In our previous update here we summarised the subcontractor-friendly recommendations of the Final Report released by the Independent Inquiry into Construction Industry Insolvency chaired by Bruce Collins QC (Inquiry). On 18 April 2013, Greg Pearce, Minister for Finance and Services, released the New South Wales Government’s response to the Inquiry.

The Government has not presently committed to implementing the Inquiry’s recommendations. It has however, indicated that some are supported and some will be subject to further consideration and regulatory impact assessment. However, the recommendations it supports, or supports in principle, are material.

Government’s response to Inquiry’s main recommendations

Construction trusts to be trialled on a smaller scale

The Inquiry recommended that the Government establish statutory construction trusts for all projects valued at $1 million or more for the purpose of paying subcontractors and suppliers quickly and making payment more likely.

The Government’s response is to trial the use of trust accounts on selected government construction projects before considering its wider application. Subcontractors working on Government projects would be paid directly by Government agencies rather than the head contractor.

Retention sums to be safeguarded

The Inquiry recommended that retention sums as between principals and head contractors, and head contractors and subcontractors, shall be held in the construction trust account. Those retention sums shall be paid out of such account only once the head contractor, or subcontractor, has submitted a statutory declaration stating the amount due and payable and that the amount is to be paid out of the trust account.

The Government supports this recommendation in principle and, subject to regulatory impact assessment and industry consultation, has committed to protecting subcontractors’ cash retention moneys through developing the first retention trust scheme in Australia. The scheme will be administered by the Office of the Small Business Commissioner, with legislation to be introduced in Spring of this year.

Prompt payment provisions

The Government has signalled its in-principle support of the Inquiry’s recommendations in respect of prompt payment of those down the contracting chain. It has committed to drafting legislation that incorporates implied prompt payment provisions whereby:

  • head contractors are to be paid by the principal within 15 days; and
  • subcontractors are to be paid by the head contractor within 30 days.

These entitlements will be supported by implied rights to suspend work without breaching the contract, in the event that payment is not made on time.

There will of course, be exemptions for circumstances where the payment claim is disputed.

Security of payment system to be strengthened

The Government has also indicated its support for some significant changes to the Security of Payment Act 1999 (NSW) (Act). The proposals being given oxygen include:

  1. enabling adjudicators to decide on an interim basis, disputes concerning bank guarantees and whether or not a party was entitled to cash a bank guarantee;  
  2. providing for the resolution of disputes concerning the entitlement or otherwise to retain retention sums (presumably by an adjudicator);  
  3. expanding the Act’s jurisdiction to include works on residential property to a value of $1 million or more where the respondent is the occupier;  
  4. giving an adjudicator power to issue a final certificate to disputes involving sums less than $40,000;  
  5. increasing the time permitted for an adjudicator to make his or her determination; and  
  6. removing the right of a claimant to choose their own nominating authority.

The Government’s support of the above is however, qualified in the following, not insignificant terms: “issues to be considered in comprehensive review of the Act in 2015”.

NSW Building and Construction Commission

The Inquiry recommended that the Government introduce a NSW Building and Construction Commission to consolidate government functions relating to the control and regulation of the building and construction industry into a separate autonomous statutory body.

The Government’s response is that this recommendation remains subject to consideration and will depend on the outcome of a cost benefit analysis.

Licensing framework with financial tests for builders

The Inquiry recommended that the Government introduce a licensing framework with financial tests for builders which would effectively restrict builders and construction contractors to the category of project value for which they have demonstrated financial backing and licensed accreditation.

The Government’s response is that it recognises the high levels of industry support for and the reasoning behind the recommendation, but its implementation will be subject to the outcome of a regulatory impact assessment and cost benefit analysis. The Government has however, committed to subjecting subcontractors engaged by Government to more comprehensive and frequent financial assessments.

What the Government does not support (recommendations not taken up)

Other than in respect of Government contracts, the Government will not, for the time being, be progressing construction trusts for progress payments, ie requiring payments by a principal to a head contractor or by a head contractor to a subcontractor to be paid into a statutory trust account. It will be trialled on Government contracts but will not go beyond that at this stage.

In respect of interest earned on retention funds, the Government preference is to apply it to fund the administration of the retention fund trust account and an education campaign for the industry, as opposed to being available to principals to cover the cost of rectification work beyond the value of the retention, or being returned to the contractor or subcontractor.

To read the Government’s response to the Inquiry, click here.