case? Nobody. In NSW there were all sorts of penalties for making false statutory declarations or false supporting statements. I think there has only ever been one prosecution of that in court. And yet how many false declarations are signed every month? Plenty. It just doesn’t work. The thinking is wrong.

“If you want to improve the payments in the industry, then do exactly that. Don’t set out how you can punish those who do the wrong thing; instead give those who want to do the right thing more powers, and wider scope to do it.

“Make it easier to use the Act to have a payment dispute settled. Those are the provisions that actually have effect. Setting out a list of punishments will do nothing.

For example, s.23(4) (oof the Act) limits making claims to 6 months after works in many instances. That should be 12 months. Give contractors more time to take action. Six months is too short. Those in the industry will know what I’m talking about there.

“The provisions of s.16 that invite the parties to argue about notice-based time-bars is not in any other Act in the country and is big stick for anyone trying not to make payment. It is full of vagaries that allow parties to get out of paying for work.

“These kinds of provisions that effect the process of recovering payment have a far more detrimental effect on the object of the Act then those provisions that list punishments.”