Trust Regimes Punish Breaches—Not Prevent Loss

Construction is a notoriously challenging sector when it comes to payment, so much so that every state has their own specific legislation aimed at making payments more reliable—is there another industry that government has felt compelled to intervene to such an extent?

With the news that the Victorian Government is now formally exploring its own trust account structure to help protect subcontractor payments, we thought it might be useful to reflect on why payment issues persist despite the existing statutory regimes and the various commercially developed ‘solutions’ designed to prevent them.

Additional checks and balances look good on paper but offer little in terms of prevention

The default response to payment issues is more administration. We’ve seen stricter financial due diligence processes, intensified ‘stat dec’ requirements and additional contractual rights come into play in the private sector, while governments continue to look at ways to strengthen security of payment rules.

The result? Lots of extra hoops for your builder to jump through and tougher consequences for contractual and/or legislative breaches, but the reality is that these measures tend to shift responsibility rather than reduce risk. There is very little to help identify—let alone prevent—chronic non or under-payment of subcontractors and suppliers.

Trust accounts won’t solve the problem if no one is monitoring them

The move towards project/retention trust accounts by various government agencies and larger commercial developers is logical, but unfortunately, still only half a solution. While funds may be ring-fenced in a legal sense, there’s nothing practically stopping a distressed builder from accessing the cash if they’re desperate (there’s already multiple documented instances of this occurring).

And let’s not forget, you’re still relying on a ‘stat dec’ … the trust structure does not provide any additional oversight, meaning that any ‘undesirable’ withdrawals will still likely go undetected until the account is selected for a compliance audit (if opened under a statutory regime) or, the builder goes under.

Yes, penalties or fines may follow if it’s ultimately proven that the builder has done the wrong thing (assuming they’re still in business) but that won’t help you recover missing funds.

▲ Penalties or fines are no help in recovering lost funds.

Prevention requires legal protection AND real-time commercial controls

No matter what contractual protections or statutory requirements are in place, if you can’t prove there’s an issue, you can’t act. Whether legislated by government or privately mandated, the various solutions we’ve seen imposed are all missing the one element that would make them truly effective: payment transparency. 

Transparency provides a natural ‘go/no-go’ checkpoint each month: 

• payment issues get addressed before further claims are approved

• risk is capped to a single payment 

• serious or repeated breaches can be acted upon before losses compound.

The bottom line

The behaviours driving non-payment remain unchanged and an effective solution is required. The common failure across current statutory and contractual regimes is that they only detect problems after funds have already left the project. At that point, enforcement may punish breaches, but it cannot prevent loss.

Legislation sets minimum standards, but preventing payment issues requires continuous monitoring. That’s not something those with capital at risk are likely to trust to others.

Want transparency over how progress payments are distributed on your next project? Get in touch: visit www.ipex.com.au or reach out at https://ipex.com.au/contact/ 

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