Improving Security of Payment Building and Construction Industry

9. Mutual Fund Insurance Page 107National Public Works Council IncImproving Security of Payment in the Building and Construction Industry9.1 Recommendations• As with Insurance, this Consultancy recommends that further research be undertakento obtain empirical data to quantify the number and overall impact of Head Contractorinsolvencies on Subcontractors in the Building and Construction Industry. The resultsof the research are needed before the concept of Mutual Funds providing security forSubcontractor payments is able to be fully considered.• However, it is the recommendation of this Consultancy that if the concept of MutualFunds is adopted, then the Mutual Fund should be used only for the purpose ofreimbursing Subcontractors on the default of Head Contractors due to insolvency.• As with Insurance, if Mutual Funds are to be used to protect all Subcontractors thenthere must exist a universal approach. Universality can only be achieved throughlegislation. However, in the interim, before such a legislative approach is adopted, allstandard form building contracts should make provision for all Head Contractors tocommit to a Mutual Fund to cover against its default in payment to Subcontractorsdue to insolvency.• The Building and Construction Industry participants rely on the receipt of progresspayments throughout the duration of the contract. Given our earlier recommendationthat proof of payment mechanisms should exist in all standard building contracts, wewould contend that at any one time there would be only one payment outstanding tothe Subcontractors. Further, with amendment to Section 556 of the CorporationsLaw, the Subcontractors would receive a priority for their unsecured claims to$10,000 with the balance of the claim ranking as unsecured. Accordingly, theappropriate level of fund cover would need to be determined after taking into accountthat at the time of the default (ie insolvency) of a Head Contractor the maximumexposure to any Insurer would be one payment (either progress or final) less thepriority afforded to Subcontractors.9.2 BackgroundMutual Funds are similar in concept to insurance in that they provide security to theSubcontractors in the event of the insolvency of the Head Contractor. The key difference toinsurance is the way in which the monies to cover the "Insured" party are obtained andsubsequently retained.