An independent Inquiry into the surging number of insolvencies in the construction industry in NSW has made 44 recommendations in its Final Report which would overhaul the current contract payment practices used across the sector.

The need for an Inquiry

The Inquiry, chaired by Bruce Collins QC, was initiated by the NSW Government following an increasing number of construction and building companies going into liquidation and voluntary administration, including Southern Cross Constructions (NSW) Pty Ltd, St Hilliers Construction Pty Ltd and Reed Constructions Australia Pty Ltd.

The basis for the recommendations

At the Master Builders Association of NSW Top 50 Builders Luncheon on Friday 22 March 2013, Mr Collins reiterated the two propositions put forward in the Final Report by the Inquiry in support of its 44 recommendations. Namely, that:

  • it is against “good conscience” for there to be no legal protection for a subcontractor, who has completed, not to be paid when the principal has paid the head contractor for the work; and
  • it is “unacceptable” that head contractors apply payments received by a principal for work completed a subcontractor to “destinations outside of the project pyramid”, such as paying off other jobs and investing.

Construction trusts

A key recommendation of the Inquiry is that a statutory construction trust be used in building projects which have a value of over $1 million. Essentially, it recommends a construction trust be created when a principal makes payment to a head contractor. The head contractor would then hold this payment on trust for its subcontractors with which it had directly contracted.

Once a subcontractor has been paid by the head contractor, another construction trust would be created between this subcontractor and its sub-subcontractors. A cascading structure of construction trusts would then evolve, as this arrangement extends to all contractors and suppliers involved in the chain of the project. This structure limits the obligations on a head contractor to only the subcontractors it has directly contracted with.

Under current contract payment practices, subcontractors typically become unsecured creditors of an insolvent head contractor, meaning that there is no guarantee they will be paid for the work they complete. The purpose of a construction trust is to ensure that subcontractors receive payment for work completed, as the funds from a construction trust would not be available to creditors of an insolvent head contractor until the head contractor has paid all of its direct subcontractors.

The implementation of construction trusts is supplemented by other recommendations made in the Final Report, including that:

  • the trust funds should be held in a separate trust account;
  • a principal pay progress payment claims to a head contractor within 15 days of receiving the progress payment claim;
  • a head contractor pay its subcontractors from the Construction Trust within 28 days of receiving a progress payment claim; and
  • a head contractor pay its subcontractors before it can access any of the funds in the Construction Trust for its own purposes.

Possible issues

Whilst the use of construction trusts would better protect a subcontractor if a head contractor were to become insolvent, their use raises a number of issues, including:

  • whether it will complicate accounting and bookkeeping for the trustee;
  • whether it will impact on the making of commercial arrangements;
  • if the Building and Construction Industry Security of Payment Act 1999 (NSW) is to continue being used for interim dispute resolution, how adjudicators will be independently selected; and
  • whether it will truly provide any assurance that any contractor in the contractor chain will pay its employees.

Where to now?

Written submissions responding to the Final Report closed on 21 February 2013.

It will be interesting to see whether the recommendations made in the Final Report in relation to construction trusts are implemented by the New South Wales government and, if they are, when enabling legislation will be introduced into the parliament.