Improving Security of Payment Building and Construction Industry

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7. Priority Payments Page 89National Public Works Council IncImproving Security of Payment in the Building and Construction Industry• This Consultancy recommends that the definition of Subcontractor be limited tothose Contractors who enter into a written standard form contract such as AS2124-1992. Where a Subcontractor is undertaking work and supplying materials pursuantto an oral agreement, a priority would not be given. Whilst this might seem harsh tothose Subcontractors who do not enter into a written contract, a provision such asthat proposed for the amendment to Section 556 may provide some incentive forwritten form contracts to be entered into. Many Subcontractors take on work of arelatively small nature with there being no apparent necessity for a formal writtencontract to be entered into. In that situation it is the intention that the HeadContractor will pay when the job is done and likewise, that the Subcontractor willundertake work in a satisfactory manner. Non-formal contractual arrangements areundertaken with somewhat of a commercial gamble being assessed. Those partieswho do not enter into a standard form building contract will therefore take a gamblethat the Head Contractor will complete its part of the deal and make promptpayment, rather than obtain a measure of security for payment under the provisionsof Section 556.7.2 BackgroundThe Construction Industry is a very fragmented industry as evidenced by the following tablewhich categorises the 589,900 people employed in the industry in 1994/95 by size of theemploying establishment:Number ofNumber of Employees Establishments %0 - 4 77,050 83.95 - 9 9,511 10.410 - 19 3,129 3.420 - 49 1,467 1.750 - 99 430 0.5100 + 298 0.191,885 100%While it may not be a precise measure, the above table suggests that there is a significantnumber of "employees" engaged in the Building and Construction Industry through smallestablishments that have "subcontracting" relationships as the basis of their operatingcapability.
7. Priority Payments Page 90National Public Works Council IncImproving Security of Payment in the Building and Construction IndustryWe would contend that the establishments with 0 - 4 employees comprise family businesseswith one or two husband and wife partnerships teaming together, perhaps with an apprentice,in a form of commercial venture practising in a particular building industry trade. Thesepartnerships, while having corporate structures, are essentially driven by the personalexertion and labours of the principal tradespeople behind the corporate structure.The structuring of Subcontractors is then explained by the differing, but compatible,objectives of the principal tradespeople (Subcontractor/employee) and building manager(Head Contractor/employer).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.
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Page 118 and 119: 10. Prequalification Page 115Nation
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Improving Security of Payment Building and Construction Industry

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