On Thursday 18 April 2013, the NSW Government released its response to the Collins Inquiry into Insolvency in the NSW Construction Industry. The Government has adopted a number of the Inquiry’s recommendations including: the development of a trust scheme for cash retention money, strengthening the security of payments scheme and a trial implementation of construction trusts on Government projects before a possible wider application.

Background

In response to the increase of construction company insolvencies which left subcontractors more than $1 billion out of pocket, the NSW Government commissioned Mr Bruce Collins QC to conduct an inquiry into the construction industry and make recommendations on ways in which the rights of subcontractors and suppliers could be better protected.

The inquiry

In January 2013, after a three-month inquiry, Mr Collins QC produced a report which outlined forty-four recommendations. The key recommendations included the creation of the NSW Building and Construction Commission, a licensing system for all commercial builders and construction contractors, a statutory construction trust for all projects over $1 million and financial health checks. The full report can be found here.

The Government’s response

Of the forty-four recommendation made, ten were supported by the NSW Government. Sixteen were supported “in principle”, support for five others was expressed to be contingent on or subject to other factors, and the remaining thirteen were not supported “at present”.

The key recommendations supported by the NSW Government include:

  • Establishing the first Cash Retention Trust Scheme in Australia to protect subcontractors, administered by the Office of the Small Business Commissioner;
  • Amendments to the Building and Construction Industry Security of Payments Act 1999 (NSW) which will shorten the required time for payment of progress claims to 15 days to head contractors and 30 days to subcontractors;
  • Establishing an Industry Advisory Taskforce to develop an education program targeting subcontractors to improve business and financial management skills in the industry;
  • Making payment of the head contractor contingent upon the principal receiving a written statement from the head contractor declaring that all subcontractors have been paid; and
  • Implementing a trial of Project Bank Account Trusts on Government construction contracts only, under which the Government will directly pay subcontractors.

The NSW Government’s response to the Collins Report can be found here.

The Construction Trust

The introduction of a Construction Trust scheme for projects over $1 million would require money to be deposited not into the bank account of the head contractor, but into a trust account to be distributed to those entitled to payment. During the period in which the Collins Report was open for public consultation, the Property Council of Australia opposed the adoption of the Construction Trust. The Council highlighted the expected increase of the administrative and financial burden on the parties, and the restriction on cash flow, both of which would be even greater for smaller operators, without positively reducing insolvency in NSW. It is unclear how the trust system would apply in practice and how it might effect a principal’s or head contractor’s usual rights in the event of a contractor/subcontractor insolvency. At present, the NSW Government will implement a trial use of trust accounts on certain Government projects only. It will be important to follow the progress of the construction trust during this trial and how a scheme of broader application may apply in practice.

The NSW Government is yet to present firm legislation making these changes and is still considering many of the recommendations.