Improving Security of Payment Building and Construction Industry

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2. Introduction Page 19National Public Works Council IncImproving Security of Payment in the Building and Construction IndustryIndustry Performance and the Integrated Business Registers.It is clear that the structure of the Building and Construction Industry has changed over thelast few decades. Currently the primary contracting builder ("the Head Contractor") willengage Subcontractors to conduct a significant component of the construction work required.In these circumstances, the Head Contractor really operates as a project manager.Subcontractors engage in their trades via a number of trading entities, such as:• sole traders;• partnerships;• joint ventures; and• corporations.They 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:• Head Contractors are not responsible for:- industrial relations and human resource issues;- superannuation;- payroll tax;- workers' compensation insurance;- group tax; and- holiday pay and other entitlements.• Head Contractors only pay 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 due to their "employee" characteristics in the event of Head Contractorinsolvency.It is not the intention of this Consultancy to provide reasons for the development of this typeof structure in the Building and Construction Industry. Suffice to say that good economicreasons are no doubt suggested (see the Discussion Paper on Financial Protection in the
2. Introduction Page 20National Public Works Council IncImproving Security of Payment in the Building and Construction IndustryBuilding and Construction Industry [Project No 82] of the Law Reform Commission ofWestern Australia [page 6]).Invariably, privity of contract is between the Principal and the Head Contractor in the firstinstance, the Head Contractor and Subcontractors in the second instance and Subcontractorswith Sub-Subcontractors in the third and subsequent instance. In contract law a person canonly sue to recover a debt for work and labour done where there is a direct contract betweenthe debtor and the creditor.Therefore, security of payment has been a matter of significant debate within the Buildingand Construction Industry for some years. The issue is complex and controversial. Numerousstudies, reports, enquiries and surveys have been undertaken by industry bodies and variousState and Federals Governments, but no consensus as to the causes of the problem, norremedies have emerged.Our experience and review of the extensive research to date suggests that there are threedivergent positions on the issue within the Building and Construction Industry:• the issue is complex and difficult to measure;• there is insufficient evidence to confirm the size of the problem suggested by anecdotalevidence; or• the problem is significant and requires complex and costly remedies to protect industryparticipants.To date the industry has been unable to guarantee payments between various parties despitethe existence of contractual obligations. The problem of security of payment is by no meansunique to the Building and Construction Industry. However, it is perceived that its impact isgreater in this industry primarily due to the traditional hierarchy of Contractors withcascading payment obligations, low capital backing and reliance on cashflows to sustainbusiness, the ease of entry into the industry and the disproportionately large number ofenterprises employing very small numbers of people.
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