Overhaul of Victoria’s Security of Payment Regime

AS PART OF NECA’S ROLE AS A PEAK INDUSTRY BODY, NECA VICTORIA AIMS TO HELP OUR MEMBERS AND THE WIDER INDUSTRY, NOT ONLY TO OPERATE AND MANAGE THEIR BUSINESSES MORE EFFECTIVELY AND EFFICIENTLY, BUT TO ALSO REPRESENT THEIR INTERESTS TO GOVERNMENT AND REGULATORS.

NECA Victoria was recently approached by the Victorian Department of Environment Land Water and Planning (DELWP) to provide feedback on the Building and Construction Industry Security of Payment Act (the SOP Act) from the outset. A personal thank you to those members who took the time to provide feedback, as the crucial information on the day-to-day practical impacts on contracting businesses, has allowed NECA Victoria to properly represent members’ interests.

The issues

Outlined below are the most common issues members face when it comes to payments for services performed:

1. Not getting paid

As a finishing trade, electrical contractors are involved in the latter stages of the building and construction cycle. In the event a head/principal contractor falls into receivership, electrical contractors, as subcontractors, can be heavily disadvantaged compared to other trades, which are paid much earlier in the build.

2. Late payments

The most common issue is noncompliance with payment terms on invoices. For example, if payment terms are 60 days, the client can unilaterally stretch out payment to 90 days or longer, causing serious cash flow issues for the subcontractor, who typically works on terms of trade with suppliers, for 60 days or less.

Members have also reluctantly accepted repayments in small monthly amounts, which can be an administrative nightmare to control. Long delays are also encountered in processing variations, payments and return of cash retentions. In these instances, businesses, mainly SMEs, continue to experience cash flow issues due to the backlog, which creates a vicious cycle.

To counter these payment issues, members have made use of debt collectors, the Magistrates Court or the Victorian Civil and Administrative Tribunal (VCAT), but the consensus is that debts are not pursued if they are less than $1,000 and the process is time-consuming. Even where an order is obtained, it is of little assistance if the client is insolvent.

……So that leaves us with the SOP Act.

Problems with the SOP Act

The Act has been touted as a fast-track, cost effective process that aims to ensure that any person who carries out construction (or who supplies related goods and services under a construction contract), is entitled to receive and can recover progress payments for those works, goods and services.

However, this is not what is experienced by members on the ground. In fact, the current process is time-consuming, complex, and expensive to access.

Some of the key problems with subcontractors utilising the SOP Act include:

a) If the subcontractor uses their statutory right under the Act to suspend work until paid, they are usually threatened with claims for liquidated damages. b) Usually, the appropriate person to deal with the payment from the client end is not contactable/accountable.

c) The Act does not embrace variations, especially where the principal contractor/builder issues a variation order for works without a price.

The electrical subcontractor is instructed to carry out the works immediately or is threatened with liquidated damages. When the variation is eventually submitted, it is disputed and frequently only offered as a percentage of the cost. d) Most subcontractors are reluctant to proceed with the SOP process, as they do not want to damage the relationship with the client (principal contractor/government) out of fear of potentially losing future work.

What needs to change?

Based on the above issues, NECA Victoria has made the following recommendations to the Victorian Government.

Retention Trusts is a system where retention money is held in trust for the subcontractor in a trust account, established with an authorised deposittaking institution. These types of schemes should be administered by the Government, to reduce or avoid administrative burdens on business, and to create a level playing field via a consistent and transparent approach. Payment Withholding Request (PWR) legislation, similar to that existing in NSW. A PWR is served by a subcontractor who has made an adjudication application for a payment claim. It includes a written statement by the subcontractor/claimant in the form of a statutory declaration, that it genuinely believes that the amount of money claimed is owed to the subcontractor by the head contractor.

Upon receiving a PWR, the principal must withhold from any amount payable to the contractor, an amount equivalent to that claimed by the subcontractor. If the principal fails to comply with this request, it will become jointly and severally liable with the head contractor for the amount owed to the subcontractor.

Project Bank Accounts (PBAs) have the potential to compliment security of payment laws. It is a bank account opened and maintained by the head contractor in government sector construction contracts, into which the principal deposits contract payments. Simultaneous payments are then made from the PBA to the head contractor and subcontractors (including suppliers and consultants). The PBA has trust status established through a Trust Deed.

The purpose of the PBA arrangement is to ensure, as far as possible, that money paid to the head contractor for work undertaken by subcontractors is passed on promptly. The trust status of the PBA prevents money paid to the head contractor from being used for other purposes or, in the case of a head contractor’s insolvency, being available to an administrator or liquidator.

 Legislation should be enacted to mandate payment of SME contractors within seven days, according to agreed payment terms and enforce heavy penalties for non-compliance/ late payment with an interest impost.

 Granting the Australian Building and Construction Commission (ABCC) the power to sanction and/ or exclude from Federal Government contracts head contractors, who have repeatedly failed to make payments or return retention money within the specified time to subcontractors, as is the case under the WA Building and Construction

Industry Code of Conduct 2016.

Harmonisation of creditor line process laws across Australia, to assist subcontractors operating nationally.

The full submission can be located on the NECA Victoria website at www.neca.asn.au/vic/advocacy-vic. We will continue to provide members with updates, as this important issue progresses with government.

Joy Meilak

General Manager Business and Commercial Services, NECA Victoria joy.meilak@neca.asn.au

GRAB YOUR FREE COPY Free HUmAN CApItAL mANAGemeNt (HCm) mINI mANUAL

Due to popular demand, NECA is excited to announce a Mini HCM Manual – FREE for all NECA Victoria Members.

The policies featured in this HCM Manual have been designed specifically for the Electrotechnology industry and will assist businesses achieve their human resources and workplace compliance requirements It features 3 complimentary polices such as Employment Conditions Policy, Leave and Absences Policy, Performance and Conduct Policy as well as additional resources. Request your free copy via email at workplace.relations@neca.asn.au.