The construction industry’s struggles have brought about some stark figures. In 2010/11, no fewer than 1,862 construction firms entered insolvency throughout Australia.
Furthermore, around $2.64 billion is lost by creditors in building related-bankruptcies each year, according to an analysis of Australian Securities and Investments Commission data by Kingsway Financial Assessments, an Australian firm which evaluates the financial capacity of contractors to deliver on projects.
Perhaps the most telling statistic, however, relates to the sum of money the vast majority of unsecured creditors, including suppliers and subcontractors, receive in the event of a collapse: zero.
Kingsway executive director Robert Jochelson offers several key points of advice to help people avoid being caught up in the losses:
Jochelson says that before contracting with any party, it is critical to do your research and understand exactly who you are dealing with.
In particular, it is important to understand the legal structure of the entity you are dealing with and whether, in the case of companies, it is part of a group structure. Jochelson says there are sometimes cases in which one company in the group has the contract with the client but another is used to engage and pay subcontractors. In other cases, companies which engage subcontractors are merely trading as a trustee of a trust.
Company searches can help here, while credit reports give subcontractors a picture of the payer’s credit history. It is also important to verify the contracting party’s ABN and check online for any evidence of trouble the contractor has had in the past.
The bottom line is that subcontractors must know exactly who they are dealing with, who will be paying them and whether or not the contractor enjoys a positive reputation.
“Find out as much as you can,” Jochelson says. “Your only leverage is before you start. Get credit reports and Google them for past indiscretions.”
2) Check their financials
It is also important to examine the contractor’s financial records and accounts.
In its role as financial assessors of companies for projects, Kingsway says it sometimes comes across firms that are not able to provide up-to-date financial records in a timely manner or that produce flawed management accounts. These are telltale signs of poor financial control and an immediate red flag indicating potential problems.
Other areas of concern revolve around working capital deficiencies, related entity loans, trading losses, high levels of debt and poor management of receivables.
3) Decide how much unpaid work you will do.
Before agreeing to take on a job, it is imperative for sub-contractors to decide how much unpaid work they will do before taking any action.
Jochelson suggests subcontractors allow no more than one month of unpaid claims – that is, they should never be more than two months behind on receiving payments.
4) Make Noise.
Jochelson says that far too often, creditors are overly accommodating with regard to late payments.
Non-payers, he says, need to feel ‘pain.’
“Make a loud noise early,” Jochelson says, adding that suppliers and subcontractors should not be fooled by empty promises of getting their money when the contractor in question themselves gets paid.
5) Don’t get drip fed.
Related to the previous point, Jochelson says it is important to avoid working on the basis of ‘drip-feed’ minor payments.
By doing so, he says, subcontractors risk going backward and end up delivering more work (and incurring additional costs for said work) for less money. He says it is often better to not get any payment at all than to extend yet more credit and incur yet more costs with the likelihood of receiving only small payments in return.
6) Use Security of Payment Laws
Due to vast inconsistencies between states, it is becoming increasingly accepted throughout the both the building industry and the legal profession that the current shape of security of payment legislation in Australia leaves a lot to be desired.
Be that as it may, Jochelson says creditors and subcontractors should invoke relevant state-based legislation early on to recover outstanding amounts owed. He says it is also important that subcontractors ensure that the wording on each invoice specifies that the Security of Payment Act applies to the bill in question.
7) Stop work if they don’t pay.
Finally, Jockelson says subcontractors should make use of the Security of Payment Act to suspend work in cases where amounts have been scheduled for payment but not paid by the due date.
At the end of the day, Jochelson says this is all about sensible risk management.
“Nothing can prevent a client going into external administration,” he says. “The whole approach is to minimise risk at the front end by being choosy [about] who you contract with/work for; and minimise risk at the back end by limiting the amount of credit/unpaid work before escalating and taking hard action.”