Within these tiers is the private builder servicing residential and smaller commercial work. This part of the industry is not unionised, and the participants often work with known partners on a repeat basis. This does not prevent problems arising but is an effective mitigator of risk.
At the other end of the spectrum is the larger commercial and government projects serviced by what is known as Tier 1 builders. This sector is heavily unionised to the extent that the building union (CFMMEU) is dealt into the fundamental economics of a given project by means of the Enterprise Bargaining Agreements (EBA’s) that are negotiated between them and the Tier 1 builders, usually every 3 years; the terms of which are then foisted upon the sub-contractors who have no input into the EBA but who then bear the risk on each project.
The wages, conditions and extra allowances embedded into the EBA’s are outrageous. They benefit the union official and the building worker who has a job at a given time where there is a project. Although many workers are on ridiculous money for no productivity trade off, many also end up unemployed when the industry slows down.
The effect of this structure is that layers of costs are embedded in each job, which are not able to be recovered within the contract sum a given sub-contractor will be expected to accept when bidding to that same Tier 1 builder for the job. This subject was dealt with at length in a previous Black Stump concerning the C Bus development for the State of Queensland at 1 William St.
The State Government is sitting each day in the glass tower at 1 William St which is itself a testament to everything that is wrong with the structure of the large commercial building sector. Added to this is the fact that the sub-contractor is expected to put up a “security package” for the job. This is a mix of bank guarantees and retentions which might be 5% to 10% of the contract sum. In effect, the Tier 1 builder is building with the sub-contractor’s money. These bonds are only released after a “defect period” which might be 3 to 6 months after the end of the job.
Guess what happens to these monies?
They are often never paid. An excuse is manufactured to retain those funds. Often this is because the Tier 1 builder is themselves under pressure at the end of a job and they expect the sub-contractor to share the pain. If the sub-contractor is at that stage bidding for the next job, they often have no option but to take the hit.
So, what you have is the Tier 1 builder, building with the sub-contractor’s money, withholding an amount which is equal to or greater than the expected profit, and then not paying it anyhow.
The Stump knows of a major sub-contractor who has not been paid in full for any job they have done in the last 5 years. The human survival instinct is so strong that businesses can keep going for a time using a range of creative strategies but eventually they will exit in either a managed or an unmanaged way.
The biggest creditor is usually the taxpayer through non-payment of GST and PAYG tax. In a labour-intensive industry these losses are astronomical but rarely made public.
Enter the QBCC.
In Queensland the Building Industry regulator is the Queensland Building and Construction Commission (QBCC). If you want to build in Queensland you need a licence from the QBCC. To get the licence you need to meet the Minimum Financial Requirements (MFR), which are several financial measures around asset backing and liquidity.
These requirements are well intentioned, but the fact remains that even where the MFR is met, most licences are chronically undercapitalised. They often rely on work in progress or access to funds off balance sheet to meet the MFR; in that respect they are like most private business in Australia.
The MFR miss a vital element which is that of education. If licensees were better educated as to the requirements and to financial management generally, all the industry would be better off. A collaborative approach with industry bodies and the professions would assist, but the QBCC is seen as an enforcer rather than as a facilitator. There is a lack of data available to assess the effectiveness of the MFR in reducing the occurrence of business failure in the building industry, but one has the feeling that if they were effective the number of licensees would be fewer and building rates would be higher.
QBCC to require annual MFR reporting from 2019.
The QBCC recently announced that they remain concerned about insolvencies and collapses in the industry and the wide ranging financial and social impacts. They are concerned that they no longer receive detailed financial information from licensees. The implication is that the QBCC believe that ongoing business failures are due to the lack of detailed financial information provided to them. There is no data available to support this conclusion.
Annual reporting only ceased because the predecessor of the QBCC, the BSA, decided in 2014 that they no longer wanted this information every year upon licence renewal, they found it was a mammoth task to administer and had not achieved its objective and they moved to a self-reporting system. Who has ever heard of a self-reporting system that works? Particularly in an industry which is a primal fight for survival for many participants.
Now, in 2019, they are going to bring back the old policy. There are a few tweaks, but it is essentially the same policy.
One might ask – if it failed then why will it succeed now?
In the Stump’s opinion it will not succeed for two reasons;
- Because where you have business, you have business failure from time to time. The building industry is no different in that respect and reporting historical figures to a government department with limited expertise to interpret them will not change that. Rather than be a “big stick” regulator the QBCC should be canvassing other options which are not as punitive and encouraging more engagement with licensees.
- Because it does not address the source of the problem which is the structure of the industry around proper costing and realistic pricing, around the form of legal contracts, around the EBA process, around undue union influence, and around the many opportunities for final payments to be withheld from builders and from sub-contractors. Queensland has a range of laws supposedly to secure payment. There is the BCIPA legislation, project bank accounts and so on. They may have had a level of success, but it is difficult to tell. They have certainly imposed much regulation and red tape without being an industry wide solution.
Is there another way?
The combination of ongoing legislation and heavy-handed regulation is not working. A holistic approach is needed with more genuine stakeholder input.
A person known to The Stump with many years at the coal face, says that the QBCC should be like a footy referee. They should make sure the rules are transparent and enforce them with impartiality, they should have full control over the game, the lines should be clearly marked and the head high tackles result in a red card. But the QBCC is focused on punishing licensees deemed to have breached the MFR or some other element of the code irrespective of the cause of the problem and whether it was foreseeable or avoidable. In that regard the QBCC comes onto the battlefield after the fight and bayonets the wounded.
A better alternative would be for the QBCC to stop pretending that they can prevent business failure though the imposition of the MFR regime. There needs to be more analysis, consultation and intervention at a much higher level. Reading the QBCC fact sheet (see link below), the Stump cannot supress a wry smile. There is no hint of self-awareness in seeking to reinstate an ineffective policy with no real analysis of experiences over the last 20 years.
Click here for QBCC Fact Sheet