Wednesday, 31 July 2024

Environment and Planning Committee

Employers and Contractors Who Refuse to Pay Their Subcontractors for Completed Works

Kathleen MATTHEWS-WARD (Broadmeadows) (11:13): I rise to speak on the Legislative Assembly Environment and Planning Committee’s report Employers and Contractors Who Refuse to Pay Their Subcontractors for Completed Works. I would like to start by firstly thanking the committee membership, especially the chair the member for Wendouree and the deputy chair the member for Morwell, and also the member for Bass, the member for Monbulk, the member for Nepean, the member for Ripon, the member for Croydon and the member for Warrandyte. Consistent effort and strong commitment have been valuable in making Victoria fairer, and the important work that is done on committees looking into things that need review is really worthwhile. I thank the members for their commitment. I would also like to thank the secretariat – committee manager Igor Dosen, acting committee manager Kieran Crowe, research officer Samantha Leahy and administrative officer Helen Ross-Soden – for their work in crafting this comprehensive report.

Everyone deserves the right to be paid for the work they do. This is a fundamental right, and it is what our society is based on. Fair pay for one’s work is also one of the founding principles of the labour movement. All of us here are paid regularly without having to worry if our pay will come in to cover our bills and mortgage. Unfortunately this is not the case for many people who work for themselves, who are reliant on people paying invoices for work they have already completed. The committee investigated this issue, and the report offers 28 recommendations across four key areas: (1) to ensure that subcontractors are paid fairly and promptly for completed work, (2) to strengthen the statutory right to claim payment, (3) to improve adjudication of payment disputes and (4) to address higher-than-standard levels of insolvency in the construction sector.

The construction industry holds a vital position within the Victorian economy. As per data from the Reserve Bank of Australia, the construction sector accounts for 7.3 per cent of Australia’s total economic output. According to a submission by Master Builders Victoria, a representative body for the construction sector, the total value of construction work completed in Victoria in 2022 amounted to $66.89 billion. This figure represents approximately 12.1 per cent of the gross state product, underscoring the significant contribution of the construction sector to Victoria’s economic landscape, and subcontractors are a big part of this work. Timely payment is crucial as delays can severely affect small businesses, small contractors and subcontractors, who make up much of the sector.

The committee discovered that subcontractors often struggle to negotiate fair payment terms due to the nature of the construction industry, with subcontractors sitting at the bottom of the food chain. As a result, subcontractors often need to continuously find new projects to maintain their income and cash flow. This urgency to secure jobs in a highly competitive market can put them in a weaker bargaining position. It can see them accepting less favourable payment terms to win contracts, fearing that pushing for better payment conditions could result in losing the job to a competitor willing to accept lower terms. This is why payment terms are so important.

Several submitters pointed out that even though the Victorian security of payment law is designed to ensure prompt payment for completed works, the Building and Construction Industry Security of Payment Act 2002 does not currently restrict the payment terms that can be included in a construction contract. The committee heard that many subcontractors in the construction industry face prolonged payment terms. Head contractors often enforce payment terms of 60, 90 or even 120 days on subcontractors, who have little bargaining power. The committee also found that many businesses in the construction industry in Victoria tend to have insufficient funds and poor cash flow. This can lead to poor payment practices and to funds earmarked for the payment of subcontractors being used instead to finance other projects or business operations.

Throughout the inquiry it was suggested that the narrow profit margins of the construction businesses contribute to payment issues in the industry. For example, the Housing Industry Association noted that builders often operate on razor-thin profit margins. Similarly, Master Builders Victoria reported that head contractors are currently facing low or negative profit margins due to fixed-price contracts and challenging economic circumstances. Thin profit margins are problematic because sustained losses can lead to undercapitalisation and cash flow issues for construction businesses.

Aside from poor payment and financial practices, the Victorian construction industry experiences higher levels of business insolvency than other sectors of the economy. An insolvent construction business can result in the non-payment and subsequent insolvency of subcontractors, causing financial hardship to consumers and adversely impacting the economy. While most insolvencies in the construction industry were found to concern small and medium-size businesses, we have witnessed the collapse of multiple large building firms of late. These financial challenges all increase the likelihood of subcontractors not being paid properly.

In my Broadmeadows electorate approximately 20 per cent of the constituents are employed in construction and maintenance, and a large number are subcontractors. I am pleased to see attention being drawn to the payment issues faced by subcontractors and their families. It is crucial that we work towards substantial improvements in payment practices within the construction industry going forward.