Security of payment for subcontractors is an area where seemingly none of the legislated ‘big sticks’ have solved the problem. Project trust accounts have been legislated in Queensland, are used on government projects in WA and are under consideration in other jurisdictions. However, the Australian Constructors Association (ACA) submits this blunt tool is unlikely to solve such a complex problem, and instead proposes reforms aligned with the 3 pillars of a sustainable industry will achieve better outcomes.
Improving Security of Payment for Construction Contractors – Carrot or Stick?
Project trust accounts for building projects have been under consideration by Australian jurisdictions for some time as a means of addressing subcontractor security of payment issues. A number of jurisdictions have opted to legislate for a simpler regime of statutory retention trust accounts only. Queensland has required project trust accounts by legislation since 2018, applying to private sector building projects for the first time from 1 January 2022.
Contractors, including subcontractors and suppliers, must be paid what is due and owing within the required timeframes. This includes the assessment of claims and variations by head contractors and clients alike. Where cash retentions are held, these must be returned unless required to compensate the other contractual party for rectification of defective work or omissions, or other lawful rights.
The recent collapse of Probuild has rocked the industry. Subcontractors and suppliers have announced they are owed substantial sums, most of which is unlikely to be received.
However, even if there was a project trust regime in place for the Probuild projects – would all of those subcontractors and suppliers have actually been paid?
To be paid via a project trust account, the subcontractor must have issued a payment claim for work completed that has been assessed by the head contractor as due and payable (or becomes payable by operation of legislation). Typically, only those subcontractors contracting directly with the head contractor are paid through a project trust account.
Problems arise when claims in addition to the original tendered amount are made, as these can take time to properly assess, including in circumstances where the project owner has not agreed the work is ‘additional’. Problems also arise when payment claims are not validly made.
In the undesirable situation of a head contractor insolvency, even assuming claims have been made and are due for payment prior to the insolvency event, the money needs to be sitting in the project trust account at the time of insolvency to be protected. If, for example, a client has been slow to pay the head contractor, and the head contractor did not have funds to ‘top up’ a trust account, the money simply will not be there. The client will then have various legal avenues to consider, including set offs for the additional cost likely to be incurred in completing the project – in other words, the money is unlikely to be paid into the trust account after a head contractor insolvency event.
Project trust accounts are a blunt instrument for a complex problem. There is little evidence project trust accounts will solve the industry’s payment problems and whether the expected benefits will outweigh the costs.
On the contrary, ACA is of the view the cost, particularly for major projects, will far outweigh any perceived benefit. It is possible payments will become slower as a result of the burdensome legislative requirements.
Rather than imposing more regulatory requirements, changing the culture of the industry is seen as an essential step to changing payment practices. Intertwined with this, risk allocations and contractual frameworks must be re-assessed to drive the desired behaviours, and project teams must have the knowledge and skills to effectively work collaboratively. Improving relationships and productivity throughout the contracting network will achieve greater benefits than complex legislative requirements.
Rather than another ‘big stick’ approach by governments, ACA believes there should be greater focus instead on improving the 3 pillars of a sustainable industry, namely positive industry culture, equitable and aligned commercial frameworks and sufficient capability, capacity and skills. In terms of commercial frameworks, governments and ethical investors like super funds can be model clients and lead the industry forward, by delivering projects using more collaborative forms of contract that incentivise improved project outcomes and more equitably apportion project risk. The benefits of this approach are starting to be seen in the civil infrastructure sector through projects such as Melbourne’s Level Crossing Removal Program and Sydney Water’s Partnering for Success Program.
For further information, view ACA’s position paper on project trust accounts.
Author: Kate Raymond, National Policy Lead, Australian Constructors Association