26 June 2013 Inquiry into construction industry insolvency - final report and recommendations

By Michelle Harpur, Partner and Tom Johnston, Senior Associate

In Brief

The Final Report released by the Independent Inquiry into Construction Industry Insolvency chaired by Bruce Collins QC (Inquiry) was released in January 2013.  On 18 April 2013, Greg Pearce, the Minister for Finance and Services, released the New South Wales Government's response to the recommendations.
The Inquiry, initiated by Mr Pearce, came about as a result of the recent collapse of a number of building companies, which left countless subcontractors out of pocket and with little recourse for compensation.
Whilst the Government has not yet committed to following the recommendations, it has indicated in principle support to some of the recommendations and sought further clarification on others. 

The key recommendations are as follows:

NSW Building and Construction Commission

The Inquiry recommended that the Government establish a separate autonomous statutory authority known as the "NSW Building and Construction Commission" which would have the sole responsibility for control and regulation of all aspects of the building and construction industry.  The Government is considering this recommendation and intends to conduct a cost benefit analysis of consolidating the current government functions in order to create the proposed single body.

Licensing framework for builders

The Inquiry recommended that the first role of any new commission should be to establish a licensing system which requires all builders and construction contractors to qualify within a particular licence category according to the net financial backing they are able to demonstrate.  The desired result would be that builders would be restricted to the category of project value for which they have demonstrated financial backing and licensed accreditation.  The Government has stated that this recommendation should be subject to the public release of a regulatory impact statement. 

Prompt payment

The Inquiry recommended that the time for payments by principals to head contractors and head contractors to subcontractors should be shortened to 15 and 28 days respectively.  The Government has offered in principle support and intends to amend the Security of Payment Act (SOPA) provisions to enable head contractors to be paid within 15 days and subcontractors to be paid within 30 days of receipt of progress payment claims.  The Government has also supported the inclusion of a statutory provision which enables a subcontractor to suspend work until it is paid.

Construction trusts

The Inquiry recommended that the Government establish statutory construction trusts for all projects valued at $1 million or more for the purpose of paying subcontractors and suppliers promptly and regularly.  The Government has not supported this recommendation in full – but agreed to trial the use of trust accounts on selected Government construction projects in order to consider wider application.
The Inquiry also recommended that retention sums as between principals and head contractors and head contractors and subcontractors should be held in a construction trust account and that retention sums should be paid out in accordance with any relevant certificate, agreement between the parties, SOPA arbitration, Court decision or expert determination.  The Government offered in principle support, noting that the retention sums should be held in trust and administered by the Office of Small Business Commissioner under a proposed Retention Trust Model, which is to be developed by the Government.

Improvements to the SOPA

The Inquiry made a number of recommendations in terms of expanding the jurisdiction of adjudicators and general powers under the SOPA, namely:  

  • Enabling adjudicators to decide on an interim basis disputes concerning bank guarantees and whether or not a party was entitled to cash a bank guarantee;
  • Enabling adjudicators to resolve disputes in the home building sector in respect of projects valued at $1,000,000 or more;
  • Giving adjudicators the power to issue a final certificate after hearing both sides of a dispute involving sums less than $40,000;
  • Abolishing the requirement that contractors' and subcontractors' progress payment claims include a statement that the claim is made under the Act;
  • Removing the right of claimant to choose its own adjudicator;
  • Ensuring contractors are obliged to swear statutory declarations that subcontractors have been paid (and also extending the power to prosecute under the Oaths Act 1900 (NSW) to the NSW Department of Finance and Services which administers the SOPA); and
  • Instituting a more thorough training course to be completed by persons before they can qualify to act as an adjudicator and exercise functions under the SOPA.

The Government has offered in principle support for these recommendations.
> Read the Final Report on the Inquiry
> Read a summary of the Government's response to all recommendations
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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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