Australia’s construction industry insolvency crisis – reform is underway

There are calls for urgent intervention from the Commonwealth Government to address the insolvency thousands of Australian contractors and subcontractors face when participants higher in the payment chain become insolvent or fail to pay.

One of the ways in which contractors and subcontractors have been protected by Government has been by the implementation of security of payment legislation is each of the States and Territories. Historically the Federal Government has not legislated to protect subcontractors and has not implemented any security of payment legislation.

This follows the release of the “Review of Security of payment Laws: Building Trust and Harmony” (Murray Review) in May 2018, conducted by John Murray AM. The Murray Review set out to identify areas of best practice for the Australian construction industry, focusing on payment issues and ways to increase protections for subcontractors.

Murray’s comprehensive report made 86 recommendations to improve consistency in security of payment legislation and enhance protections to ensure those in the building and construction industry, particularly subcontractors, get paid on time for work they have done, even if the party to whom they are contracted becomes insolvent and regardless of the state or territory in which they operate. The Murry Review also recommended the adoption of a uniform national regime for security of payments to remove the current inconsistencies between the States and Territories.

Non-payment issues have long plagued the construction industry, causing a world of pain especially for contractors further down the chain – who often do not get paid even if they have completed the work.

The problem is a highly competitive industry with a toxic culture. The problem is often also entrenched in subcontracts (many of which are standard form or expressed to be ‘non-negotiable’) which often contain onerous terms which provide for payment deferral, set-off, significant delays in payment and otherwise causing financial prejudice to sub-contractors further down the chain.

It starts with a culture of underbidding on jobs just to win work, from the top of the construction chain to the bottom. Then, when the project cannot be delivered on budget and/or on time, everyone in the payment chain is squeezed, not paid in full or at all, with subcontractors usually coming out the worst.

Often non-payment of subcontractors becomes a feature which arises towards the end of a project – often at the time that a final claim is submitted and the discussion ensues about liquidated damages, incomplete and defective works and other reasons to withhold payment.

According to the 2017 Australian Small Business and Family Enterprise Ombudsman’s report on the construction industry:

• 37% said more than 60% of invoices were paid late
• 60% said nearly half paid late
• 44% said the average payment was more than 30 days late
• Of those who “always or frequently” pay late;
• 64% were large/multinational business
• 61% were medium businesses
• 39% were small businesses.

Current laws in Australia have attempted to deal with prompt and fair payment. Recently project bank accounts have been introduced in some but not all jurisdictions. They are all designed to protect payments in the event of the insolvency of a business higher in the payment chain. They differ from jurisdiction to jurisdiction and none of them apply universally to all jobs and projects.

With the construction industry in Australia accounting for 20 to 25% of all insolvencies, more needs to be done to protect industry participants right through the payment chain, particularly smaller subcontractors who are the industry’s most vulnerable participants.

Various reviews at State and Territory level have resulted in amendments being made to legislative regimes in individual States and Territories (particularly to each jurisdiction’s Security of Payment Act) all designed with the right intentions but resulting in an ever-diverging legislative landscape.

Prompted by the crisis, the Queensland Government announced in February 2019 a Special Joint Taskforce, led by a retired Supreme Court judge, to dig deeper into allegations of white-collar crime in the Queensland construction industry. The inquiry will look at, amongst other things, allegations of ‘phoenix activity’ in the construction industry (a practice in which companies trade whilst insolvent racking up debts and avoiding obligations to subcontractors, employees and creditors) and whether contractors traded whilst insolvent.

The Commonwealth Government has not yet endorsed the recommendations of the Murray Review. It seems that there will be a further process of consultation as the governments in each jurisdiction, including the Commonwealth, consider the recommendations and the best course from our current position. It would appear unlikely that any reform at a Commonwealth level will occur until sometime after the next Federal election.

The ALP has indicated that, if it wins government, it will introduce a ‘Tradie Pay Guarantee’ and set up a Federal security of payments legislative regime based on the Murray Review. If the ALP wins government, the Commonwealth government may need to seek the referral of relevant powers from the States to the Commonwealth. Whether some or all of the States and Territories would agree to such a referral remains unclear.

Cornwalls’ Building and Construction team are actively involved in promoting the reform agenda, including making submissions and participating in the process at all levels of government.

Queries

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Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.