Sub-contractors bearing the brunt of builder collapses

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There has recently been a spate of builder collapses, with more expected over the course of 2017.

Builder failure risk has moved up the priority list for most lenders. Part of the review by GPS involved inviting some of our quantity surveyors for some sandwiches and a group discussion. Items which came out of the review include:

  1. There will be a higher level of due diligence on builders for new projects;
  2. Increase site inspections; and
  3. More testing on whether sub-contractors have been paid.

There is no doubt that sub-contractors bear the brunt of builder collapses. Lenders are secured creditors and will be able to make a full recovery of any costs occasioned by a collapse of a builder. Sub-contractors are unsecured creditors and therefore bear the first loss.

Sub-contractor associations have pushed the QLD state government to work towards the introduction of project bank accounts. I do not see this as the solution to the issue. From a lender’s perspective the progress draw process will remain unchanged. The difference is that instead of paying the builder we will pay the monies into a third party bank account. The operator of this third party bank account will charge a processing fee and have around 28 days to make payment to the sub-contractor. This will further push out payment terms to sub-contractors, which will not assist.

In tradie terms, fixing the problem is all about having the right tool in the tool box. The project bank account solution is like only having a hammer in the tool box. It is great for driving a nail, but hopeless for fixing a light switch. Hitting the light switch repeatedly with a hammer, and abusing it, will still not fix it.

Funders can be part of the solution, but we first need to know that sub-contractors are not being paid. We rely on statutory declarations from builders. If we walk around a building site asking everybody if they have been paid then, assuming we make it off the site in one piece, doing so will become a self-fulfilling prophecy. All we will have achieved is starting up the rumour mill.

GPS generally puts a sign on the site fencing that we are funding the project. It includes our contact details. This has worked well for GPS for the past 20 years. Subbies who are not paid will ring us up (preferably not at 4pm on Friday afternoon after a couple of hours “lubricating” their vocal cords) and tell us what is happening.

GPS sign artwork v3

GPS puts up a sign at each of our projects so that we can be contacted if issues arise.

As the funder, GPS has several powers under our security which can assist when issues arise. These include taking over direct payment of sub-contractors (two days is a lot better than a 28 day term) and the appointment of a site superintendent, etc.

The sooner a funder knows about a problem, the sooner they can act. This reduces the leakage of funding from the project and expedites a solution being put in place. This should decrease the amount owing to sub-contractors and increase the amount available under the building contract. Overall, early notice can greatly improve sub-contractors’ prospects of recovery.

I have offered to work with sub-contractor associations on this long-standing problem, and my offer remains open.

The golden rule is to contact the funder as soon as a problem occurs. Gossiping in closed chat rooms on the internet will not achieve a positive outcome.

 

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