Construction is a $ 360 billion dollar industry in Australia.
It’s what builds the homes we live in, the offices we work in, and the hospitals, schools and critical infrastructure that bind communities together.
However, it has an Achilles heel: insolvency.
According to data from the Australian Securities and Investments Commission (ASIC), 2,170 construction businesses entered administration in the 2022-23 financial year.
That’s 69% more than the previous year and 20% more than the previous high of 1,802 in 2013-14.
In the new financial year, external administration appointments jumped to 943 - 36% higher than the same stage last year - according to data released on 9 October.
Six years ago, The Queensland Building & Construction Commission (QBCC) introduced the ‘Building Industry Fairness (Security of Payment) Act’, which it hoped would reduce the risk and minimise the contagion effect of insolvency.
The legislation mandated that construction project funds be ‘siloed’ into dedicated trust accounts with strict rules surrounding payment practices and the threat of penalties or fines for non-compliance.
On paper, the legislation sounds promising and the positive intent is significant, but in practice there are flaws.
The legislation is overly complex and contains several loopholes that have the potential to be exploited - whether intentional or not - allowing behaviour that contradicts the key objective: protecting subcontractor payments.
But why is the legislation necessary?
What are the pros and cons?
How are loopholes being exploited?
And what is the solution?
Why was the legislation introduced?
When a builder submits a progress claim, they’re not only asking to be reimbursed for costs incurred by their business but also on behalf of the consultants, subcontractors and suppliers that have provided labour or materials on the project.
They’re only entitled to a portion of the progress payment - the rest is due to their subcontractors and suppliers.
Unfortunately, some builders treat the entire progress payment as their own, using subcontractor and supplier entitlements to cash flow other projects.
Unfortunately, this practice, though long-standing as an industry standard, can be incredibly damaging.
The daily headlines of builders entering administration make it abundantly clear that this is a serious and ongoing problem.
According to the Australian Constructors Association, building firms are entering administration at double the rate of other industries.
The QBCC’s legislation was intended to reduce a practice whereby subcontractors and suppliers involuntarily risk their entitlements at their builders’ discretion before they can be paid.
QBCC: Pros and Cons
It’s important to note that, while flawed, the fact that the legislation exists in the first place is hugely positive and signals the beginning of major reform that is desperately needed.
The Queensland Government has acknowledged that the industry has a problem, and it has created legislation intended to fix it.
The message that intent sends to the industry is significant. It’s a trailblazing piece of legislation to compel builders to ‘silo’ funds on a project-by-project basis, which aims to reduce the contagion effect of insolvency - non-payment amongst subcontractors and suppliers.
For all that positive intent, this first attempt at reform is yet to protect the entire industry.
The legislation is overly complex, which creates the potential for misinterpretation and, potentially, exploitation, and is focused more on compliance than outcomes.
The legislation is a staggering 232 pages long, which is evidence in itself of the detailed complexity and compliance required to be effective.
It poses the question: if so few actually understand what’s required, how can we expect compliance?
This complexity also gives rise to potential gaps in protection.
For example, the legislation may allow for a ‘window’ between the builder receiving a progress payment and the subcontractor entitlement being recognised.
This means a builder can withdraw project funds from the trust account, then later deposit the amount required to cover due invoices back into the account and remain compliant.
Timing is everything.
It’s common for administrators to be appointed shortly after a progress payment is received; precisely when this ‘window’ may apply to a project.
Essentially, there are vulnerabilities during the point at which the Act is most needed to protect subcontractor payment.
In addition, the QBCC has fixed the beneficial entitlements for subcontractors only; the legislation excludes consultants and suppliers.
This means that it’s an offence under the Act to pay these parties directly out of the project trust account, requiring that builders transfer funds from the project account into their operating account to pay these invoices.
Aside from being inefficient, this raises the question as to why suppliers and other third parties have been ignored despite facing many of the same risks.
Guest author: Paul Reid, Head of Strategy and Operations at IPEX
