As the launch of Project Bank Accounts to the wider construction market draws near, the Queensland construction industry is being forced to address the complexities and gear up for the new environment. Mitchell Brandtman poses the questions ‘What cost impacts will this have?’ and ‘What effect will it have on the stability of the industry?
For those who may not be aware, the Queensland government states that these legal changes have been introduced to “safeguard progress payments, protect retention monies and allow for more timely payments to subcontractors”.
The intent therefore is to make sure subbies get paid and in a timely fashion, indeed one legal opinion suggests that this Act will “make Queensland legislation the most weighted in favour of claimants in Australia”.
Any time the Government intervenes in an industry, it is normally to fix a problem and oftentimes it’s a problem that the industry in question cannot fix within itself.
And so it appears within our industry today, that the amount of insolvencies and non-payments to subcontractors and the associated hardship created, has reached a level that cannot be ignored. Whether or not this legal measure will provide the solution required remains to be seen. There are mechanisms in place for review and adjustments to make sure it’s having the desired effects, but government is a broadsword not a scalpel, and it is historically slow and difficult for government to change tact mid-journey.
Our questions today are what cost impacts will this have, what effect will it have on the stability of the industry and is it likely to have the intended effect.
What cost impacts will this have?
This legislation will most likely raise costs in parts of the industry in which it’s being implemented. Not to a large degree as material, site labour and plant costs won’t be effected by this move. Financing and compliance costs are the effected inputs and head contractors will need to make sure that sufficient staff resources are available (and suitably qualified) to handle the additional compliance. The financial penalties for failure are quite steep as well as the reputational damage that could be done, so leading builders who operate in this space will want to ensure they get it right. Since this is being applied to large projects, most will require professional financing and it is certain that our financial institutions will ensure that all systems are in place to comply with legislation the same way they currently do with other due diligence issues such as insurance. The additional use of multiple accounts will further involve financial institutions in the entire project cycle and those services will need to be paid for somehow.
Any possibility that subcontractors will reduce costs as they are now more certain to receive timely payments is not likely to materialise in our opinion. All other factors that go into tender pricing remain the same, other areas of uncertainty that subbies take into consideration when pricing haven’t disappeared and, above all, subcontractors are business people. They are out to make as much money as possible from the work they do and tend to reduce tender pricing when they feel there is stiff competition or a lack of work generally. It is market forces that have the strongest effect on construction costs such as competition, innovation, an available workforce and extended economic considerations such as the general cost of living.
What effect will this have on the stability of the industry?
Currently this is aimed at larger building projects, so there are sections of the industry not effected. When introduced into the private sector in March 2019, any private sector project over $1M in value will require PBA’s, although civil, engineering and infrastructure projects are excluded. So many in the industry won’t need to concern themselves with the changes and whatever payment problems exist in those sectors will presumably continue.Most legislation has unintended consequences and it is most likely that this legislation will follow that pattern. In our opinion this will have a ‘shake-out’ effect where head contractors that do not have sufficient liquidity (or certainty of access to funding) will be caught out or be unable to effectively tender for certain contracts. Larger and more highly resourced companies will be able to use this to their advantage and effectively use the legislation to out-manoeuvre their competition. The realisation on the ground could be a period of less competition and industry consolidation with negative consequences for the companies and families on the losing end. Once everything’s bedded down, competition will continue with new and old participants slugging it out in the new reality as they always have.
While strong underlying economics continue to operate, there will continue to be strong demand for construction. Where that demand continues there will be companies willing and able to meet it and adjusting payment requirements won’t change that fundamental.
Will it have the intended effect?
There are already legal requirements in place which have varying degrees of effectiveness, some of which are ignored, flaunted or only complied with in an ad-hoc manner. Any legal requirement is only as effective to the level it is policed. Good industry players that treat their subcontractors decently and ethically have done so for many decades and enjoy the reputation and trust that comes from such behaviour. These participants would continue to do so if the laws remained the same and will do so when the law is changed. The intention is to catch the underhanded, the game players and to instruct those who may simply be uninformed as to their responsibilities. Those who are determined to behave in an unethical manner will probably continue to do so and the legislation will only be effective in such situations when there is the commensurate level of policing powers by the relevant statutory bodies.
Another aspect to consider is that of subcontractor behaviour. The intent of the legislation is to protect subcontractors, but head contractors and developers have also fallen foul of underhanded behaviour from subbies and the legislation appears to offer little in this direction. This will certainly be tested in court from multiple angles and it is certain that lawyers will do well as judges fine tune the implementation and set precedents.