The brutal end of dog eats dog

The West Australian on July 19, 2016

Like doomed footsoldiers on the blood-soaked battlefield of the Somme in 1916, subcontractors in the construction industry are so numerous, they are considered expendable.

That’s the startling analogy cited by a Senate committee report into insolvencies in the industry, underlining just how brutal it can be for those at the bottom of the contracting chain. The report, tabled on Parliament’s final sitting day last year, refers to a “cutthroat culture” and evidence that a surfeit of subcontractors mean they just “get mowed down and fresh bodies are poured in”.

It says there’s little pressure on big builders to “play nice” or even pay subcontractors for their work.

Darren Barnes must feel like one of the fallen. The Maddington cabinet-maker has been going through the stages of grief since learning he will not be paid for some $300,000 of work done at schools, hospitals and community centres.

He’s felt denial, then anger — much of it directed at the State Government. Acceptance is still a long way off. “The Government says it wants to make sure subcontractors are paid but they’re doing nothing about this,” he fumes.

His frustration is understandable. Working on State Government-backed projects hardly seems high risk. It wasn’t until the head contractor on those projects, the CPD Group, called in the administrators in May that Mr Barnes discovered his invoices may not be worth the paper they were printed on.

He’s not alone. Others have lost even more in recent collapses or payment disputes. Some are loathe to speak out, fearing they will cruel their chance of future work.

But writing about this topic elicits phone calls from desperate tradies, who have been reduced to relying on the charity of relatives after losing their life savings.

In WA, complaints of non-payment dog major construction projects, both public and private.

The shocking discovery of asbestos last week in panels installed at the Perth Children’s Hospital is not the project’s only bugbear. Head contractor John Holland has also been plagued by payment disputes, including with Yuanda — the company that supplied those panels — and with smaller subcontractors.

Multiple companies working on the Perth airport expansion have gone bust, claiming to be owed money.

Bankruptcies have long been a feature of the construction industry, which accounts for up to a quarter of all insolvencies nationwide, outstripping its 8 to 10 per cent share of GDP and employment. As the economy slows, the scale of the problem is growing.

Head contractors, facing stiff competition as mining construction cools, are bidding low to secure projects. That may seem like a win for cash-strapped clients such as the State Government, but it can have serious consequences down the contracting chain.

As head contractors drive a hard bargain, there are increasingly disputes over who pays for variations in a project and over release of retention funds that are supposed to be passed on to subcontractors when their work is completed and defects fixed. Retention funds are worth 5 to 10 per cent of a contract’s value, so pocketing them can give a head contractor a reasonable return but deprive a subcontractor of any profit margin.

Some larger subcontractors wield considerable clout but many are small enterprises with neither the time nor the resources to chase payments.

As for contracting companies, they may be responsible for major building projects but their own structure can be as precarious as a house of cards.

An insolvency expert, who has picked over numerous corporate carcasses, describes an “in-house ponzi scheme”, with companies relying on the first payment on a new contract to pay off losses on the previous one. But this may not show up when a contractor bids for a new project, as there’s rarely any analysis of their real cash flow. Small wonder insolvencies are common.

Subcontractors who have been stung before by corporate collapses argue it’s high time for extra protections to ensure they are paid for their work.

The Senate committee agreed. It called for uniform national laws and for the introduction of project bank accounts, though coalition senators expressed reservations. Project bank accounts put the payment of subcontractors at arm’s length from the head contractor. Rather than paying the head contractor directly, the client deposits payments into a trust account, to be disbursed to subbies for their work.

Subcontractors argue this protects their payments if a head contractor goes bust. Crucially, they say it would also put the whole industry on a surer footing by exposing businesses that are trading while insolvent.

After pioneering trials of project bank accounts over the past three years, the Barnett Government seems to have gone cold on them.

Unsurprisingly, head contractors are not keen on project bank accounts, arguing they duplicate existing processes.

Treasurer Mike Nahan says project bank accounts won’t feature in a package of reforms the Government will soon unveil in response to concerns about the treatment of subcontractors. Instead, he endorsed a measure favoured by big building companies to direct only retention funds to a trust account, rather than all payments associated with a project.

But the State Labor opposition is also poised to unveil a reform package, which is expected to include project bank accounts, and the issue may gain momentum at a Federal level.

Newly empowered crossbencher Nick Xenophon sat on the Senate committee and adopted its recommendations as his party’s policy. Some coalition backbenchers are also aware that subcontractors are small business people who expect the Liberals to stand up for them.

If the Turnbull Government wants to crack down on union malfeasance in the construction industry by reviving the Australian Building and Construction Commission, it will come under pressure to also tackle the corporate cowboys.

Until then, for subcontractors, it’s once more unto the breach.