‘Struggling to pay debts’: Construction woes highlight need for sub-contractor protections

Small business ombudsman Kate Carnell is calling on the federal government to urgently improve protections for sub-contractors as new figures reveal a worrying spike in bad debt activity within the construction industry.

National Credit Insurance (NCI) has warned the risk of bad debts has hit its highest level in three years on the back of a 50% spike in credit insurance claims over the last three months.

The broker tracked 5,557 overdue debts owed to Australian businesses across the country in April, May and June on the back of a first-quarter high of 5,718 debts.

The building and construction industry remains the worst offender amid ongoing concern sub-contractors continue to be ripped off by suppliers and other contractors.

Almost a third of the $34.1 million in insurance claims filed in the second quarter were related to the electrical, building and hardware industries, with Queensland emerging as the most affected state, accounting for 29% of claims.

The findings add context to separate data sets tracking an increase in insolvencies within the construction sector, with ASIC figures for March identifying an increase to 153, amid ongoing weakness in the housing market.

“An increasing number of Australian businesses are struggling to pay their debts on time or at all, which in turn places increasing cashflow pressure on the businesses they owe,” NCI managing director Kirk Cheesman said in a statement circulated Friday.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, has recently been working with small business commissioners across the country to tackle the issue, last year dubbing ripping off subbies as “systemic” within the sector.

Carnell wants the federal government to implement new protections for subcontractors which would introduce a guarded piggy bank to protect sub-contractors going unpaid on Commonwealth projects.

“They should mandate cascading statutory trusts in Commonwealth government-funded projects as part of the contracts,” Carnell tells SmartCompany.

“They could do that immediately.”

Cascading statutory trusts ensure money payable to sub-contractors is reserved rather than distributed to other secured creditors in the event of an insolvency.

Ahead of the federal election earlier this year, the opposition pledged to introduce the trusts to Commonwealth projects, following recommendations made by the government-initiated Murray review last year.

Sub-contractors account for more than 80% of all work in the Australian construction sector, while businesses with fewer than five workers make up 64% of all firms in the area, according to ASBFEO figures.

Federal government action is just one piece of the puzzle though. While Canberra can set standards for use on its own projects, payment security laws are state-based.

Carnell says the government has expressed interest in cracking down on sub-contractor rip-offs on federal projects, and is also considering whether to raise the issue at an upcoming Council of Australian Governments (COAG) forum.

The Western Australian state government has already taken a leadership role in dealing with the problem, announcing a suite of reforms earlier this year after completing its own review into payment security laws.

Under the proposed reforms, which are slated to be legislated later this year, the small business commissioner in the state would be given new powers to oversee and investigate complaints about poor behaviour experienced by subbies.

The commissioner will be given greater authority to compel parties to provide information, offer resolution services, protect complainants from retribution and report results of investigations to government.

The small business ombudsman is supportive of the Western Australian reforms and is pushing other states to consider reforming their own laws.

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