Improving Security of Payment Building and Construction Industry

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10. Prequalification Page 123National Public Works Council IncImproving Security of Payment in the Building and Construction Industry- less than 50 employees at the end of the financial year;- gross operating revenue for the financial year of less than $10 million; and- gross assets of less than $5 million at the end of the financial year.For small proprietary companies there is no longer any requirement under theCorporations Law to prepare financial statements and no financial information isrequired to be disclosed in the company's annual return. In contrast, largeproprietary companies are required to lodge audited financial statements withthe ASC by no later than four months after their year end, subject to certaintransitional concessions. 'Grandfathering' provisions apply which allowformerly audited large proprietary companies to not lodge their accounts withthe ASC.Overall, the information available through the ASC is largely dated and historic.Therefore, its value in predicting future performance is somewhat limited.Furthermore, limited financial information is only available in respect of smallproprietary companies and previously audited large proprietary companies.• External Credit Reference AgenciesThere are several organisations offering independent credit reference reports.Various levels of report can be obtained and the costs are typically below $250per report. Anybody can utilise these services with the only advantage of anygroup approach being a potential fee reduction of up to 50%.The information which is typically contained in a credit reference report includes:- company background and operating structure;- director information including other failed directorships and past courtactions against the directors' individually;- financial information;- banking details;- details of registered charges;- details of any court actions;- trade reference records; and- risk assessment based on the above information.The sources used by the credit reference agencies ("CRAs") to compile thesereports include:- interviews of company officials;- ASC records;- court records;- interviews of trade suppliers; and- other credit reference sources.Typically, CRAs will update their information sources as part of the service of
10. Prequalification Page 124National Public Works Council IncImproving Security of Payment in the Building and Construction Industryproviding a report so that it takes into consideration all current information. Theability of CRAs to provide on comprehensive reports, particularly for smallerContractors, depends somewhat on the extent of co-operation and informationprovided by the Contractor itself and its suppliers.This often means that information for smaller companies/businesses is not verydetailed, except for noting any judgements effected against thecompany/business.10.5 An Effective Prequalification Process10.5.1 Current PracticeNo empirical evidence is readily available to establish the effectiveness of the existingprequalification practices undertaken within the Building and Construction Industryin Australia. However, research has been undertaken which generally supports that inorganisations with an appropriately structured risk assessment and risk managementsystem the organisation's exposure to those risks is reduced.Overall, the only level at which a full prequalification process is currently occurringin the construction chain is between the Principal and the Head Contractorpredominantly in the public sector. Realistically, this is most likely due to both therelative financial exposure of the Principal and the ability of it to command theinformation required to undertake such a process.Given the lack of empirical evidence upon which to base a risk assessment theselection of an "optimal" prequalification system must inevitably be based on asubjective assessment of relative risk. In this context it is more appropriate to focuson the fundamental aspects of a sound prequalification process rather than specificfinancial benchmarks. Where necessary, financial benchmarks based on ourunderstanding of the industry, have been used to describe the prequalification process.Before universal implementation these benchmarks they should be further testedagainst appropriate empirical evidence.
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