NSW building inquiry recommends construction trusts to protect sub-contractors

A NSW inquiry into building company collapses has recommended the adoption of Queensland-style regulatory model, including the establishment of a construction industry trust to ensure sub-contractors get paid first should a construction company collapse.

The trust would hold all payments due to a head contractor, sub-contractors, sub-subcontractors and suppliers and be required for all projects valued above $1 million. Sub-contractors would be paid first before head contractors while there would be “no point at which the funds may be ‘scooped’ by the bank.

The final report prepared by Bruce Collins, QC, also recommends the creation of a single statutory and autonomous body, the NSW Building and Construction Authority, modelled along the lines of the Queensland Building Services Authority, which would undertake all of the administrative oversight, regulatory and operational responsibilities currently undertaken by different regulatory bodies.

Under the current system of regulation in NSW, the Office of Fair Trading deals with the regulation of contracting and industry licensing, policy is created by the Building Regulations Advisory Council (BRAC) and disputes handled by the Consumer, Trader and Tenancy Tribunal (CTTT).

In all, there are 44 recommendations made by Bruce Collins, QC in his lengthy, final report following a three month independent inquiry.

Other recommendations include a strengthened security of payments scheme and a licensing system for all commercial builders and construction contractors, which would limit participation to projects with demonstrated financial backing and licensed accreditation.

“The first key role of the NSW Building and Construction Commission will be to establish a licensing system which requires all builders and construction contractors operating in the commercial building sector to qualify within a particular graduated licence category according to the net financial backing they are able to demonstrate, in respect of proposed projects,” says Collins.

“The result will be that the work of builders and construction contractors will be restricted to the category of project value for which they have demonstrated financial backing and licenced accreditation.”

The second key role of the proposed new commission would be the financial monitoring and auditing of the accounts and financial affairs of all builders and contractors in NSW, including a “formal set of standard financial and accounting requirements”.

Collins notes in his introduction, that it is “rare to find unanimity upon any issue in a chattering society such as ours, however all those who gave evidence to the Inquiry from all sections of the industry with the exception of the Housing Industry Association (HIA) agreed that it was an essential part of any reform package to bring in a licensing model and regulatory structure along the Queensland lines”.

He notes that the HIA’s views on the Queensland model are “largely shaped by the opposition to the insurance role being included in the model”.

In its submission to the inquiry, the HIA claims the “Queensland Building Services Authority (QBSA) is fundamentally flawed” and says its various functions should be separated.

“The QBSA’s one-stop-shop structure with its multiple functions creates significant opportunities for internal conflicts of interest thereby exposing both the customers of the building industry and licensees to unjust outcomes from their dealings with the Authority,” says the HIA.

Instead, the HIA recommends the creation of a policy body that can take a “whole of government” approach to regulation of the industry.

The establishment of the NSW Building and Construction Authority has the support of the NSW Building Professionals Board, the Master Builders Association and the Building Regulations Advisory Council among others.

The building industry inquiry was instigated by NSW finance minister Greg Pearce in August last year, following the rising number of construction company collapses over the last three years which is estimated to have left thousands of suppliers and subcontractors more than $1 billion out-of-pocket.

High-profile building firm collapses last year included Reed Construction, 100-year old firm Kell & Rigby, St Hilliers Construction, Baseline Constructions and Nahas Construction.

“The Queensland model presents the only solution to the problem of preventing insolvency in the first place.  The construction trust is important because it operates in a remedial manner after insolvency has begun to cause its problems,” says Collins.

“The inquiry cannot place too much emphasis upon that vital conclusion,” he adds.

“The most effective way to ensure a healthy industry is to ensure the healthy condition of those who aspire to participate in the industry.  That is what is done in Queensland and it is there that it has had its effect upon reducing the number of disastrous insolvencies in the building and construction industry."

The full list of 44 recommendations contained in the report, which is subject to public consultation until February 21, can be downloaded from the NSW Department of Finance and Services website.

“We now need to carefully work through the reforms in consultation with those stakeholders and the public,” commented NSW finance minister Greg Pearce following its release.

The NSW government has prepared separate consultation papers on statutory construction trusts and the licensing of commercial builders, which are available for public consultation by February 21.