COVID-19: Protecting Payments in the Building and Construction Industry

Most Australian politicians give support to ensuring that those who perform work in the building and construction industry be paid what they are due promptly. All Australian governments, other than the Commonwealth, have introduced Security of Payment legislation to promote that objective.

The Senate Economics References Committee Report ‘I just want to be paid’¹ recommended, across party lines and following further enquiries (now completed), that:

‘…the Commonwealth enact national legislation providing for security of payment and access to adjudication processes in the commercial construction industry’.

And further proposed a reference to the Law Reform Commission to enquire into²:

‘…what (Note: the word is ‘what’ not ‘whether’) statutory model trust account should be adopted for the construction industry as a whole, including whether it should apply to both public and private sector construction’.

Both these recommendations were ably assisted by the NSW inquiry into construction industry insolvency, headed by Bruce Collins QC³. His Report recommended:

‘Any payment by a principal to a head contractor or by a head contractor to a subcontractor on account of or in respect of any work done or materials supplied by the head contractor, any subcontractor, sub-subcontractor or supplier whether as a result of a favourable adjudication under SOPA or not, shall be made and treated in the following way:
• any cheque drawn upon a bank account in favour of the head contractor in respect of such work shall be held on trust for the head contractor, subcontractor, sub-subcontractor and supplier; and …’

And⁴:

‘The contractor or subcontractor is the trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts through related to the improvement owed to them by the contractor or subcontractor.’

The Commonwealth’s response was to appoint John Murray AM to review security of payment laws both in Australia and internationally and prepare a comprehensive review⁵’. His Review recommended:

‘A deemed statutory trust model should apply to all parts of the contractual payment chain for construction projects over $1 million. The deemed statutory trust model outlined in the Collins Inquiry provides a suitable basis’.

And⁶

‘The Australian Government should take a lead role in working with the states and territories and key industry stakeholders towards the establishment of a nationally consistent deemed statutory trust model’.

The most recent report was conducted by John Fiocco for the Western Australia government⁷. Likewise that report recommended:

‘The Government should adopt recommendation 85 of the Murray Report. Legislation should be introduced to establish a deemed trust scheme such that whenever a party receives payment(s) under a construction contract, on account of work performed (in part or whole) by another party, whether as a result of a favorable adjudication or not, the payment is deemed to be held in trust, at the point of receipt, for the benefit of the party who performed the work.’

The Commonwealth Senate has established a Select Committee on COVID19 to inquire into the Australian Government’s response to the COVID-19 pandemic. The primary oversight issues should be (and probably are) whether government support to Australians and their businesses is sufficient and is the government investment being spent wisely?

In commending Senate for this initiative, concern for the building and construction industry must be to not repeat the mistakes that were discovered during implementation of the Commonwealth and State economic response to the global financial crisis of the late 2000’s.

At that time, with the economy experiencing its biggest slowdown since the early 1990s and facing a recession, the Commonwealth announced an economic stimulus package worth $10.4 billion. A second economic stimulus package worth $42 billion was announced in February 2009, including an infrastructure program worth $26 billion. Unfortunately, a percentage of this infrastructure package never reached the subcontractors who performed the work. Rather the money was retained by the main contractors, many of whom were either under capitalized or inexperienced to fulfil the contract. In brief, taxpayer money set aside for subcontractors never reached the intended recipients.

The Western Australia Small Business Commissioner, David Eaton, wrote a valuable report into these unfortunate circumstances.⁸

‘The matter concerned Complaints made by subcontractors who had allegedly not been paid by head building contractors on projects administered by the Building Management and Works (BMW) division of the Department of Finance, in circumstances where the head contractors had gone into liquidation.’

There was a particular focus in some of the Complaints directed towards projects that had been funded, or partially funded, by the Federal Government's Building the Education Revolution BER) program. The BER Program was part of the Federal Government's $42 billion economic stimulus program to fund primary and secondary school infrastructure and maintenance projects.’

In short, the Small Business Commissioner identified many pitfalls in existing practices and made responsible suggestions to ensure that money paid for work performed by subcontractors reached subcontractors.

The most effective guarantee of ensuring that money promptly flows through the contractual chain to those who performed the work is to implement cascading trusts in which, and to quote the Collins recommendation,⁹:

‘…the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts through related to the improvement owed to them by the contractor or subcontractor.’

A practical consideration is the time it takes for legislative reform. That work is done for us. The Ontario Government in Canada via the newly passed Construction Act¹⁰ in Part II ‘Trust Provision’ implements cascading trusts as per the Collins/Murray/Fiocco model.

A quicker short term solution, capable for immediate implementation, is for the Commonwealth, working through the Building Minister’s Forum (BMF – the joint Forum for the Commonwealth and State Building Industry Ministers), to declare that all building companies applying for funding under COVID-19 stimulus packages must demonstrate they have in place cascading trusts to guarantee that Commonwealth money flows from the main contractor to contractors to subcontractors who have performed the work.