Inconsistent SOP laws don’t adequately protect the rights of subcontractors, who are already hampered by the culture of imposing unfair contract terms. Sean Carroll looks at what’s being done.

Too often, subcontractors receive payment for their work late, or in worst-case scenarios, not at all. It’s unacceptable that a subbie should be paid later than everyone else. In the case of insolvencies, subcontractors can be the last to be paid, if paid at all.

The lack of consistent and fair payment protection laws is hurting the building and construction sector, an industry that employs approximately 1.3 million Australians.

Something has to change.

With the current financial stress on Australians, there’s an even greater importance on getting tradies paid. Business pressures extend beyond material impacts and can impact the wellbeing of business owners, employees and their families, leading to some tradespeople leaving the industry altogether.

Lloyd Construction is a small, family-owned and operated business specialising in commercial carpentry fit-outs.

“Since October 2023, we have been caught up in the collapse of three builders in Canberra and have subsequently lost $440,000,” Amie from Lloyd Construction says.

“Unfortunately, we are not alone and there are hundreds of subcontractors across just Canberra alone who are owed millions of dollars. A local joiner is owed more than $800,000. A local electrical company has lost over $350,000. Suppliers across the region are owed millions. From administrators’ initial findings, the return to subcontractors and unsecured suppliers will be zero dollars.”

This is because, as it currently stands, the builder’s debt becomes the subcontractor’s debt.

“As well as losing payment for works already complete, subcontractors also lose their pipeline of work resulting in a complete stop to their business. At the back end of one collapse, it has taken over ten weeks for some of the jobs to start moving again under a new builder,” Amie explains.

Both state and federal governments have ambitious housing and renewable targets and desperately need the workforce to help achieve these goals.

Iron-clad security of payment (SOP) laws are needed to regain business confidence in the sector, support small and medium-sized businesses, create new jobs and attract skilled workers.

Nobody in the industry is immune to these risks and more must be done to support the real people affected.

“It’s time someone in this government stood up – took responsibility – and did something about properly protecting subcontractors,” independent senator David Pocock says.

“The government is making bold announcements about delivering 1.2 million homes over the next five years. Well, who’s going to build them? Who’s going to build them if we aren’t actually looking after tradies in this country?”

In 2017, John Murray AM was commissioned by the Federal Government to undertake a review of existing SOP laws, delivering a report in 2018 titled Review of Security of Payment Laws: Building Trust and Harmony.

John, who conducted the review alongside the Australian Government’s Department of Jobs and Small Business, is the former national executive director of Master Builders Australia and a specialist in building contract disputation and security of payment legislation. He became a Member of the Order of Australia in 2014 for his service to the construction industry.

Without a national SOP law, the various states and territories have progressively enacted their own legislation. All of the jurisdictions, other than WA and NT, have based their legislation on the Building and Construction Industry Security of Payment Act 1999 (NSW) and such legislative regimes have come to be referred to as “the East Coast model”. The legislative regimes that operate in WA and the NT are based on a different model, referred to as “the West Coast model”. There are significant differences, not only between the two models but particularly within those jurisdictions that have adopted the East Coast model.

The report notes several issues that come with having two different models of SOP laws:

• With the exception of Queensland, none of the existing state and territory legislations provide any effective ‘security’ of payment where a party higher up the contractual chain becomes insolvent
• The legislative regimes are unduly complex and this has discouraged their usage and caused confusion
• There are questions around the process of appointing adjudicators; the adequacy of qualifications, training and grading of adjudicators; and the variable quality of adjudication decisions
• There is an imbalance of bargaining power within the contractual chain and the practice of passing on contractual risks has resulted in the imposition of unfair contract terms that operate to prevent payment to the party that has carried out construction work
• There are suggestions that acts of intimidation and retributive conduct by head contractors discourage subcontractors from pursuing their entitlements
• Late payment continues to be a major issue for the construction industry

“There is no uniformity of the various legislative regimes that currently operate across the various jurisdictions,” John says.

“In some jurisdictions (e.g. Victoria) there is a carve-out preventing subcontractors from being able to claim payments for variations, whilst in other jurisdictions the process for resolving disputed payment claims can take months to resolve rather than a few weeks (e.g. Queensland), thereby making a mockery of the legislation’s prime objective of promoting the cashflow of the party that has carried out construction work.”

After identifying the issues with the current SOP law situation, the Murray report outlined a range of recommendations that can resolve the issues currently affecting subcontractors across the country. These recommendations aim to improve the level of construction payment protections across the country while ensuring subcontractors obtain prompt payment for the work they have completed.

NECA director of government relations, Irma Beganovic, says that a piecemeal adoption of the Murray recommendations by some states and territories has led to greater inconsistencies between jurisdictional laws.

“NECA, together with our other subcontracting industry bodies, are actively advocating for three key areas of reform. More specifically, we are calling for the Federal Government to introduce a single framework and remove the confusion between jurisdictional laws,” she says.

The three key areas of reform are:

• The implementation of recommendations as outlined in the Murray report, including provision for cascading statutory trusts in favour of subcontractors and sub-subcontractors
• Greater protections against unfair contracting through stronger prohibitions for unfair contract terms, which are strongly linked to SOP issues
• Ensuring procurement practices, policies and procedures support fair contracting down the construction supply contractual chain

Irma says that everyone deserves to get paid for the work they do, including 85% of workers on construction sites who are employed through subcontracting arrangements, many of whom are electricians.

Amie from Lloyd Construction says that they’d like to see the Commonwealth enact legislation for SOP: “It makes no sense that the construction industry is working to eight substantially different pieces of legislation regarding SOP.

“With the national legislation, we’d like to see retention money withheld from subcontractors put into a trust account. We’d like to see a review of the Australian Securities and Investments Commission (ASIC). ASIC has never prosecuted an insolvent construction company director. We are seeing directors collapsing construction companies owing millions without consequence and we would like to see these directors investigated and charged. ASIC need to step up and enforce consequences.”

To address the challenges facing the sector, the federal government, through the Department of Employment and Workplace Relations, established the National Construction Industry Forum (NCIF). The NCIF is a tripartite forum and aims to bring together businesses, unions and governments to jointly discuss the challenges facing the industry.

The NCIF is chaired by Minister for Employment and Workplace Development, Tony Burke, and includes the CFMEU, Australian Workers’ Union, Australian Manufacturing Workers’ Union, Electrical Trades Union (ETU), NECA, Housing Industry Association, Property Council of Australia and Australian Owned Contractors among others.

The goal of the NCIF is to work constructively and cooperatively to tackle a range of issues facing the building and construction sector.

Irma says: “I’m honoured to have the opportunity to represent employers and the interests of the industry and bring to the government’s attention the key priorities facing electrical businesses, including SOP.”

ETU national secretary Michael Wright adds: “ETU members know that a strong SOP regime will keep workers employed and protect their entitlements.

“The ETU strongly supports the strengthening of the current legislation that governs SOP. No worker should face a situation where they are not paid for the important work they are doing because a contractor delays or withholds the payments they are required to pay. Our members’ wages shouldn’t be used as the developer’s piggy bank.”

As outlined in the February 2024 communique of the NCIF, two subcommittees of the forum have been established, the Gender Equity Subcommittee, and the Financial Viability Subcommittee. In the work of the Financial Viability Subcommittee, five priority areas have been identified to improve the financial viability of the sector.

These include SOP for everyone in the contractual chain, including consideration of nationally consistent laws, profitability and fairness, cash neutrality, securities and insurance and future workforces and skillsets.

The NCIF will address initiatives in line with the forum’s Forward Work Plan, which has been established to outline the priority areas of work for members of the NCIF.

John Murray says it’s high time for the government to address the SOP issue: “It has now been six years since my report was released that recommended that steps be taken to ensure uniformity of legislation and the introduction of cascading statutory trusts.

“It’s also almost three years since the ALP promised that, if elected, it would ‘immediately implement’ all my recommendations. Some two years after being elected, the Federal Government has yet to follow through on that promise. But for the lack of political will, many fine firms continue to suffer undue financial and mental hardship.”

Amie concludes that it’s frustrating to see that the government identified these issues back in a 2003 Royal Commission but no changes have been made yet.

“The number of subcontractor businesses, families and tradespeople that have been affected by the lack of payment in the construction industry since 2003 would be millions,” she says.

“The government has all the information in front of them, they need to put their information into action. We are calling on the federal government to enact security of payment legislation as soon as possible. Subcontractors just want to be paid.”