Sasha Borissenko: Will a draft law end up protecting subbies if the construction sector dives?

For the 35 subcontractors at Wellington’s The Paddington development, work was stalled and left in the hands of liquidators. Photo / Supplied

OPINION:

Last week I reported on the ramifications on construction subcontractors when principal contractors go into liquidation. In the case of Armstrong Downes Commercial, which went into liquidation in May, a total of $9.2 million was owed to 320 unsecured trade creditors across eight different projects.

There is no legislative framework governing how long a liquidation process should last, except for the notice period and objection period, which must last four weeks. In cases where subcontractors aren’t following the Construction Contracts Act to the letter, they may be left out of pocket.

For the 35 subcontractors at Wellington’s The Paddington development, work was stalled and left in the hands of liquidators and payment was left in arrears. Thankfully for them, Thames Pacific decided to foot the bill.

The Construction Contracts Act

But we’re getting ahead of ourselves.

When the Construction Contracts Act came into force in 2003, the “pay now, argue later” reforms sought to dramatically reform the cashflow process between parties to a construction contract, as well as prohibiting conditional ‘pay-when-paid’ and ‘pay-if-paid’ payment provisions.

Previously, contractors could defer payment to subcontractors until the contractor was paid or exclude payment entirely in the event a contractor wasn’t paid.

One of the issues is the processes contained in the Act are compulsory and it’s only workable if it’s followed correctly.

For The Paddington development subcontractors I spoke to, the main issue stemmed from a “broken payment and compliance system”, which is allegedly resource-heavy and hard to navigate. Payment claim information may exist across multiple platforms and there mightn’t be a clear process as to how to get paid.

New tech company, Payment Claims, is aiming to relieve the construction industry of these issues. The software streamlines the payment and compliance process for all parties and in alignment with the Construction Contracts Act. The technology offers efficiency, ease, and transparency, which unlocks cost savings, Founder Lewis Gyson said.

How does the legislative framework protect subcontractors?

The Construction Contracts Act helps to ensure a balanced and appropriate payment regime for construction contracts, Commerce and Consumer Affairs minister David Clark told me.

For context, retention money is an amount held back by a head contractor from payments to the subcontractor, as security to ensure the performance of the subcontractors’ work, he said.

Holding retention money is voluntary, but in practice, it’s custom, he said.

“There have been times where head contractors have used retention money for their everyday business. This generates great risk for subcontractors because they may not get their retention money paid out if a head contractor becomes insolvent,” Clark said.

“Holding retention money is voluntary and most head contractors in New Zealand are doing the right thing and managing their retention money appropriately. When retention money is properly protected and stored in a transparent manner, it gives everyone confidence that all parties will be paid for their work.”

When the situation goes south

On a wider scale, under insolvency provisions of the Companies Act 1993, subcontractors left in the financial lurch are treated as unsecured creditors unless they’ve organised security for themselves.

They sit behind secured creditors who have security over the assets of the company and preferential creditors, such as company employees and Inland Revenue, who will be paid out first.

What’s the answer?

The Construction Contracts (Retention Money) Amendment Bill was introduced in June 2021 and had its second reading in Parliament last year.

In a bid to improve outcomes for subcontractors in the event a head contractor becomes insolvent, the bill addresses the risk of a head contractor mixing retention money with their everyday business cash flow, Clark said.

It also will require head contractors to hold retention money on trust in a separate account, reporting around said account, and it introduces new offences to deter head contractors from noncompliance with the rules.

“The Government wants to ensure subcontractors have confidence in the practices of their head contractors and provide security knowing retention money will be available if things go wrong,” Clark said.

Is liquidation on the rise in the construction industry?

Data from the Companies Office and Stats NZ does not point towards a systemic problem in the sector, Clark told me.

In 2021 there were a total of 224 liquidated companies and 287 in 2022 as of November 22, for example.

While the number of liquidated construction firms was higher than usual during July and August 2022, it came down to the usual range in September.

“There appears to be a disproportionate spike between numbers for November 2022 and November 2021, but this was due to an unusually small number of liquidations in November 2021. The number of liquidated construction firms represents a small fraction of the sector,” he said.

As the prospect of a recession draws nearer by the day, it’s those in the most precarious contractual arrangements that remain the most vulnerable. For the Construction Contracts (Retention Money) Amendment Bill, let’s hope it pulls through the legislative process. And if it does, there’s then the issue of whether it fulfils its purpose.