Page 16 - MPA

Plumbers have had enough
Master Plumbers Association of South Australia (MPA SA) is now calling on Governments (both State and Federal) to act, following an increase in poor payment behaviours within the construction industry. Plumbing subcontractors have had enough and are now demanding action.
How much longer does this industry need to deal with poor payment terms and conditions, cash flow mismanagement by builders / developers and unfair contracts that are designed to shift the risk to subcontractors.
In today’s business world there should be more transparency and fairness especially if work has been completed to the necessary standards.
There are so many components within the construction industry that are rife with controversy and it is becoming a farce.
Let’s look at some of the issues surrounding the industry.
Issue 1 - Subcontract Special Conditions – Reallocating Risk between Main Contractors and Subcontractors
Insolvency (or liquidation) in the Australian construction industry has become all too common. The scale of the issue has become so serious that the New South Wales Parliament and the Commonwealth Senate recently commissioned enquiries into construction insolvency. Part of the cause of the high level of insolvencies is the “unfair” placement (or allocation) of risk in subcontracts onto subcontractors under the main contractor’s subcontract terms and conditions.
In a recent paper “Construction Insolvency in Australia: Reining in the Beast” the authors note:
“Insolvency represents one of the biggest contemporary issues facing the Australian construction industry. No other single industry sector in Australia is blighted by the scourge of insolvency anywhere near to the same extent as the construction industry. Data submitted by the Australian Securities & Investment Commission (ASIC) to the Senate Economic References Committee (SERC) (2015) shows that over the period 2009 / 10 to 2013/14, the construction industry (which reported 8% to 10% of national gross domestic product) accounted for 23% of all external administrations in Australia. The same data reported 2,153 corporate insolvency events in the construction industry in the 2013 /14 financial year......a large proportion of construction insolvencies are experienced by small contractors and subcontractors; entities with assets with less than $10,000 (BIS Shrapnel, 2012). This is perhaps unsurprising as the vast majority of construction firms are small specialist trade contractors. These alarming insolvency statistics, coupled with several recent high profile insolvencies of large building contracting firms leaving hundreds of subcontractors and suppliers unpaid, have in recent times promoted the New South Wales Parliament (Collins, 2012) and the Senate (SERC 2015) to conduct urgent enquiries into the construction insolvency problem”.
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In South Australia there has been the insolvency of (for example) Tagara Builders, Promptair and First Degree Airconditioning. These insolvencies have left subcontractors and suppliers owed millions of dollars.
The authors of the above mentioned paper note eight potential reasons for the construction insolvency problem. In the context of this paper, three of the eight reasons given are particularly relevant.
(1) The “pyramidal” contracting chains on construction projects;
The vulnerability of subcontractors lower down the contracting chain to the actions of those above them requires regulation to ensure that main contractors carry out business in an ethical, responsible and commercially sound manner, and so reduce and avoid insolvency events lower down the contract chain. Reducing insolvency also requires fairer risk allocation under subcontracts by changing the mindset of principals and main contractors, and also by amending the main contractors proposed subcontract to create fairer subcontract conditions and so reduce the risk of a financial catastrophe for the subcontractor.
Subcontracting is now very common in the construction industry, with subcontractors providing most of the building work on construction sites, as this is the most cost efficient method of contractors to engage specialised labour. Main contractors generally don’t employ building staff, and instead have become more project managers than builders.
The subcontract chain (or “hierarchy”) means that subcontractors lower in the hierarchy are financially vulnerable to an insolvency or poor payment practice of a contractor higher up in the contracting chain.
(2) The unsecured creditor status of building contractors and suppliers for work done and / or goods supplied in the liquidation of a main contractor.
A subcontractor’s status as an “unsecured creditor” in a liquidation usually means that they receive very little or nothing from the liquidation, as there are not sufficient monies available to a liquidator to repay all the debts owed to unsecured creditors. Not only do unsecured creditors usually get paid far less than the amount actually owed, they also have to wait for a significant period of time before the money is paid.
Note; Interestingly, Banks that lend money to a main contractor for whatever reason are classified as secured creditors which basically means that they (the Bank) are on the top of the list when it comes to receiving payment from the liquidator. Basically, a Bank is often the first one to see warning signs of financial instability yet they don’t have any worries when it comes to claiming their funds back if the main contractor goes into liquidation.