In the building industry there are some things governments never want to fix.
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Builders, many of whom are undercapitalised, are allowed to operate under a business model that is guaranteed to leave a devastating trail of financial and emotional distress.
When a builder collapses, homeowners who invested much of their savings in pursuit of their dream homes become financially crippled and mentally scarred.
Subcontractors, many of whom are small businesses and who usually carry out as much as 85 per cent of construction work, discover, to their chagrin, that the builder has no funds to pay for the work the subcontractor has done and the building materials they supplied.
Governments, who ought to know better because they have seen similar collapses in the past, mutter concerns for the victims but, in the end, do nothing.
This ensures that the same trail of broken dreams and financial hardship will continue to be borne by innocent victims.
Why is this endless cycle allowed to happen?
Insolvency is a blight on the building industry. Many reviews have sought solutions to better protect the vulnerable.
But, here's the thing, every review held in the past 25 years has not only identified the source of the problem but has recommended the same solution.
Why is this endless cycle allowed to happen?
In 2017, I was engaged by the commonwealth to review the security of payment laws.
What struck me most during the review was how vested interests persuaded governments to retain the current payment practices, thus condemning those who actually carry out building work, i.e. the subcontractors, to whistle in the wind.
A builder who enters into a contract with an owner does very little building work. Most of the work is undertaken by specialised trade contractors, referred to in the industry as subcontractors.
But because there is no direct contract between the owner and the subcontractors, the owner will make direct payments to the builder.
Subcontractors are therefore exposed whenever a builder delays making payment or misuses funds by treating the payment it receives from the owner as its own money, or becomes insolvent before paying its subcontractors.
Allowing builders to treat the progress payments they receive from owners as funds available to meet creditors on other projects goes to the root of the problem because it, in effect, allows builders to use Peter's money to pay Paul.
Further, under current insolvency laws, all of the payment the builder receives from an owner becomes the asset of the builder's estate for distribution to all the builder's creditors, including those creditors not involved in the project for which the payment was made.
Most right-thinking people would consider this to be fundamentally unfair, because it's not the builder's money.
To address these fundamental ethical issues, I recommended that legislation be implemented to impute all payments that a builder receives for work undertaken by subcontractors as trust money. Such imputation, called a deemed statutory trust, would ensure that when a builder receives payment from an owner, then the builder who owes money to those subcontractors who carried out construction work or who supplied materials on that project, holds that money in trust for the benefit of the subcontractors.
The builder would therefore be personally liable for the application of the trust funds, and this would include directors of a corporation where the corporation is the trustee.
Builders should not be able to draw on any of the trust funds until all the amounts have first been allocated and paid to its subcontractors. Failure to pay subcontractors would expose builders to liability for breach of trust.
Opponents to my recommendations have said that the introduction of a statutory trust would impose an unacceptable administrative burden on builders. But previous inquiries, such as the Cole Royal Commission and the Collins Report (commissioned by the NSW Government), have dismissed these arguments as grossly overstated. I reached the same conclusion.
The fact that statutory trusts have been operating for many years in most parts of the construction industry in North America should give governments ample comfort that reform in this area would not saddle the industry with any undue administrative burden.
But governments continue to kick the can down the road.
How many more builder collapses, such as Privium, will it take before governments have the backbone to implement measures to protect the most vulnerable, rather than continue to prop up the unethical payment culture that underpins the building industry?
Ministers must legislate to stop another Privium.
John Murray AM, is an independent construction professional, the former CEO of Master Builders Australia and the author of the Murray Review of Security of Payment Laws in Australia prepared for the federal government in 2018
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