Pocock wants better payment protections in the building industry
Fitout trades: Later-stage subcontractors such as electricians come in when much of a project is already complete - and the risk is greater that a builder has run out of money. Photo: Jessica Shapiro

Pocock wants better payment protections in the building industry

Independent senator David Pocock, who holds a key vote on the Labor government’s industrial relations laws, is pushing it to follow through with its election promise to improve payment protections for subcontractors, who are often left unpaid when a builder goes under.

Senator Pocock, whose vote in the 76-seat upper house could prove vital for the government’s multi-employer bargaining legislation, said the government should act on its election promise to bring in measures including trusts to safeguard payments for subcontractors.

“This is a pressing issue that has a huge impact on subcontractors and something I will keep pushing to see addressed as a priority,” Senator Pocock told The Australian Financial Review.

While on the backburner as the government works its way through the omnibus industrial relations legislation, security of payments will come on the agenda as a topic next year for the National Construction Industry Forum, a government-industry-union body created after September’s Jobs and Skills Summit.

But the Zimbabwe-raised former Wallabies player’s views carry weight now, as, with the Greens on side, the federal government needs just one more vote in the Senate to pass legislation.

“If he’s a crossbench senator where the government and Greens plus one is what you need, Pocock is a player on whatever he wants to be a player,” said one person involved in the issue.

There is already clear disagreement around the key proposal, recommended in a 2017 federal government review commissioned by former Master Builders Australia chief executive John Murray. It is about the money a client pays to a head contractor for work to be done, to be held in trust and not treated as part of the builder’s general cash flow.

“At the end of day, we say the money they’ve received belongs to the contractors,” said Oliver Judd, chief executive of the National Electrical and Communications Association, an industry group.

“It has to be safeguarded and paid to them.”

It is a big concern for electrical contractors and others in what’s known as the “fitout trades”. These trades come in later to a project, when the walls and other structural elements are up; and also when the money is more likely to be running out, which puts them at greater risk of losing out than an earlier-stage trade such as formwork.

With as much as 90 per cent of work on a commercial construction site performed by subcontractors, who are employed by a head contractor rather than by the client, arguments about how funds are transferred to them from the regular payments a client makes during a project cuts to the heart of a debate about transferring risk.

With building companies making up 26 per cent of corporate failures even though they only make up 17 per cent of businesses, small businesses in the thinly capitalised industry that trades on razor-thin margins need to have their money protected when a head builder goes under, Mr Judd said.

“If and when a builder goes into administration those monies need to be quarantined from administrators,” he said.

“Rather than going to banks and secured creditors, that money needs to flow to the people that’ve done the work.”

In construction and infrastructure industries with a wide range of contracts and relationships, views vary.

Large contractors oppose the proposal for statutory trusts, and say it shouldn’t be included in discussion at the forum, likely to meet in the first or second quarters of next year.

“This is not an issue that impacts on the whole of the industry,” said Jon Davies, CEO of the Australian Constructors Association, which represents large contractors.

“The forum in our view should be focused on more of the broader industry issues like improving culture and productivity of the industry.”

Large contractors, which are better capitalised than many, say a trust system would not resolve the problems they themselves face; for example, when a client refuses to pay mid-project for a change of scope caused by an unforseen discovery, such as a utility cable in the ground.

Unions say that fixing protections from the bottom up would put pressure throughout the chain for better recognition and sharing of risks.

“The ACA and others may say we need to talk about liquidity of the industry,” Electrical Trades Union acting secretary Michael Wright said.

“And fair enough. But let’s get this fixed. If we get this fixed it’s going to force the conversation.”

The insolvency industry also opposes the idea of statutory trusts, saying a system of trust accounts that ring-fenced any funds paid for work done would reduce the pool available for all creditors.

“It breaks pari passu, which is meant to be a fundamental part of an insolvency – all unsecured creditors get paid the same split of what’s left,” said John Winter, the chief executive of Australian Restructuring Insolvency and Turnaround Association.

“And that’s messy. Why is the trust recipient more worthy of protection than others?”

Subcontractors shouldn’t be seen as creditors, NECA’s Mr Judd said.

“The client has paid the builder and the builder is effectively holding money for work that’s been done,” he said.

“It’s a fine line, but it’s not like a bank that’s loaned money or taken on risk. These people have actually done the work.”

Mr Pocock said he had raised security of payments in the senate and also directly with the government.

“Labor committed to urgently implementing the recommendations of the Murray review,” he said. “We need to see this happen.”