The NSW government has this week released the final report of Bruce Collins QC following an independent inquiry into insolvency in the NSW construction industry.

The report is the product of a three-month inquiry commissioned to address the prevalence of insolvency in the construction industry after a series of high-profile collapses. Mr Collins QC has made 44 recommendations, which, if adopted by parliament, will have far reaching consequences for the industry as a whole.

Purpose of the inquiry

In August 2012, the NSW government called for the inquiry as a response to the increase in construction companies becoming insolvent and the adverse effect on construction workers, the economy and unsecured creditors including subcontractors. The principal focus of the inquiry was to consider and make recommendations on ways in which the rights of subcontractors and suppliers could be better protected.

Key recommendations

The key recommendations of the Collins report include:

Creation of the NSW Building and Construction Commission

The Collins report concludes that the creation of such an overarching body is the only way in which appropriate reforms may be instituted, implemented and monitored. This will bring all bodies regulating the construction industry under one roof. NSW is the only state on the eastern seaboard not to have established an integrated building commission or authority.

A licensing system for all commercial builders and construction contractors

The Collins report notes that NSW is the only state that does not require builders working in the commercial sector to be licensed. The value of the licensing system is already recognised in NSW in the residential building sector. Mr Collins QC proposes that licensing will work alongside other reforms such as capital backing and net tangible asset thresholds as mandatory requirements to operate in the industry.

A statutory “construction trust” for all projects over $1m

As one of its most significant reforms, the Collins report proposes that any payment by a principal to a head contractor or by a head contractor to a subcontractor be held on trust in a separate account for the head contractor, subcontractor, sub-subcontractor and supplier. The practical effect of this reform will be that moneys will not at any time be deposited into the bank account of the head contractor; rather they will be paid into a trust account and distributed as quickly as possible to those who are entitled to payment. Disputes regarding payment will be resolved via an expanded security of payment regime.

Financial health checks

The Collins report proposes that a key role of the NSW Building and Construction Commission will be the financial monitoring and auditing of the accounts and financial affairs of all builders and contractors in NSW. The Commission will have far reaching powers to conduct spot audits and call for production of financial information from construction contractors who may be in financial difficulty.

The remaining recommendations address matters including, amongst other things, the operation of the construction trust, retention sums, dealing with disputed progress payments, time for payment to subcontractors, and the use of dispute resolution boards.

What does this mean for me?

The Collins report is open for public consultation until 21 February 2013 and will certainly generate significant discussion in the construction industry. The NSW Finance Minister, Mr Greg Pearce, has said in a statement that he will now carefully work through the proposed reforms in consultation with stakeholders and the public. It remains to be seen which, if any, recommendations of the Collins report will become law in NSW. Commercial construction contractors should monitor developments with interest as the proposed reforms will have a significant impact on the landscape of the construction industry in NSW.