Broader effects of construction industry insolvencies
The economic effect of insolvencies in the construction industry
is significant. However, such insolvencies also have an equally enormous but
less-easily identified non-economic impact. This chapter will examine broader effects
of construction industry insolvencies. In particular, it will address the
social impact insolvencies have on individuals and families, as well as their
indirect impact on productivity and the potential for non-industry participants
to engage in unlawful and anti-social conduct related to debt collecting.
As devastating as their financial effect may be, the social
impact of insolvencies in the construction industry can be greater. Many
submissions noted how insolvencies up the contractual chain can place financial
pressure on individuals down the chain, leading to the collapse of their
businesses and dire flow-on effects including the breakdown of relationships
and tragically, in some cases, suicide. According to the Subcontractors
Alliance, the effects are:
Too numerous to detail in this submission but it includes the
stigma attached to insolvency, the inability to restart, loss of personal
property, marriages and tragically for some, their insolvency caused by others,
ends in suicide.
Mr Stelling, who lost $2½ million in the collapse of Walton
Constructions, explained how this situation affected the health of his family:
One of the things that affected me is that my wife has
Multiple Sclerosis and I wanted her to have stem cell treatment and things like
that, but that just cannot be afforded now. It has been nearly two years; we
just cannot look at it at the moment. It has just been a real struggle, and it
is a struggle today.
Mr Michael McGeary lost over $250,000 when Andeco, owned and
managed by Mr Frank Nadinic, was liquidated. He explained how the collapse of
this business affected many subcontractors:
Andeco went straight into voluntary liquidation and offered $750K
3–4 years instead of the $6.5 million they owed. This proposal went to vote and
it was [defeated]. We, the sub-contractors, received nothing and many will be
still suffering financially today, yours truly included.
Mr McGeary noted that the financial stress insolvencies caused
placed considerable pressure on workers and their families: 'I know many
subbies who have lost their homes because of builders going into voluntary
In a case study provided by the CFMEU, a medium-sized earthmoving
and civil contractor working on a federal government project in Canberra was
left $700,000 out of pocket after the head contractor entered external
administration. The CFMEU explained what happened next:
The banks ultimately withdraw financial support from the
earthmoving business and its principal who had provided personal guarantees to
underwrite the company's operations. The company collapses. The principal is
declared bankrupt, loses his house and his ability to obtain finance.
The personal toll this experience had on the contractor and his
family was so great that he did not wish to be identified.
At the 12 June 2015 hearing, Mr Len Coyte, a senior project
management consultant and commercial manager, linked construction industry
insolvencies to medical problems prevalent in the sector. In his view, the
stress caused by worrying whether you will be paid has a tremendous effect on
health and safety. He referred to attitude, quality of work and motivation as
particularly valid and quoted the CFMEU:
...when people are worried about whether they are going to get
paid or not, their minds are not on the job. We have one of the highest levels
of depression, suicide, diabetes and poor health in the construction industry.
In many cases I see people turning their brains off when they come to work,
because half the time we do not know whether we are going to get paid for it or
not, so why bother? Why put our effort into it?
Mr Dave Noonan, National Secretary, CFMEU, made a similar point.
He noted that insolvencies mean 'people lose their homes, their businesses and
in some cases they lose their families and their mental and physical health
through the stress they endure'.
Ms Rachel Prater, Director of the South Australian business
Prater Kitchens, detailed the social consequences insolvencies up the
contractual chain have had on her family life:
I love what I do, but I find the pressure behind it is too
intense for my family. My 18-year-old daughter throughout this traumatic
experience practically raised three of my little kids.
also negatively affected the family life of Ms Lo Re, manager of the Canberra-based Capital
Hydraulics and Drains. Ms Re explained:
The pressure that going through some of the liquidations over
the past seven years puts on my husband and me is huge. We have two young
children and just find it very unfair.
Mr Leigh Winnet, a Queensland tiler, explained the consequences
of the sudden collapse of a company he was contracted with:
Over the next two to three weeks I had to use savings put
aside for our family's first home to pay for bills, food, petrol and parking so
that I could come into work in the hope of getting some of the money that I was
owed and finding out what the chance of future employment would be. During this
time my wife was forced to consider going back to work as a teacher to help
support our family, which caused a lot of distress since our daughter was still
Mr Ross McGinn, who appeared before the committee in a private
capacity, related his family's experience in the construction industry. Mr McGinn’s father, Ross McGinn
Senior was Managing Director of Acrow Ceilings which were contracted to John
Holland on the Perth Children's Hospital project. Acrow Ceilings were involved
in dispute with John Holland over non-payment of monies due for work performed.
Mr McGinn Senior took his own life on 20 June 2015. His son informed the
committee that he did not want to insinuate the precise cause of his father's
suicide, but suggested that the dispute with John Holland 'was more than likely
the largest contributing factor'.
The committee acknowledges the significant non-economic impact of
construction industry insolvencies. Evidence from witnesses across the country
drew attention to the troubling health effects and stresses placed on family
life, caused by financial distress. The committee appreciates that it is
natural that some businesses will fail and individuals caught up in those
businesses will struggle. However, the committee reiterates that it believes
that the structure of the construction industry inequitably allocates risk to
those least able to bear it. As noted above, these structural forces are
exacerbated when those with the greatest amount of power in the
pyramid—developers, principals, head contractors—capitalise on the risk borne
by those at the bottom of the pyramid, such as subcontractors, by delaying or
refusing payments unfairly, challenging adjudications and using the threat of
litigation to create a culture of fear. Legislative reform to address the structural
imbalance in the industry would therefore be an effective starting point for
cultural change and consequently reduce the number of people suffering.
4.15 The committee recommends that construction
industry participants, particularly those representing the interests of
subcontractors, develop partnerships with mental health support organisations
to provide ready access to support, counselling and treatment for people in the
industry who may suffer from the adverse mental health effects of the financial
distress caused by contractual disputes and insolvency in the construction
Effect on productivity
The cost of insolvencies is not merely confined to financial loss
borne by businesses and individuals and the harm to people's physical and
mental wellbeing, but also translates into broader economic losses. Submissions
and witnesses frequently noted that investment and entitlements lost in the
collapse of a company had a considerable knock-on effect across the entire
industry with employers facing higher costs to continue operating and therefore
less willing or able to invest in their employees or their business. In the
words of Mr Roddy Higgins, an Adelaide based cleaner, insolvency events
negatively affect 'future business confidence'.
The HIA explained the relationship between productivity and
In terms of economic signalling, insolvency is the system's
way of saying that the resources consumed in creating the firm's output exceeds
the benefit of that output. This means that as long as insolvent companies
remain trading, they are diverting resources and productivity away from other
areas of the economy.
Most directly, as the Electrical Trades Union of Australia noted,
the collapse of a business leads to delays in the completion of projects and
the additional costs involved in having to engage new contractors or
These delays can ripple out into other projects unrelated to the project on
which the original insolvency event occurred. As the CFMEU explained, 'if a
subcontractor such as a crane hire company is affected by a collapse on Project
A, this can bring its operations on Projects B, C and D to a halt, which in
turn can delay those latter projects because of the critical role crane
operations can play in the sequential construction process'.
However, the failure of a business within the contractual chain
does not only affect clients. A confidential submission described how
insolvencies adversely affect the operation of businesses:
The only productivity that is affected in our case is my
personal productivity. As the person left to deal with the effects and fallout
of insolvent and difficult builders a ridiculous amount of time is spent with
paperwork for administrators and debt collectors.
This occurred to Mr Roddy Higgins. Mr Higgins explained how the
insolvency of Tagara Builders and associated losses of $50,000 negatively
affected his business by foreclosing attempts to expand:
In any small business your plan is to build yourself up from
where you are to more sites, more people and bigger turnover and become more
sustainable. This was one of the steps in that process. So it was going to take
me from being a sole operator to being somebody a bit more substantial and
sustainable. I had to go out and borrow money to cash flow the people I had
taken on. Obviously I am left with that debt. Fortunately, I managed to pay
everybody, but it sort of halted my progress, as it were.
Insolvency also has an indirect impact on productivity. The
potential for economic losses in one project forces businesses to build-in that
cost in other projects. The HIA described how this operates in relation to
access to finance:
By its very nature, insolvency means that some financiers of
activity in the industry are left out of pocket upon the liquidation of the
insolvent entity. This has unfavourable impacts on the financing costs for all
businesses in the same sector, regardless of how strong their own solvency is.
The higher costs of financing therefore may have a flow on impact [and] adverse
effects on the productivity position of all firms in the industry.
Where businesses face higher operating costs it is more likely
that some will struggle to remain solvent. In an industry where a single
insolvency can place significant financial stress on many operators, companies
are more likely to remain timid, meaning that the industry as a whole fails to
make productivity improvements. According to AMCA, the 'spectre of insolvency'
explains why the construction industry is regularly ranked as Australia's least
The spectre of insolvency can be a deterrent to firms
considering investing time and resources into new and innovative building
practices. New technologies, approaches and processes take time to embed within
a business. Invariably, it also involves the acceptance of risk that the return
on investment will not [be] realized until some future time; potentially not at
all. Subcontractors existing on tight profit margins can ill-afford the
allocation of resources to such initiatives. Such disincentives explains why
the construction industry has frequently ranked as the lowest of all industries
in the annual Australian Innovation Systems Report, with only 30% of businesses
being classified as innovative.
One tangible example is the slow and piecemeal adoption of
building information modelling by Australia's building and construction
industry, despite the significant opportunities for firms to deliver
improvements in productivity, cost effectiveness, reductions in time and cost
overruns, and limit the need for reworks and wastage.
Mr Trent O'Sullivan, President Masonry Contractors Association,
agreed with AMCA's submission. He accepted the proposition that companies
struggling to receive payments or not receiving payments at all, cannot invest
in technology or training to upskill their workers, and in some cases, cannot
even afford to pay their workers.
Mr O'Sullivan and Mr Terry Hough, Director Masonry Contractors Association,
noted that this has negative consequences. Where workers are unsure about
whether they will receive payment or not, both their morale and the quality of
their work suffer.
Or, to put it another way, as Mr Len Coyte pointed out: 'productivity
improve[s] when people are getting paid properly or in advance'.
Importantly, in addition to their direct effect on workers and
businesses, insolvencies have a broader drag on the economy. Mr Noonan
explained that workers who have lost their jobs 'have to go and queue up and
the taxpayer has to deal with this', meaning 'that there is less money for
those important things, a drain on productivity and a drain on all of the
things we should have in a civil society'.
But problems, and their flow on effects, are evident long before
a company collapses. Poor industry practice relating to progress or final
payments also has a considerable effect on businesses operating on tight
margins and anxious about the potential for insolvency events. The CFMEU teased
out this difficulty:
Delayed payment, often a precursor to insolvency, also has a
negative effect on productivity. Because insolvencies are so common in the
construction industry many take a poor payment record as an indicator that a
more serious financial crisis is inevitable. Employees whose own employers are
unable to meet commitments to wages and entitlements on a regular basis because
of difficulties in extracting progress payments, are unlikely to feel engaged
in the process of making the project a success.
Delayed payments have a more direct effect on the solvency of
businesses. As Mr O'Sullivan explained, many businesses spend a considerable
amount of money chasing debts that are due and payable. In Mr O'Sullivan's
experience, most businesses are forced to pay a person to spend part of their job
chasing up unpaid invoices:
...We drive to places. We drive to Sydney to pick up cheques
when they are late, when they do not turn up on time. We spend maybe one day a
week on that, and a lot of other contractors do the same thing. If you have
someone working five days a week, 20 per cent of that time is spent chasing
money that should have been paid.
Moreover, Mr Frank Mastronardo, Director Masonry Contractors
Association, informed the committee that despite this effort 'a lot of it does
not get paid'.
Despite the evidence that the high rate of insolvencies in the
construction industry is highly likely to affect productivity in the
construction industry negatively, no submissions presented quantified data as
to the total or estimated economic cost. Mr Rob Heferen, Deputy Secretary
Revenue Group Treasury, informed the committee that Treasury has not examined
Mr Heferen continued, warning the committee that because of 'such an
uncertainty' around its impact, any precise figure 'would be potentially
Mr Wilhelm Harnisch, CEO, Master Builders Australia (MBA),
acknowledged that one could come to an early conclusion that reduced business
confidence, as well as more cautious and risk averse participants, would have
an effect on productivity in the sector. However, he considered that any effect
would be 'towards the smaller end of the scale'.
Nevertheless, evidence provided to this inquiry that the
Australian construction industry is not as innovative and productive as it
otherwise could be is confirmed by the Australian Bureau of Statistics (ABS).
ABS data shows that the construction industry consistently
ranks in the three least innovative industries in the country, along with
agriculture, forestry and fishing and transport and warehousing. According to
latest ABS innovation data, only a third of construction businesses in 2012–13
could be classed as 'innovation-active' compared to more than half of
businesses in the warehousing, media and telecommunications and retail sector
businesses. In the same year, less than 15 per cent of construction businesses
had innovation in development, compared to over 30 per cent of manufacturing
businesses and 35 per cent of media and telecommunications businesses.
The committee acknowledges that the effect of the high number and
value of insolvencies on productivity within the construction industry is
difficult to accurately quantify. Further, the natural volatility of the
industry presents difficulties in isolating appropriate variables.
Nevertheless, the committee accepts the common-sense view expressed by Mr
Coyte, that 'productivity improve[s] when people are getting paid properly or
Legislative reforms designed to ensure that outcome, will be addressed in chapters
8 to 10.
Businesses now operate in an environment where security of
payment is quite low, where non-payment for work carried out is commonplace,
cash flows are uncertain and businesses lower down in the subcontracting chain
have little power relative to those at the top of the chain. In this
environment, there is very little incentive to invest the necessary capital to
adopt new and innovative construction methods, invest in new capital equipment
or invest in workforce skills development.
The committee recommends that the government fund an independent
analysis of the effects of the high rate of insolvency and related issues on
productivity and innovation in the construction industry.
Potential to attract criminal elements
A third non-economic effect of insolvency was raised by some
submissions and witnesses. Late or non-payment of money owed and limited
opportunities for settling disputes and claims has the potential to attract criminal
elements into the construction industry. While submissions were divided as to
the precise reasons for the prevalence of standover and strongarm tactics in
debt recovery and related activities, there was broad agreement that unlawful
elements were involved. Nevertheless, in some cases, this has been found to be
At the 12 June 2015 hearing in Canberra the committee heard from
Mr Michael Hogan, director of a commercial window business. Mr Hogan also
provided a submission to the inquiry. In his submission and at the hearing, Mr
Hogan informed the committee that he was kidnapped by bikie gang members who
were associates of Mr Frank Nadinic in relation to a payment dispute.
Mr Nadinic disputed this.
The committee has subsequently been informed that Mr Hogan pleaded guilty to
making a false report. He has been convicted and placed on a Community
Corrections Order and has been ordered to pay Victoria Police the sum of
Outlaw motorcycle gangs and debt
MBA quoted media commentary that linked the construction industry
to outlaw motorcycle gangs and other criminal elements:
The NSW construction industry is hiring from the ranks of
bikies, former criminals and colourful businessmen, including a convicted
terrorist, to collect debts from building companies that have gone bust.
Fairfax Media has found desperate companies are increasingly
hiring self-described 'mediators' like Ray 'Rugby' Younan, James 'Big Jim'
Byrnes and Alex 'Little Al' Taouil to resolve and collect debts.
A series of high-profile multimillion-dollar bankruptcies
over the last two years has created a domino effect resulting in out-of-pocket
sub-contractors employing people with questionable pasts to chase debts for
Mr Harnisch informed the committee that the MBA had received
anecdotal evidence of the presence of outlaw motorcycle gangs in debt recovery.
Mr Harnisch acknowledged that the MBA 'does not have...any evidence to validate
Mr Noonan acknowledged that the use of strongarm tactics in debt
recovery does occur, but emphasised that it is rare: 'We have heard of it
happening. It does occur in the industry. I would not say that it occurs in
every case or that every industry participant engages in that sort of thing'.
Mr Noonan informed the committee that he had heard of subcontractors so
desperate for payment that they had engaged people as debt collectors who may
have had colourful reputations or criminal links. He did not think, however,
that a majority of the industry was engaged in such activities:
I think most subcontractors would have enough common sense to
know that, if you get into bed with those sorts of people, it is pretty hard to
get out again, and that it is a really bad idea. I would tell any contractor
that is in that situation, however desperate they are, that that really is a
bad idea. But we do hear about it in the industry, yes. ...
Mr Noonan was adamant that the union does 'not entertain or hire
outlaw motorcycle gangs as debt collectors' and 'condemn[s] the use of
standover tactics or debt collectors or these sorts of people in the industry'.
In its submission, the CFMEU noted further that the union 'completely disavows
such conduct. These matters should be reported to and dealt with by the
Reasons for criminal elements
There was disagreement among submissions as to the cause of, or
reasons for, strongarm tactics in debt recovery. The CFMEU argued that the
incidence of insolvency is a direct cause of the prevalence of non-industry
participants and criminal elements in debt recovery. In its submission, the
We have however witnessed the intense anger and frustration
experienced by those who have carried out work and not been paid. We have seen
long‑term employees lose thousands of dollars in accumulated
entitlements, though this has been alleviated to some degree through the
taxpayer-funded safety net schemes. A number of contractors have expressed
their feelings of powerlessness to address obviously unjust situations.
In the union's view, the failure of the current legislative and
regulatory regime contributes to contractors' and subcontractors' feelings of
helplessness and causes them to seek extra-legal measures to enforce payments
rightfully due. Relating conversations with their members, the union noted:
They say that the current mechanisms for recovery are
ineffective, too slow or simply not worth the time and money required to see
the matters through to the end. They say that larger contractors use their
superior resources to deny payments knowing that they can simply outlast and
outspend smaller businesses. In many company liquidations, there is simply no
money available to creditors in any event and the amounts must be written off.
Mr Noonan repeated these claims at the public hearing on
12 June 2015:
But we also make the point that, where there is a failure of
the legal processes and people become desperate and put into these situations,
unfortunately, the opportunity occurs for criminal elements to come into the
industry and act as debt collectors. That is in nobody's interests. It ought to
be dealt with by the authorities, but measures ought to be put in place as well
to, if you like, drain from the swamp the sort of situation that causes these
elements to be able to operate in the industry.
The CFMEU emphasised that 'unfortunately, for as long as the
current system remains in place, there is a potential for unlawful conduct to
arise in relation to unpaid money', and urged the Parliament to adopt
legislative and regulatory amendments that reduce the potential for unlawful
These proposed amendments will be addressed in chapters 7 to 12.
The MBA, on the other hand, declared that 'there is no logical
link between the use of unlawful tactics and increased insolvencies.' They
considered that 'the fact that insolvencies occur should not be a catalyst for
unlawful threats or unlawful behaviour to be manifest'.
The committee condemns the use or presence of criminal elements
in debt recovery and related activities. The committee understands that the
prevalence of insolvencies within the industry and their tremendous economic
and social effects both attracts and creates an incentive for non-construction
industry participants to offer their services for a fee. But the committee
considers that people should not have to resort to intimidation or harassment,
or any unlawful activity, to recover what is rightly theirs. In the committee's
view, the failure of the current legislative and regulatory regime to
adequately secure payments owed down the contractual chain contributes to the
involvement of anti-social and unlawful conduct related to debt collecting and
related activities. Leaving aside the practice of debt recovery measures, the
committee understands the harm caused through a payments system that unfairly
and improperly denies subcontractors, in particular, payments for work done.
It would be foolish not to acknowledge that the sheer volume of
unpaid debt in the construction industry and the reasons why a substantial
proportion of that debt remains unpaid creates a strong incentive for desperate
people to adopt desperate measures to recover money owed to them. The committee
believes that the recommendations in this report, designed to improve the
payment regime in the industry and reduce the incidence of unconscionable and
unlawful behaviour, will reduce the incentives for individuals to resort to
dubious, if not illegal debt-recovery methods.
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