The report of the Senate Economics References Committee inquiry into insolvency in the construction industry was tabled in the Senate today.
The inquiry found a culture has developed throughout the industry where it is considered normal business practice for head contractors to refuse to pay subcontractors for work undertaken in accordance with their contracts.
In the view of the committee, there is one guiding principle that should be observed in relation contract payment practices in the construction industry: it is a fundamental right of anyone who performs work in accordance with their contract to be paid for the work they have done.
To believe otherwise is to condone practices in the industry that are distorting the construction market, killing businesses, killing innovation and killing job creation in one of Australia’s most important industries.
While accounting for around ten percent of GDP and employment, the construction industry accounts for between one fifth and one quarter of all insolvencies in Australia.
The economic cost of construction industry insolvencies is staggering. The report found that the construction industry is plagued by insolvent debt amounting to around $3 billion every year.
The report found that the conduct of head contractors is contributing to the destruction of small businesses, increasing costs and entrenching low productivity growth in the industry.
Small businesses in the construction industry face a higher risk than any other industry of either becoming insolvent or becoming a victim of insolvency elsewhere in the contracting chain.
Aside from the catastrophic business effects of insolvency, witnesses provided evidence to the inquiry which included a catalogue of the social effects of insolvency: family breakdown, mental illness, homelessness and suicide.
Insolvencies in the construction industry have left an average of $630 million a year in unpaid tax debts for the past three years.
The report found that progress by regulators in curbing illegal phoenix activity has been too slow and legal loopholes that allow dishonest operators to defraud their creditors must be closed.
The report recommends that the legal requirement for the corporate regulator to prove an intention to defraud creditors in a phoenix operation be removed from the Corporations Act.
The inquiry heard evidence that a culture is developing in the industry in which some company directors consider compliance with the law merely optional, because the likelihood of unlawful conduct being detected and the consequences of non-compliance are so low.
Among its 44 recommendations, the report calls for urgent reform of payment practices in the industry to protect small and medium-sized businesses from unconscionable conduct and abuses of market power on the part of head contractors.
The industry’s subcontracting chain is beset by cash flow problems, unfair contract terms, take-it-or-leave-it contracts, zero and negative margin tendering and concentration of market power in the hands of the dominant head contractors.
Subcontractors who provided evidence to the inquiry likened the culture of the industry to that of a battlefield on which subcontractors are mowed down and fresh bodies are poured in to fill the gaps.
The result is a cut-throat industry characterised by entrenched problems with non-payment and a deeply troubling rate of business insolvency, much of which could be avoided by the enactment of uniform, national security of payment laws and protection of subcontractor payments in Project Bank Accounts.
Construction is a national industry and it is absurd that are eight separate and widely different security of payment regimes operating in each of the States and Territories.
The continued prosperity and viability of the construction industry requires Commonwealth legislative reform to ensure that businesses, suppliers and employees who work in the industry’s subcontracting chain get paid for the work they do.
THURSDAY, 3 DECEMBER 2015