Collins inquiry into construction insolvency Part 1 - red tape or solving an economic challenge - Construction & Planning

Part 1 of a two-part analysis of the recommendations of the NSW Construction Industry Insolvency Inquiry.

Construction industry participants have until 21 February 2013 to comment on the Collins Inquiry recommendations on insolvency in the construction industry. The NSW Government initiated the Inquiry following a year marred by high levels of insolvency in the NSW construction industry. The Final Report was released on 28 January 2013.

The Report clearly favours more regulation as the solution to safeguarding sub-contractors interests in construction. But is more regulation the answer?

THE KEY RECOMMENDATIONS

Central to the Report's reform agenda is preventing insolvency by raising barriers to industry entry. The report's 44 recommendations broadly comprise:

establishing a new "one stop shop" regulatory body, the NSW Building and Construction Commission (recommendations 1 to 5);
requiring contractors to set up construction payment trusts for all projects over $1m, with the burden on the head contractor and the benefits falling to subcontractors (recommendations 6 to 20);
mandatory payment statutory declarations with upgraded requirements accompanied by anti-avoidance provisions and prosecution powers (recommendations 21 to 23);
establishing maximum statutory payment terms (15 day payments to head contractors and 28 day payments to subcontractors) backed by penalty interest and creation of statutory offences (recommendations 24 to 36);
strengthening the security of payment legislation including abolishing the need to invoke the Act by endorsement on payment claims – all claims would be deemed to invoke the Act (recommendations 38-40 and 42); and
requiring Government to use Project Bank Accounts on every Government project, carry out financial checks on a rolling basis and establish a dispute prevention and resolution process for every Government contract with a project value of $10M or more (recommendations 37 and 41).

A NEW REGULATOR FOR NSW CONSTRUCTION?

The NSW Building and Construction Commission, if established, would administer a system of licensing commercial builders that is coupled to a compulsory financial backing requirement. The Inquiry broadly favours Queensland's current licensing model. That model features:

Self funding of a "one stop shop" agency (Queensland Building Services Authority), through licence fees, search fees and fines.
Mandatory licensing for building contractors and subcontractors.
Mandatory compliance with net tangible assets to allowable annual turnover ratios.
Financial audits of licensed contractors and subcontractors.
Licence audits with QBSA inspectors visiting building sites and interviewing all persons performing building work to ensure they are appropriately licensed.
Licence bans for serious defective work on individuals and companies.
Disqualification from holding a contractor's licence or supervisor's licence for accumulation of sufficient demerit points, with demerit points recorded on a register that is publically available on-line, including for failing to satisfy judgment debts.
Preventing "phoenixing" through the exclusion of individuals from holding a contractor's or supervisor's licence if the individual takes advantage of bankruptcy laws or becomes bankrupt, and 5 years have not elapsed since the relevant bankruptcy event happened.
The power to exclude companies from holding a contractor's licence if a director or secretary of, or an influential person for, the company is excluded.

Between 2003 and 2012, 402 individuals were permanently excluded under the QBSA Act from holding a contractor's or nominee supervisor's licence. Despite this action, Queensland's building sector has continued to experience insolvencies, particularly in residential construction. Clearly, the Queensland System has not been a complete insolvency prophylactic.

More recently, the Queensland parliament's Transport, Housing and Local Government Committee has cast doubt on the future of Queensland's system.

The committee reported that QBSA's "one stop shop" structure is flawed because of a perceived conflict of interest in having so many diverse responsibilities. It recommended the "one stop shop" model be discontinued, the QBSA disbanded and the services be restructured so there is a clear and transparent divide between the roles of licensing; management of directions to rectify and complete work; and management of the limited home warranty scheme ¹.

If NSW follows the Queensland model there is a risk of a double impost to the construction industry; first, covering the cost of a "self funding" government agency and; second, covering the direct cost of regulatory compliance.

While attempts to stamp out insolvency in the construction industry are desirable, all stakeholders must consider whether they are prepared to accept a higher cost of building and construction work as the price for the commonly held desire to reduce insolvencies in the sector.

Footnotes

¹ Inquiry into the Operation and Performance of the Queensland Building Services Authority 2012, Recommendation 1 and 2 here. here.

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