Building industry seeks payment reform to ensure subbie survival

by | Apr 1, 2020

The building and construction industry is in danger of collapsing unless emergency measures to address delayed and non-payments, such as those already in use by the real estate sector, are put in place. That’s the message from Australia’s leading SME trade subcontractors, peak industry bodies, security of payments laws reviewers, advocates and builders.

The united group has written an open letter to the Prime Minister, calling for his government to urgently introduce payment reform to protect SME subcontractors and ensure they will be well placed to assist with the rebuilding of the economy once the COVID-19 emergency has passed. 

The solution, they say, is simple: implement cascading statutory trusts (CSTs).

A CST is a trust imposed by law that “cascades” down through a string of “deemed” trusts. The money that is payable to a business down the line is held for the benefit of that business by the business above. Put simply, CSTs protect payments for all levels in the contractual supply chain – from principals to subcontractors. It includes any payments the public makes to a builder that historically a builder may not pay to subbies who have done the work before the builder ‘disappears’.

 The united group, which includes the Australian Subcontractors Association, Adjudicate Today, Master Plumbers Association SA, the National Electrical and Communications Association (NECA) NT/SA and fintech payment protection platform ProjectPay, is calling for urgent implementation of the CST reform promised to them, – as recommended by John Murray AM, who conducted a report of the Review of Security of Payment Laws – to force the industry to manage all project payments through CSTs.

“This is a national emergency. Our first priority must be to fix the payment problems in the industry so that the government’s economic stimulus flows through to the tradies that do the work,” says fair-pay advocate, Louise Stewart. “We urgently need the support of all governments to keep as many tradies afloat as possible. As part of relaxing the insolvency laws, we believe the federal government has an obligation to put in place protections for the public and subcontractors to ensure they get paid.”

Stewart is the former Chair of a leading Australian subcontractors’ association and is CEO of construction payment protection platform ProjectPay, which automates the set-up and management of cascading trusts for the industry by integrating with authorised deposit taking institutions, such as ANZ and links payments to progress claims and e-invoices to ensure there is transparency over the requesting payment stage most fraught with delays and non-payment.

She says the industry can no longer wait and that introducing payment reform would be the greatest single action taken by government since Federation, as it would create a secure environment for contractors and subcontractors in the industry.

“The construction sector is a critical part of a functioning Australian economy, employing approximately 1.2 million people and responsible for 9 per cent of our GDP,” Stewart says. “It performs as a vital growth multiplier, with every dollar spent on construction and infrastructure generating a total of $360 billion in total economic activity. Its importance cannot be understated, particularly at this time. Our industry will play a crucial role in the recovery from the impact of COVID-19 and in the delivery of many government infrastructure projects.”

Proven solution

Paul Williams, Chair of the Australian Subcontractors Association, says, “We need to introduce CSTs now as a way to protect payments that are due to subcontractors, even where a contractor above them becomes insolvent. This is an industry already plagued by illegal phoenixing and changes to insolvency regulations make the ground even more fertile for this type of reprehensible behaviour. That’s why it’s more important than ever to expedite the introduction of statutory trusts. It’s a proven solution: the real estate industry has been using such trusts for years.”

Stewart says that more debt is not the answer. “Many of these SME businesses work on lean margins and do not have the capacity to take on more debt, given the payment problems in this industry.”

An industry working group is being formed to commence emergency plans to ensure the implementation of cascading statutory trusts across the industry.

“While six independent government-commissioned reviews have all recommended the urgent need for cascading statutory trusts, governments continue to waste time implementing complex and onerous Project Bank Accounts (PBAs) that are designed to protect government and large tier one contracts only,” says Stewart.

The combined group has called for the federal government to:

  • Release the report of the senior officers requested by the Building Minister’s Forum (BMF) to prepare model legislation for the introduction of CSTs across the industry
  • Convene an emergency meeting of the BMF to consider and commit to model legislation across Australia
  • Make all government payments owing to subcontractors directly to the subcontractors by CSTs and not to tier one contractors, etc.

“We commend the BMF for directing its senior officers to prepare draft legislation for the states to implement and call for the immediate release of their proposals, in addition to an emergency meeting of the BMF to determine the proposals. We also applaud the WA, NSW and SA governments for their support and urge them to immediately bring forward legislation to implement their commitments,” says Stewart.

She adds that the Morrison government should not follow the path of the Rudd government’s $16.2 billion Building the Education Revolution (BER) package, one of the stimulus measures implemented following the 2007-2010 Global Financial Crisis. “Subbies working on school projects perceived the BER projects to be ‘safe’, meaning money was ‘guaranteed’. However, many did not get paid. This time around, let’s not repeat the same mistakes.”

Letter to the PM from the building and construction industry