Improving Security of Payment Building and Construction Industry

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2. Introduction Page 21National Public Works Council IncImproving Security of Payment in the Building and Construction IndustryAnecdotal evidence suggests that this problem is particularly prevalent with payments fromHead Contractors to Subcontractors. Subcontractors provide a substantial proportion, if notall, of the trade work associated with projects in the industry and it is considered that theyhave not been sufficiently secured in regards to amounts owing to them for services andmaterials rendered. The problems for Subcontractors include not being paid on time, notbeing paid at all or only receiving part payment for work completed. This is especiallyevident where a Contractor higher in the contractual chain becomes insolvent and its affairsare then administered through an insolvency process.Anecdotal evidence also suggests that Contractors at various levels in the contractual chainsuffer from loss of retention monies and cash securities. It appears that it is not uncommonfor such monies to be forfeited unfairly or negotiated away in response to perceived problemsand disputes. Accordingly, Contractors load their tender prices to manage this risk, therebyincreasing overall industry costs.Set out below are the primary causes identified as contributing to the problems associatedwith security of payment:• Unethical or illegal behaviour;• Inadequate financial structuring and technical ability of industry participants;• Inadequate business acumen;• Industry structure and practice issues;• Failure to pay on time; and• Insolvency of the Principal or Head Contractor.These issues are of particular significance and importance to specialist Contractors andSubcontractors as the loss of a single substantial payment or a number of payments can besufficient to close down a Contractor's business. The closing down of a business willinvariably, directly or indirectly, affect other industry participants further down thecontractual chain.Non-payment of Subcontractors also causes delays to projects with Subcontractors beingreluctant to continue with contract works where payments are not being made promptly bythe Head Contractor. Also, where the Head Contractor's contract has been determined,difficulties are experienced in having an unpaid Subcontractor return to site to finish offworks, as well as subsequent industrial disruption that may be caused by the non-payment ofSubcontractors.The National Public Works Council Inc ("NPWC") has been addressing the security ofpayment issue by developing a set of over-arching principles of conduct that industryparticipants should observe in order to assist in securing payment and also a set of agreedNational actions to be implemented in all jurisdictions by Government Principals.Alongside the work being done by the NPWC, there have been or currently are, a number ofinitiatives being developed to address and resolve the problem. In this regard, we note thefollowing:• The Queensland Government's Inquiry into Security of Payment Within the Building
2. Introduction Page 22National Public Works Council IncImproving Security of Payment in the Building and Construction IndustryIndustry, under the chairmanship of Mr Arthur Scurr which is expected to report inSeptember 1996.• The Law Reform Commission of Western Australia's Discussion Paper on FinancialProtection in the Building and Construction Industry (Project No 82) and Issues Paper,which sought comments by March 1996.• The Fifth Report of the Parliamentary Inquiry into the Victorian Building andConstruction Industry by the Economic Development Committee on the Matter ofSecurity of Payments, in September 1994.This issue is not unique to Australia. Research has also been initiated overseas, for example:• The Latham Report in the UK, July 1994• The Palmer Report in the UK, November 1995• The Construction Industry Development Board in Singapore, 1995• The European Commission Recommendation, May 1995It appears to this Consultancy that a number of the remedies which have been proposed todate to guarantee payment at all levels of the contractual chain, be they based on a legislativeframework or by industry initiative, are potentially so legally and commercially onerous andso organisationally and administratively burdensome, that they would most likely beineffective in terms of cost/benefit in alleviating the problem that the industry andGovernment are endeavouring to solve.The NPWC wishes to ensure that proposed remedies are legally and commercially sound andcan be implemented practically and cost-effectively to improve security of payment.It is this desire which forms the basis of this Consultancy.
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