Dialogue: Kick the crutch from bad payers

By PETER DEGERHOLM*

The Construction Contracts Bill is quite simple. Essentially, it provides business process measures that will improve cashflow, encouraging money on projects to flow quickly from the developer down to the lowest-tier subcontractor and supplier.

The bill recognises that bad payment habits have caused serious damage to the industry.

In providing rights to payment for subcontractors, it also provides identical rights to main contractors to secure their own payments from clients.

The bill does not, as some suggest, simply transfer risk to the main contractor. It establishes a legal obligation for each party to pay according to its existing contractual obligations.

Subcontractors stand to benefit most simply because they are at present the most disadvantaged.

The bill sets out to improve cashflow, along the lines of legislation enacted in Britain and New South Wales, by:

* Establishing default payment guidelines for all contracts.

* Banning pay-when-paid clauses.

* Providing rights to suspend work for non-payment.

* Establishing fast-track adjudication (binding but not necessarily final).

* Establishing the right for a main contractor to register a charge against land based on an adjudicator's award.

The bill is expected to become law early next year. Most industry commentators agree with the general aims of the legislation, but some question whether it goes far enough.

I take issue with economist Gareth Morgan's assertion that the bill is legislative lunacy.

Evan Geeves (Herald, June 6) refers to the Golden Rule: He who has the gold makes the rules - the anarchy that has reigned since the repeal of the Liens Act. It would be legislative lunacy to leave the industry to wallow.

Gareth Morgan offers no sympathy for the small contractors whose blood is being spattered. Does he realise that one of the largest creditors of Hartner was a multinational company that stands to lose about $1 million?

Unless realistic commercial practices are developed, blows like that will simply act as a disincentive to big companies becoming involved in the construction sector.

Morgan describes the industry as high-risk, but recent failures have little to do with the perils of building as a commercial activity. Any main contractor who fails to address the risk of non-payment does not deserve the right to use subcontractors as a buffer.

Stephen Franks (Herald, May 31) raises valid concerns about the under-capitalisation of the industry, but the legislation cannot address that. It is an industry problem and, with payment legislation in place, may be addressed by a united industry.

Bad behaviours have developed as under-capitalised developers, contractors and subcontractors fight over an inadequate pool of funds, but suggesting that small contractors should improve their capital base is like saying, subbies have no bread - let them eat cake.

That main contractors have learned to rely upon small, under-capitalised players is a choice made by default in response to competition. Contractors have eliminated the risk of labour cost overrun (which carried with it the cashflow burden of weekly wages) by subletting to small subcontractors who can be paid on the 20th of the month following.

Contractors then took the liberty of deferring payment through the use (and often abuse) of pay when/if paid clauses that would not be acceptable in any other industry.

All of these are reactions to an overly competitive and increasingly fragmented industry. Subcontractors have followed suit, by shedding labour and relying upon small bands of sub-subcontractors, speeding the breakup of the industry into smaller firms.

Gareth Morgan seems to suggest that builders and tradespeople should be registered and barriers to entry raised.

Compulsory registration is vehemently opposed by many who would foresee a controlled market, higher costs and regulatory interference of the worst kind.

Surely any attempt by an industry organisation to create or raise barriers to entry would lead to scrutiny under the Commerce Act.

The industry must adopt a whole new mindset.

In particular, clients must be prepared to pay more for their buildings.

This means dismissing the cheapest tender in favour of the one from the company that offers the financial and other resources to do the job, at a realistic price. Stephen Franks warns of a shakeout. It will be good riddance to companies dependent on their pay-when-paid crutch.

The Construction Contracts Bill will remove the cashflow blockages caused by those who survive in business by avoiding or delaying payment and prolonging disputes.

* Peter Degerholm is chief executive of the Building Subcontractors Federation.