Executive summary

Introduction

The objective of this audit was to assess progress to improve the security of payments made to subcontractors by contractors on State government construction projects and compliance with the Building and Construction Industry Training Fund and Levy Collection Act 1990.

The audit focus was based on a request from Parliament’s Estimates and Financial Operations Committee (EFOC) that the Auditor General assess the implementation of the Small Business Development Corporation’s (SBDC) 2013 report[1] recommendations.

Overview

The construction industry is a key driver of economic growth in WA. In 2015-16, construction accounted for 10% of WA’s employment and $31.3 billion of our gross state product[2]. It provides employment, housing and infrastructure.

In the past, construction companies employed large workforces. But, in the last 3 to 4 decades the industry has become more dependent on contractors managing projects and subcontracting work. Now, almost all larger projects use subcontractors to provide services.

A serious and ongoing issue within the industry is non-payment of subcontractors – a problem first recognised over 40 years ago[3]. The collapse of a WA government contractor in May 2016 and complaints of non-payment by subcontractors has brought attention back to the topic, despite a government investigation into the issue in 2013.

Subcontractors’ complaints about non-payment for work done on WA government projects under the Building the Education Revolution program from October 2008 to October 2012[4] saw the WA government request the Small Business Commissioner to investigate the claims. The claims included that Building Management and Works (BMW – a unit in the Department of Finance) had not responded to their complaints.

The SBDC’s 2013 report directed 13 recommendations at BMW, mostly to improve:

  • processes for prequalifying and risk assessing tenders for government contracts prior to awarding of contracts
  • administration of payments to contractors and obtaining statutory declarations from contractors that they have paid their subcontractors
  • management of subcontractor complaints about non-payment.

It also included 4 recommendations aimed at construction contracts in both the private and public sector. This included a recommendation to improve dispute resolution legislation in the construction industry.

Appendix 1 provides further details of the recommendations. Government accepted all recommendations in June 2013 though it has not reported on their implementation.

Although the SBDC recommendations were mainly intended for BMW, we also used them in this audit to assess practices used by the Department of Treasury (Treasury) and the Housing Authority (Housing), as they contract construction projects. Housing awarded the most construction contracts from the end of June 2013 to 1 July 2016 (1,153) followed by BMW (527) and Treasury (5).

Treasury’s contracts are all large strategic projects valued over $50 million. These are one-off projects for which Treasury appoints a head contractor specifically for the project. It does not appoint contractors to panels through a prequalification process that assesses their suitability to undertake future projects.

Non-payment of subcontractors can arise because of factors such as disputes over work quality, different interpretations of contract arrangements, poor accounting practices and contractor insolvency. To compound the problem, the rate of contractor insolvencies in the building and construction industry is high compared to other sectors of the economy[5]. The SBDC recommendations focus primarily on measures that protect subcontractors when contractors become insolvent.

As part of ongoing reforms, the State Government announced on 5 December 2016 that it would introduce a new code of conduct for WA’s building and construction industry to prevent anti-competitive behaviour and improve workplace safety.

Another way the industry is supported, is through the Building and Construction Industry Training Fund and Levy Collection Act 1990. This Act establishes a fund to contribute to the training of workers for WA’s construction industry. Funding is by way of a 0.2% levy on construction work over $20,000 and on variations over $25,000. In 2015-16, the fund received $29.4 million in levies paid by the industry on construction projects. The Act requires a project owner to pay the levy. For most government projects, this will be the contractor. If a building permit is required for construction work, the levy must be paid before a permit can be issued.

[1] Small Business Development Corporation Commissioner, Final Report: Construction Subcontractor Investigation (March 2013).

[2] WA Department of State Development, Western Australia Economic Profile, November 2016, p 1.

[3] CH Smith QC, Inquiry into the Building Industry in Western Australia, 1973 as cited in the Report on Operations and Effectiveness of the Construction Contracts Act 2004 (WA), Professor Philip Evans, August 2015, p.12.

[4] ibid. p. 1.

[5] ASIC Australian insolvency statistic series 1A July 2013-December 2015.

  Page last updated: December 22, 2016 Next: Audit conclusion