Uncertainty Clouds South Australian Building Industry
Accountants and business advisers with SA building industry clients have rarely seen greater need to be on their toes protecting clients’ interests.
There’s a pervading sense of uncertainty in the industry.
Yet the scale of commercial construction is unprecedented. The new Royal Adelaide Hospital, estimated to cost $1.7bn, is the largest single piece of public infrastructure being built in Australia. Within a few hundred metres of it, there is to be a $535m upgrade of the Adelaide Oval, the building of a $200m research institute, a $350m Convention Centre upgrade and projected Riverbank projects yet to be costed. Add to this lot, the Lyell McEwin Hospital project, the conversion of the former Mitsubishi factory and billions of dollars to be spent eventually on Olympic Dam expansion and associated projects (currently mothballed), it’s clearly a challenging future confronting SA’s building industry.
There are problems
There is much government involvement in much of this business. Two major corporations have laid claim to most of the work. Interstate building companies are jostling with SA firms to get their hands on what’s left of the building business, especially where it’s related to mining - despite the Olympic Dam postponement. So, as tender lists get longer there’s an increasing need for accountants, lawyers and other business advisers to rein in building industry clients too anxious to invest money in projects to, in effect, buy themselves work. Equally at risk in this situation are subcontractors trying to outbid larger and better financed interstate competitors. It’s not uncommon these days for project managers to sign contracts for as much as 20% below pre-tender estimates.
Labour too is an issue
Demand for labour will increase as contracted projects – especially larger ones – get underway. It’s a situation likely to add to wage pressures and aggravate the potential for other possible projects to be postponed indefinitely. This, according to industry analysts, can only add to existing pressures on subcontractors who face losing staff to big project recruiters while trying to survive in a diminishing small-to-medium-project market.
The private housing market is taking a beating. The 7,453 commencements in 2010-11 were down substantially in 2011-12, and are expected to be about just 5,500 by 2012-13.
The silver lining in the cloud of uncertainty hanging over the industry is the alterations-and-additions market, although even here there’s anecdotal evidence its dollar value is tending to be increasingly represented by larger projects.
Regulation handicap
An already stressed industry is now carrying the weight of unprecedented regulatory change.
We’ve been told authoritatively: “Legislation either has, or is about to, undergo once-in-a-generation change. In the case of personal property securities, the legislation affects property laws as old as the common law itself.”
So, in the context of the building industry, let’s look at security of payment legislation. Subsequently we’ll consider the Personal Properties Security Act, and how proposed work health and safety law will affect the construction industry.
Security of payment
This legislation, while new to SA, already operates elsewhere in Australia – albeit sometimes suspiciously. Derived largely from NSW legislation, the SA law specific to the construction industry, is designed to promote cash flow by way of a pay-now-argue-later regime applying to all construction as well as related goods and services.
By allowing so-called “payment claims”, this law is a powerful lever for contractors to prise progress payments from reluctant payers. Respondents to claims have 15 business days to dispute them before they’re payable on the specified contract dates. If there’s no response to a claim, the money can be recovered as a debt, due and payable in what may become virtually defenceless legal proceedings. It matters not whether the money claimed is actually due, or that the respondent has responded appropriately in time to point this out. There’s always the risk that the matter will go to adjudication - in what essentially is a privatised court system of privatised judges.
Some sources of disquiet
There’s some disquiet interstate about the quality of adjudicators, and doubt locally that regulatory framework here will result in better adjudicators and adjudication.
As one authoritative observer of the industry put it: “With private sector bodies competing for work, the incentive to keep the customer happy remains a risk – of particular concern where nominating authorities advertise no-fee adjudication, only to pocket a substantial part of what would otherwise be an adjudicator’s remuneration.” Because adjudicators set their own fees and decide who pays, it’s a system open to abuse – a situation worsened by the legislation’s cash flow implications. One or two adverse claims could ruin a business already under financial pressure. And there are also disturbing interstate reports of businesses dishonestly using the legislation in attempts to solve cash flow problems.
Unfortunately SA homeowners are largely exempt from the legislation, as are so-called “tripartite” arrangements, all of which leave builders having themselves to deal with non-responders to payment claims.
Finally, although subcontractors are supposed to be major beneficiaries of the legislation, it seems suppliers now benefit most from being able to recover payments free of concomitant responsibilities.
