Australian Government

AustralianSmall Business andFamily EnterpriseOmbudsman

24 January 2019

Security of Payment Reforms: ImplementationRegulatory Policy, BRDDepartment of Finance, Services and InnovationLocked Bag 2906LISAROW NSW 2252

By email:

Dear Sir/Madam

SECURITY OF PAYMENT REFORMS — IMPLEMENTATION

We the Security of Payment reforms for the construction industry in NSW, andwelcome the to comment on the proposed implementation timeframe andamendments.Implementation timeframes

We consider the commencement date of February 2019 for 'reforms commencedwith minimal transitional period' to be reasonable.

Q3 We consider the proposed date of 1 June 2019 for the commencement of'reforms with a transitional period' to be unachievable, giving consideration that:

• the proposed changes appear to effectively prohibit any milestone paymentregime where milestones occur less frequently than monthly. Contractors andsubcontractors in affected trades and sectors will need sufficient time to reviewcontracts and management practices and renegotiate as necessary, especially inrelation to projects or standing offer arrangements in progress at the date ofcommencement.

• the 20 day timeframe for payment of subcontractors proposed will be only 5 daysgreater than the timeframe for payment of a head contractor by a Principal(unaltered at 15 days). The Murray review recommended a period of 25 days forthe The timeframe now proposed may result in head contractorsbeing required to make payments to subcontractors before being notified ofwhether their corresponding claim for the respective head contract payment isapproved. This will require time to review and/or streamline processes to ensurethat the required timelines can be achieved, enabling the regulations to drive thedesired compliant behaviours.

We consider that it would be reasonable to provide the industry nine months to adjustto these changes, and this would also align with the reforms in Q5−6.

Commencement date (Dec 2019) for 'reforms requiring subordinate legislationbefore commencement' appears reasonable, and for simplicity should be alignedwith the date of implementation of 'reforms with a transitional period' (Q3/Q4).

1 Review of Security of Payment Laws, Building Trust and Harmony (Dec 2017), Recommendation #19. p.xvii

1300 650 460 E

Office of the Australian Small Business and Family Enterprise OmbudsmanGPO Box 1791, Canberra City ACT 2601

Q7−9 We support amendments being mandatory for projects tendered aftercommencement. The application to projects that are in progress at thecommencement date should be informed by contractor submissions, as the balanceof impost and benefits is primarily driven by flexibility of existing systems andprocesses in use in the industry at the time of commencement.

Proposed Reforms to the RegulationsWe recommend the removal of the threshold for trust obligations for retention money,so that the retention money trust obligation is extended to the entire contracting chain.The currently proposed threshold would result in the reforms having little impacton the small business sector, where security over entitlement to retention fundsremains an issue.

Q14 We do not removing the annual requirements on the operation ofthe trust account. We consider that relying on monitoring by subcontractors is not aneffective mechanism for maintaining transparency. Subcontractors are unlikely tomake significant use of the right to inspect trust account records and, where they do,they may not always engage capable of forensically identifying potentialmisuse. Also, it is proposed to limit access to information concerning thesubcontractor's own funds, which limits the subcontractors' ability to monitor or

on the operation of the trust as a whole (refer Q16 below).

Q15 A six to nine month transitional period (to Dec 2019) is suitable, permitting alignmentof commencement with the commencement of other regulations above.

Q16 We the subcontractors' right to inspect trust account records. Where a trust isestablished in reference to multiple subcontractors and/or multiple projects, carefulconsideration should be given to extension of the subcontractors' right to permitinspection of all records relevant to the trust. In some situations, a subcontractor mayneed to access not only whether the trust holds sufficient funds to meet thesubcontractor's own claims, but also whether the trust overall has sufficient funds tomeet its aggregate liabilities, which may be to establish the adequacy ofthe funds held in trust.

Q17−18 We do not any fee being chargeable for inspection of trust records. Sufficientdisincentives exist for subcontractors to exercise their right to inspect through thepower imbalance between informal or perceived pressure, the cost of time,and overall inconvenience.

Q19−20 We the listed offences and penalty notice amounts.

Q21 We believe that consideration should be given to an additional offence as follows:

"Head Contractor fails to hold sufficient retention money on trust to meet aggregatetrust obligations"

This could arise if a head contractor permitted a claimant to promote aclaim against a trust, resulting the trust being oversubscribed in the aggregate.Alternatively, this may be mitigated by prescribing the form of trust and/or relevantaccounting practices in relation to retention money trust accounts.

Thank you for the to comment. If you would like to discuss this matterplease contact Jill Lawrence on 6121 5312 orYours sincerely

Kate Carnell AOAustralian Small Business and Family Enterprise Ombudsman

Office of the Australian Small Business and Family Enterprise Ombudsman