Improving Security of Payment Building and Construction Industry

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1. Executive Summary Page 11National Public Works Council IncImproving Security of Payment in the Building and Construction Industry• The structuring of Subcontractors is explained by the differing, but compatibleobjectives of the principal tradespeople (Subcontractor/employee) and buildingmanager (Head Contractor/employer).• Subcontractors seek to be "self-employed" for the following reasons:• masters of their own destiny;• tax planning opportunities;• flexibility in work commitments;• part of the industry culture; and• concentration on their particular specialist trade.• Head Contractors engage Subcontractors as:• the Head Contractor is not responsible for:- industrial relations and human resource issues;- superannuation;- payroll tax;- workers' compensation insurance;- group tax; and- holiday pay and other entitlements.• the Head Contractor only pays for work done caused by:- intermittent work loads; and- specialist trades not required full-time.• Subcontractors minimise the Head Contractor's investment in working capital.• As a consequence there has been substantial pressure to provide security of payment toSubcontractors to ensure that they are paid on a timely basis, and due to their"employee" characteristics that their entitlement to payment is secured in the event ofHead Contractor insolvency.
1. Executive Summary Page 12National Public Works Council IncImproving Security of Payment in the Building and Construction Industry1.6 Overview of Findings1.6.1 Trusts• This Consultancy does not recommend the use of trusts as a panacea for security ofpayment, although trusts can legally assist to improve payment in the Building andConstruction Industry. Complex commercial and administrative burdens andobligations prevent the implementation of trusts on a widespread basis throughout theindustry and the workability of trusts would be severely compromised by the detailedlegal issues and considerations involved with trust law.• However, if trusts are to be considered for the Building and Construction Industry, itwould seem appropriate that they be introduced across the board rather than withinindividual sections of the Building and Construction Industry. This would requirelegislation to be introduced to the effect that a standard form building contract such asAS2124-1992 be used by the Building and Construction Industry, so that the trustprovisions are properly documented.• We would suggest the use of cascading trusts as opposed to single or multiple trusts,although there is no legal distinction between the three forms of trust.• A cascading trust is where there is one trust entity responsible for one or more buildingand construction contracts for one project site and for multiple layers of Subcontractorsand/or Sub-Subcontractors.• We would recommend that the trustee be the person who contracts for work andmaterials to be supplied or performed. Under these circumstances, the beneficiaries ofthe trust simply become those Subcontractors who undertake to provide labour andmaterials to the trustee (ie the Head Contractor).• We recognise that under this scenario the trustee will not be independent, therefore, anunderlying safety mechanism such as a mandatory external audit requirement wouldneed to be introduced.• We suggest that the trustee's powers, duties, responsibilities and obligations bepursuant to statute and common law and that the trust deed be encapsulated in astandard form building contract.• A difficult issue will arise where there are disputes between Head Contractors andSubcontractors as it is likely that a trustee will not want to make any payment untilabsolutely certain that the dispute has been resolved. We recommend that a directionbe made in any trust deed or standard form building contract such that a trustee mustrefer disputes to alternative or consensual dispute resolution. We would envisage anindependent, but qualified and experienced panel of mediators/conciliators beingavailable to enable trustees to refer disputes at the earliest opportunity.
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Improving Security of Payment Building and Construction Industry

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