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Subbies’ law has helped sink construction companies

The changes in the building industry that improved life for sub contractors after construction company collapses may have helped sink those same companies, according to a building industry expert.

Laws changed after the disastrous collapse in 2013 of Mainzeal, which left more than 1000 tradies not just out of pocket for retained payments worth a total of $18 million, but unable to access sites to get their equipment so they could continue to work. Amendments to the Construction Contracts Act in 2015 later made sure that subbies' payments were held in trust, so the banks couldn't swoop on them. 

But Building Industry Federation spokesman Bruce Kohn says in times of thin margins for construction firms, the cash those retained payments gave them - albeit in other people's money - was enough to see them scrape through some tough times when banks were putting the pressure on. 

"Possibly the changes to the act have removed the buffer that some companies were accustomed to using," he says. 

At the time of the law change the Specialist Trade Contractors Federation, in welcoming the move, said that during economic upswings, firms often grow rapidly to meet demand and may over-extend themselves. "If they are up to their borrowing limit with the bank, then there is the opportunity to use the retention payments they are holding as working capital. If the company fails, historically those retentions have been used to pay the liquidator and secured creditors such as the bank or IRD."

Kohn says two other factors have improved life for sub-contractors since the Mainzeal crash. One is a greater realisation among liquidators of the unfairness of holding back tools left on the job when they move in; and the current market means there is plenty of other work out there to pick up. 

This means that with this week's liquidation of Ebert Construction, subbies are not in such dire straits as they would have been five years ago. At one locked-up site that Newsroom visited yesterday, the Library Lane apartment block in Albany, all sub-contractors had been granted access to their equipment by the morning following the collapse. They can do that by filling in a form on PWC's website. 

Albany's Library Lane development was 90 percent finished when Ebert went under. Photo: Alexia Russell

Kohn would like to see the Government stepping in over construction company contracts. He says it can encourage or direct state agencies engaging in procurement of commercial construction contractors to adhere as a matter of course to standardised contracts. Basically, he says, contractors and procurers need to talk to each other before contracts are signed so all parties know the potential road bumps and have arrangements to deal with them. 

He wants to see a cultural change from today's situation, where lawyers essentially make sure the procurer isn't up for any costs that might crop up from unexpected road bumps. "The biggest problem is the the procurer pulling in the lawyers to de-risk the project," he says. 

"Instead we should start with the question: 'How best can we work together to make this a successful project?'" 

Potential problems that often involve cost blow-outs include incomplete design, geotechnical ground issues and inflationary pressures. 

He says the other change should be for the Government to put much more emphasis on whole of life value of a project rather than lowest cost from the outset.

A practical example - "a hospital board asks the Government for $100 million for a project. The Government cuts the sum to $80 million. The contract is let to the lowest tenderer and to get inside the $80 million limit the board specifies low cost materials and fittings. The board gets the building within the budgeted amount. A year later all light bulbs have to be replaced and in the meantime the operating costs have gone up because of higher power bills."

Kohn says the reality is that quality of building has been compromised and capital cost has been transferred to operating costs over a number of years.

Meanwhile the Library Lane development is the most likely of the Ebert projects to have a reasonable outcome. Separate titles and code compliance certificates have already been issued for each of the new apartment units within the development, which was about 90 percent finished. Library Lane lawyer David Liu says minor works only are required to finish them. 

Ironically the completion date for the apartments was the day before the collapse - it had been moved back because of weather issues. Those involved with the development told Newsroom they'd been "thrown a curve ball", but were confident that all would end well as far as the purchasers of the units were concerned. 

David Liu says the receivers, PWC, need to come up with a solution "with minimal delay", but the project would be completed "one way or another". He says the developers understand the frustration that most of the purchasers, who are mainly owner-occupiers, have when it comes to moving into their new homes. It's hoped they can settle sale and purchase agreements within the next two months. If an arrangement can't be reached within the next 10 days Library Lane has promised to engage alternative contractors to complete the remaining works in Ebert's stead. 

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