Articles

Construction insolvency and building project stress is often caused by four factors:-

• work drying up;
• tight margins;
• contractors entering into oppressive contracts; and
• external macro forces such as covert that disrupt labour and material supply chains.

When there is a construction industry downturn there are those that capitalise upon high demand for jobs on the part of builders and low supply of projects. Such actors invite contractors to tender on what are euphemistically called “take it or leave it contracts”, if you don’t like the contract then leave it.

If contractors sign up a ‘take it or leave it contract”, they subject themselves to what could only be described as oppressive terms of trade. Typically the contract migrates all of the risk to the contractor.

The profit margins tend to be meagre along with the ability of the contractor to claim time extensions. We had one matter that went to court where a contractor could only claim time extensions for extensions sanctioned by a superintendent, in itself not surprising. But when one considers that conventional grounds for claiming time extensions in particular events that were tantamount to act of God or contractual frustration events were all excluded, the contractor was compelled to rely upon the superintendent’s largess. There was no largess and when a force majeure event materialised that caused months of delays the contractor was denied the ability to claim time extensions and liquidated damages were wielded.

This problem is not isolated, the building industry is littered with the debris  of contractors that signed up oppressive contracts that subsequently went off the rails because the contracts were never tenable in the first place.

If the country allows an oppressive contracting culture to prevail then insolvencies will continue, particularly when economies are volatile, regardless of whether  they are builders, subcontractors. When this is rolled out cross jurisdictionally there is a huge dent in industry productivity and contractors and consumers all bear the brunt.

Free marketeers will chime, “too bad, let market forces prevail. The problem is when both SMEs and large contractors fail on account of oppressive contracting conditions many actors in the construction food chain are affected. In the building industry insolvency calamity tends to ‘domino’ down the line to subcontractors and suppliers.

Something needs to change

It is the writer’s` view that the only way to cure this is the promulgation of a Fair Contracts Act. It could be a Model Act, like the Model Building Act of the early nineties and the states and territories could then promulgate the FCA within their own jurisdictions. Such an act would regulate the contracting arrangements between civil and commercial contracting parties and would extend to:-

• developers;
• head contractors;
• sub-contractors and trade contractors; and
• other key service providers.

A Fair Contracts Act would impose at the very least:-

• Compulsory risk sharing for principals, builders, sub-contractors and the like.
• Outlaw the ability of a contracting party to visit losses upon an innocent a party for losses occasioned by unforeseen events, events that could not have been envisaged by the contracting parties.
• Third party certification of payments on major projects. The third party would be a discrete class of professional appointed to inspect and certify payment with the view to ensuring that, that which is owed to contractors does in fact find its way to the legitimate destination.
• Reinstate rise and fall clauses to allow contractors to claim cost adjustment for increases in labour an materials indexed with CPI.
• Embargoes on the inclusion of draconian or oppressive conditions in a contract and there would be a definition of that which is considered to be oppressive.
• The ability of parties to access mediators whilst the contract is still live to convene a conciliatory intervention and the costs of that deployment would be born on a 50/50 basis.

A Model Fair Contracts Act – the benefits and the benificiaries

Were a Fair Contracts Act to be promulgated this writer is confident that:-

• It would improve the building industry culture.
• It would be conducive to greater rapport between head contractors and sub-contractors.
• It would diminish disputation and the costs associated with dispute resolution.
• Decrease insolvency activity.
• Improve building industry productivity.
• Improve project risk management and project viability.
• With a resulting increase in building quality and a better consumer dividend.

How could it be achieved?

An intergovernmental, cooperative federalism coalition, (reminiscent of the golden years of cooperative federalism inspired by the late Bob Hawke in the early nineties) could be established.

This cooperative federalism vehicle would comprise senior federal, state and territory governmental policy mandarins and  preeminent industry experts. The coalition would be tasked with:-

• Preparing uniform principles.
• A set of drafting instructions.
• Permission would then be sought from the responsible Building Industry Ministers and the nine Attorneys General to deploy the Chief Parliamentary Counsels committee to prepare a Model Fair Contracts Act; or
• A host jurisdiction could promulgate an act adopting the drafting instructions and the other 7 jurisdictions could utilise and promulgate the template.

How does the writer know this?

It is the process that we deployed when the writer headed up the team that developed the National Model Building Act (NMBA) in the early nineties. The AUBRCC engaged the Comparative Constitutional Law Centre of Melbourne University to crystallise the options for cross jurisdictional regulation. The result was the publication of a book Constitutional Options for Uniform Legislation (the writer was the editor of same).

In a Nutshell

It would be a tremendous microeconomic reform very much worthy of the consideration of the new Federal Government to get behind and push. The time now is right as the new energy and enthusiasm for change can be capitalised upon. Further something needs to be done to reinspire the building industry and facilitate a return to confidence.