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The introduction of legislative changes that require the directors of construction giants to set up trust accounts (or Project Bank Accounts) to pay smaller subcontractors has the potential to significantly reduce construction industry insolvencies.
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Trust accounts will help stop smaller players being strangled
22 December 2015
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9 minute read
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Transcripts from last week’s Senate inquiry findings highlighted the committee recommends a two year trial of Project Bank Accounts, where funding contributions exceed $10 million for Commonwealth projects. The proposed start date is 1 July 2016.
For too long small players have been at the mercy of their larger counterparts. I have witnessed the damage that larger businesses can do by not paying small subcontractors in a timely manner. The market power is at the top with head contractors and it is pleasing to see the Senate committee has recognised this. If the trust account recommendation alone was implemented, I believe this could reduce insolvencies by hundreds of millions of dollars annually.
Some areas of the construction industry lack business nous, acumen and innovation. A licenced regime needs to be introduced to clean up the industry and protect the smaller players. The introduction of trust accounts would be an excellent step in right direction that helps protect the more vulnerable.
The Senate committee also recommended that following the successful completion of the Project Bank Account trial period, the Commonwealth legislate and extend best practice payment systems to protect subcontractors from harsh, unconscionable and unlawful conduct in the construction industry.
Forty-four issues about how to tackle the huge cost of construction industry insolvencies have been identified by the inquiry. The recommendations need to be coordinated or overseen by a government agency to be effective.
Further investigations should also be undertaken around the practices of tax tendering; under-quoting for a tender with the intention of realising profit by under-paying taxes and phoenix arrangements where a business is moved into a new entity with the intention of not paying the creditors of the old insolvent entity.
The Senate Report highlighted the construction industry continues to be the largest single contributor to insolvency statistics in Australia comprising 24 percent of external administrator reports submitted to ASIC since 2009. The latest ASIC Insolvency Statistics to June 2015 show this trend is not changing. Annual financial losses attributable to the construction industry are estimated to be around $2 billion.
The time is now right for the government to take action and clean up the activities of rogue operators in the industry. Every year the industry employs thousands of people and generates billions for the economy. To reduce insolvencies and further increase the productivity of the industry tight guidelines needs to be put in place to ensure businesses of all sizes have the opportunity to thrive.
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