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By Willow Aliento
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Lead contractors and others may have to create project trust accounts for any construction project worth at least $1 million, if state and territories adopt the recommendations of the federal government’s national Review of Security of Payment Laws.
The trusts are among 86 recommendations made by John Murray AM in his over 300-page-long Final Review Into Security of Payment Laws, released earlier this month.
Another key recommendation is that a national approach should replace the current state-by-state legislation. Mr Murray proposed the national legislation be modelled on the East Coast Model used by New South Wales, Queensland, the ACT, South Australia, Tasmania and Victoria.
Mr Murray conducted the Review with assistance from the Federal Department of Jobs and Small Business. Extensive consultation was undertaken with industry groups and stakeholders including legal experts, accredited dispute adjudicators, and relevant state and territory bodies, for instance, departments of Fair Trading.
The Review considered multiple aspects of Security of Payment. It compared the benefits and constraints of legislation in each state, the process of adjudication, and the impacts on those at the end of the industry’s pyramid-style project supply chain.
Ensuring Subcontractors Get Paid
The overall aim of the inquiry was to examine and propose remedies for factors that lead to subcontractors and suppliers experiencing repeated difficulties in receiving full and timely payment for completed works or goods and services supplied to projects. The difficulties lead to those businesses experiencing cash flow problems. They are actually among the factors responsible for the construction industry having the highest rate of business insolvencies in Australia.
Over the past decade, the report says, the construction industry has accounted for between eight and ten per cent of Gross Domestic Product. However, as the report claims, it has also accounted for up one-quarter of all business insolvencies in Australia.
“Indeed, there are on average more than 1,700 insolvencies in the construction industry every year, affecting thousands more creditors.”
The report notes that the Australian construction industry is characterised by low market concentration and high competition. It is, in fact, primarily driven by smaller businesses.
As of June 2016, the industry had the highest number of businesses operating in Australia, with 358,466 businesses; almost 99 per cent of these businesses were either self-employing (59%) or engaged less than twenty employees (39.8%). The nine largest construction companies are estimated to hold less than 10 per cent of the market share.
Mr Murray says in his report that current arrangements used by subcontractors, such as bank guarantees or use of personal funds, can cause hardship. They can also make it challenging for those businesses to achieve the financial wherewithal necessary to pursue future opportunities until progress payments have been made.
When compared to other nations, Australia is also the worst performer in terms of lateness of payments, with payments overdue by 26.4 days on average. By contrast, payments in Japan, the best performer, are on average paid six days before the due date.
Addressing Power Imbalance
The project Trusts the report proposed would also help address the power imbalance that exists between subcontractors and Lead Contractors in terms of contract terms and payment arrangements.
Mr Murray proposes the Trust funds are “ring-fenced” to ensure they can only be used for progress payments for subcontractors and suppliers. It would mitigate many risks currently experienced by those working on projects, including funds being lost should the Lead Contractor become insolvent.
Moreover, it would prevent the practice of project funds being used as working capital for other projects by principal contractors, something Mr Murray described in the report as unacceptable.
“The Review concluded that the most effective way that payments can be secured from misuse and the risk of head contractor insolvency is by implementing a cascading statutory trust,” Mr Murray states in the report. “Only such a statutory trust would secure the payments of all subcontractors, including the most vulnerable at the base of the contractual chain.”
In presenting the report to the government, Mr Murray says that security of payment is a “challenging area”, with “many complex issues and competing interests.” He says his recommendations would be both legislative best practice and would “balance the competing interests of all stakeholders.”
“It is my belief that should these recommendations be accepted and implemented consistently across all states and territories; they will greatly improve the level of protection afforded to construction industry subcontractors and ensure that they obtain prompt payment for work they have completed.
“To that end, I encourage the Australian Government to work closely with its state and territory counterparts to deliver what is widely considered within the industry to be a long overdue process of essential national reform of security of payment legislation.”
In the report, Mr Murray cautions that the national approach was essential, as “leaving it to the states and territories alone to implement the report’s recommendations will only result in cherry-picking and further divergence in the security of payment legislations operating across the nation.”
According to Mr. Murray, a “national industry requires a national approach.” With many industry participants working across multiple states and territories, varying legislation in each jurisdiction add an unnecessary level of complexity and administrative burden.
A national approach would also result in “equality of rights and protections across jurisdictions.” Besides, there is widespread industry support for a single, national approach. Amongst others, Master Builders Australia is supporting the Reviews recommendations and findings.
“Everybody who is entitled to be paid should be paid,”says Denita Wawn, the CEO of MBA. “Security of Payment is a vital function as it protects all building industry participants and ensures that businesses, and therefore their workers, get paid.”
Ms Wawn describes the report as a “comprehensive contribution to what is an important issue for many participants in the building and construction industry, right up and down the supply and contracting chain.”
The various regimes in each state have become more complex and divergent in recent years, and MBA has “long supported” the goal of greater uniformity and consistency across the states and territories. According to Ms Wawn, such approach would “increase industry understanding, clarify uncertainty, reduce complexity, and boost payment compliance outcomes.
“The history of Security of Payment law shows that more regulation does not always mean better outcomes on the ground, particularly for small subcontractors.”
That’s why Ms Wawn urged all stakeholders to consider the report’s recommendations in a “sensible and practical way.”
The National Electrical and Communications Association also welcomed the Review’s findings and proposals. NECA CEO Suresh Manickam says they are “good news” for electrical contractors. As one of the finishing trades, he says electrical contractors are frequently the “last in a long chain to receive payment; therefore, they also carry the most risk should a company fall into receivership during the project.”
“The report findings address the feedback we’ve been receiving from our members for many years, and we welcome the recommendations.”
In fact, Mr Manickam says NECA has been calling for measures to reduce the risk of non-payment due to insolvency for a long time. Late payments and unfair contract terms that can be used to prevent payment have also been an issue.
“As the majority of electrical contractors are SMEs, family-owned and run businesses, they are particularly susceptible to cash flow issues, and non-payment can be devastating,” Mr Manickam said.
He said the recommendations in the Review will simplify the process of lodging claims for payment and guarantee prompt payment for all those involved in a project.
“NECA strongly encourages all state and territory governments to move quickly to harmonise their legislation in this area and looks forward to working with the Government to progress the recommendations and increase the protection for individuals and small businesses,” he says.
Mr Murray presented the Review to Craig Laundy, Minister for Small and Family Business, the Workplace and Deregulation. Mr Laundy welcomed the report’s recommendations and said that the government would work with the states and territories on the matters the review addressed.
“I appreciate the extensive consultation that Mr Murray undertook during the review and thank him for his efforts,” Mr Laundy said. “As legislative responsibility for security of payment rests with the states and territories, the Government will work cooperatively with them on the findings of the review.
Improvements Long Overdue
“As Chair of the Building Minister Forum, I am committed to working closely with all Building Ministers around the country to deliver improvements to the building and construction sector which are long overdue.”
According to Mr Laundy, while the Government acknowledges that some states and territories have taken steps in the right direction on security of payments, the high rate of insolvencies in the industry shows “more needs to be done to protect subcontractors and small businesses who are the industry’s most vulnerable participants.”
More also needs to be done to “harmonise the various state and territory security of payments laws so that businesses and subcontractors operating in the building and construction industry are not required to be across several complex pieces of legislation at any given time.”
Where payments are protected, that protection also needs to flow through the entire contractual chain, instead of just reach the first tier of the building industry as has proved the case with various trials of Project Bank Accounts, for instance, the current trial in Queensland.
Mr Laundy said the Government would consult with industry to consider the report’s recommendations and explore ways to improve the protections for individuals and businesses subcontracting in the construction industry. The Government is also working with the states and territories through the Building Ministers’ Forum (BMF) to consider and respond to the Review’s findings and recommendations.
Responsibility for further work on improving Security of Payment nationally as now been transferred to the Department of Industry, Innovation and Science which provides secretariat support to the BMF.
“Security of payment is a state and territory matter, as such the final report emphasises the importance of the Commonwealth, states and territories working together to implement the recommendations and create nationally consistent security of payment legislation,” Mr Laundy said.
The final Review of Security of Payment Laws report can be accessed here
Review into security of payment arrangements – Making sure everyone gets paid
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