As the previous chapters noted, the exclusive regulation of
building and construction is not within Commonwealth power, as unincorporated
businesses operating intrastate will not be covered. Licensing arrangements and
standards are therefore governed by each state and territory. Naturally, differences
have emerged in the respective schemes. Many submissions indicated their
frustration with discrepancies between jurisdictions. The Electrical Trades
Union of Australia explained how the state-based licensing regime affects electrical
inconsistency is that electrical contractors in New South Wales and the
Australian Capital Territory do not require any business training for licensing
purposes, whereas other jurisdictions require between one and four units of
competency. Only Queensland and South Australia jurisdictions have provisions
of seeking financial statements or evidence of financial status whereas the
other jurisdictions do not make it a requirement to assess for eligibility.
Nevertheless, despite a push for national harmonisation of
licensing requirements for participants within the construction industry, the
Council of Australian Governments disbanded the National Occupational Licensing
Authority (NOLA) in 2013. The NOLA aimed to cover licensing requirements for
selected occupations, removing inconsistencies across state and territory
borders to allow for a more mobile workforce. In its place, the Council for the
Australian Federation is consulting with state and territory regulators and
industry to enable 'external equivalence' for selected licences across
That is, a licence to operate in State X may be accepted by State Y.
This section does not examine the licensing standards of every
state. Instead, it focuses on what submissions considered the three most
important elements of a licensing regime in reducing insolvency within the
industry: evidence of adequate capital backing; financial skills training; and
a fit and proper test. It will do so by close reference to the licensing regime
in Queensland, which was a particular focus of submissions and witnesses before
the inquiry, and a cause of concern in the Walton collapse.
In an industry characterised by low barriers to entry, small
profit margins and inequitable allocation of risk, an effective licensing
regime is necessary to protect participants from both unscrupulous and hapless
operators. However, as important as an effective licensing regime is, its
inherent limitations must be understood—an effective licensing regime is not a
silver bullet for the problems of the industry. Mr Michael Chesterman,
Queensland Building and Construction Commission, made this point to the
committee in explaining the operation of capital backing tests. Mr Chesterman
noted that capital backing requirements may 'operate in different ways at
different times, but they are always reflective of a position, essentially back
That is, a contractor who satisfies a capital backing test and thus receives a
licence to operate at a certain level, has only proven they have capital
backing at that 'snapshot in time';
it 'is not a guarantee that the company is solvent at every single point of
It is also important to bear in mind that there are trade-offs
when introducing a licensing regime. As Mr. John Price, ASIC and Mr Warren Day,
ASIC, stated that Australia consistently rates highly on international surveys
measuring the ease of doing business.
A key component of this measure is the difficulty or ease in setting up a
company. Therefore, increasing licensing requirements in order to protect
participants from unqualified individuals may reduce the ease of doing business
in Australia. Conversely, excluding unqualified individuals from operating—and
collapsing—may increase business confidence.
A further consideration is the effect licensing regimes have on
the public purse. Mr Day noted that there are about 2.25 million companies
registered in Australia. Approximately 99 per cent of those are small,
proprietary limited companies. Mr Day considered that the process of assessing
each person's qualifications and level of experience would be:
...a huge undertaking when you are talking about 2.25 million
companies and I think about 1.8 million distinct, different directors. Would
all of those have to be grandfathered straight
through or would they have to be checked? It is a huge undertaking. There is a
huge cost to government in running that out.
A number of submissions, including the Australian Institute of
Building, the Electrical Trades Union of Australia and Cbus Super,
suggested that an appropriate licensing regime should provide evidence that a
contractor has adequate capital backing for a proposed project and require
business or financial skills training. For example, Cbus Super indicated its
support for measures designed to 'ensure that contractors or sub-contractors
were able to demonstrate a financial capacity and wherewithal to meet the level
of contract they are seeking though an appropriate licensing regime' with the
aim of reducing insolvency in the building and construction industry.
As noted in chapter 2, this position mirrors the recommendation of the 2012
Cbus Super argued in favour of requiring evidence of capital
backing at the licensing stage. In its view, such a measure would 'ensure
companies bidding for work are in appropriate financial circumstances to
undertake such work' and therefore provide 'greater assurance' for
The Collins Inquiry appreciated the limitations of licensing
regimes. It acknowledged that licensing 'in and of itself, can offer little
more than gentle reassurance that a builder has paid a yearly or other fee to maintain
a current occupational licence'. As such, it is imperative that licensing 'work
alongside other reforms such as capital backing and net tangible asset
thresholds, as mandatory requirements to work in the industry'.
With that in mind, the final report of the Collins Inquiry recommended
the introduction of:
licensing system which requires all builders and construction contractors
operating in the commercial building sector to qualify within a particular
graduated licence category according to the net financial backing they are able
to demonstrate, in respect of proposed projects. The result will be that the
work of builders and construction contractors will be restricted to the
category of project value for which they have demonstrated financial backing
and licenced accreditation.
This licensing system would operate in a similar fashion to that
in Queensland. The Queensland Building and Construction Commission informed the
committee of the licensing framework for building and trade contractors in that
state. The Commission explained that the financial requirements for licensing
have recently been replaced but set out the policy that was in place at the
time of the collapse of the suspected illegal phoenix operation known as Walton
Construction (Qld) Pty Ltd. The Commission noted that under the previous policy
(the Financial Requirements for Licensing Policy—FRL):
Licensed contractors were required to maintain a minimum
level of liquidity and hold a minimum value of net tangible assets to support
their Allowable Annual Turnover (AATO). The FRL Policy established financial
categories which set the AATO for licensees based on the level of net tangible
assets held by the licensees of each financial category. Licensees were not
permitted to exceed their AATO amount. If a higher turnover was required, the
licensee needed to apply for a higher AATO with evidence that the licensee held
the required level of net tangible assets for the higher AATO.
The Commission continued:
Depending on a contractor's financial category, a
declaration, independent review report or audit report was required to be
provided on licence application and renewal as evidence that the contractor
satisfied the financial requirements set out in the FRL Policy. Independent
review reports and audit reports were required to be prepared by an 'Appropriately
Qualified Person' or 'AQP' as defined by the FRL Policy.
The complexity of the report and the qualification of the
person preparing the report increased with the financial category. Licensees
with an AATO of $300,000 or less could provide a declaration as to their
compliance with the financial requirements. Contractors with an AATO of more
than $300,000 were required to provide an Independent Review Report or if the
company was required to be audited under the Corporations Act 2001, an
Audit Report prepared by a registered company auditor was required to be
It appears that the FRL policy has proven effective in ensuring
that contractors without adequate financial backing are not allowed to engage
in high value projects. The FRL Policy became effective on 1 October 2014.
Between that date and 30 June 2015, Mr. Chesterman informed the committee that
the QBCC undertook '286 non-payment of debt investigations resulting in the
suspension of 75 licences and the cancellation of 54 licences'.
These statistics are important because licensing standards are only as
effective as their enforcement.
The QBCC acknowledged that this licensing system did not prevent
the collapse of Walton Constructions (Qld).
It should be remembered, however, that licensing systems are merely gateposts
to the industry, not the primary detection or enforcement mechanism.
Financial and business acumen
Chapter 2 demonstrated poor financial and business acumen was a
principal cause for insolvencies in the industry. Many witnesses and
submissions recognised this and indicated support for strategies designed to
improve participants' financial management skills. The ETUA considered this
approach 'worthwhile' suggesting that it 'should be introduced at the point of
licensing and in qualifications'.
Master Builders Australia provided a series of quotes arising
from consultations with its members. The overwhelming message from these
consultations was improving business and financial skills of new entrants:
If the young blokes don't have business or entrepreneurial
skills then they won't last very long in the industry...
The industry needs more business skills training. As an
industry we do a poor job of teaching apprentices about business management.
We should add one or two modules on business management to
We need to train young builders much better in running a
Building licences are too easy to get. We need to have a
tiered licencing system. HWI (home warranty insurance) at the moment in (State
name here) really is the de facto licencing system.
HWI is really the framework for licencing—what you can do,
the value of the work you can do.
(Regulators and the industry) should look at a
bronze/silver/gold tiered licensing system, which applies as the business
We need tiering (of licences). Younger builders should have
to get at least two years post ticket experience. They should also have a
diversity of experience across a range of projects before they can get an
Mr Wilhelm Harnisch, CEO MBA, informed the committee that the
Master Builders are 'actively promoting and encouraging' apprentices to upskill
through their own training programs. Mr Harnisch explained:
What we are doing actively, in terms of upskilling through
our own training programs, is encouraging particularly apprentices at year 3 or
year 4 to take on business courses, preparing themselves to be able to
Although not mandatory requirements, Mr Harnisch considered that
these programs would better position participants in the industry and provide
them with critical business and financial literacy capabilities. Mr Harnisch
did acknowledge that not all individuals would appreciate financial skills
training during their apprenticeship, and in some cases, it may be more
appropriate for the training to be conducted at registration level.
The HIA agreed that levels of financial and business acumen
across the industry are a concern, though were somewhat philosophical about
this. Mr Glenn Simpson, General Counsel HIA, noted that 'it is difficult to be
entirely knowledgeable about the full range of legal and financial issues when
essentially you are a builder, not a lawyer'.
Further, Mr Graham Wolfe, Chief Executive, Industry Policy and Media, HIA,
considered that he was not 'entirely qualified' to speculate on the connection
between insolvencies and inadequate financial and business skills.
Mr Wolfe suggested that builders should engage and rely on appropriate
specialists if they are concerned about their financial acumen.
Nevertheless, Mr Simpson informed the committee that the HIA
provides certificate IV courses, and believes that 'a greater emphasis' should
be placed on commercial issues at the certificate III and certificate IV
Consistent with their position on financial skills training and
in contrast to the MBA, the HIA contended that requiring additional financial
and business acumen courses at registration level would not be appropriate. The
HIA warned that doing so may damage productivity throughout the industry and
cause individuals to seek other opportunities. They noted:
The average small business builder/principal contractor
spends significant hours each week attending to paperwork and compliance
obligations arising from regulatory requirements including business, income and
payroll tax compliance, training regulations that apply to apprentice
employees, workplace health and safety management, occupational licensing and
state‑based home building laws and requirements.
Regulations impose cost, barriers and administrative burdens
on firms that distract them from their principal objective of growing and
running a profitable business.
Of course, a revamped licensing regime will not ameliorate all
issues. As Mr O'Sullivan, Masonry Contractors Association, noted, in most
cases on-the-job training and investment in the workforces offers the best
prospect for enhancing business acumen within the sector, though the structure
of the industry and accompanying regulatory framework must prove conducive to long-term
planning for this to eventuate:
You have to start cross-pollinating that as well, between a
tradesman and a businessman, to talk about how they work out efficiencies and
processes. You can have someone who has gone to university who does not have
the skill, and you can have a person who has the skill but does not have the
mind to process how the systems and efficiencies work. That is what we found.
Our tech company got involved with people who had nothing to do with the
construction industry, because they could understand processes. We had a guy
who had done computer science and robotics and, within three months, he could
run a job better than Lend Lease, because it was all automated and we showed
him how to do it.
Fit and Proper Person Test
Submissions and witnesses noted that an effective licensing
regime requires a third criterion: a 'fit and proper person' test. The QBCC
noted that under the Queensland Building and Construction Commission Act
1991 (QBCC Act) applicants seeking a contractor's licence must meet certain
additional requirements. In addition to technical and managerial
qualifications, a minimum level of experience and the financial requirements
examined above, the applicant 'must be fit and proper' to hold a licence. The HIA
pointed out that in relation to the housing industry; similar arrangements
exist in South Australia, Victoria, Western Australia and New South Wales.
The Commission explained further that the QBCC Act provides the
Commission with the power to exclude individuals from holding a contractor's
licence for a period of 3 years. The exclusion provisions apply to any
individual who in the previous 5 years:
has taken advantage of the laws of bankruptcy or become bankrupt;
was the director, secretary or influential person of a company
at, or within 1 year immediately before, the company has had a provisional
liquidator, liquidator, administrator or controller appointed or has been wound
up or ordered to [be] wound up.
An individual who is excluded twice is then permanently excluded
from holding a contractor's or nominee supervisor's licence and cannot be the
director, secretary or influential person of a QBCC licensee. Failure to do so
results in the company's licence being cancelled. Mr Chesterman informed the committee
that as of 28 August 2015:
...a total of 1,921 individuals and 534 companies are currently
subject to an exclusion period under the QBCC Act. In
addition, 674 individuals, comprising 461 former licensees and 213 individuals
who have never held a licence, have been permanently excluded from holding a
contractor's licence or a nominee supervisor's licence since exclusion
provisions commenced in 2007. The 674 individuals permanently excluded include
the 461 former licensees and 213 individuals who have never held a licence but
were directors, secretaries or influential persons for a failed building
Mr Chesterman, QBCC, described these exclusionary provisions as
'the commission's anti-phoenix licensing provisions'.
The QBCC noted that there is a 'limited opportunity' under the
QBCC Act for an individual to apply to have a relevant event excluded. The
individual must establish that she or he took 'all reasonable steps' to avoid
the relevant event from occurring.
Cbus Super supported the existence of a fit and proper person
test as part of a national licensing system. However, whether or not a national
licensing system is eventually developed, Cbus Super considered that a fit and
proper person test could include:
whether or not company directors had been associated with
previous insolvencies and the circumstances of such insolvencies; and
the extent of financial management skill retained in the
company—including an audit of financial records and record keeping.
The Electrical Trades Union of Australia supported this proposal,
recommending 'increased financial probity checks on an individual's
bankruptcy/insolvency history within the context of licensing'.
Veda also supported the intention behind this proposal but
suggested the introduction of a beneficial owners register might be more
appropriate. This proposal will be examined in the following chapter.
The committee notes that the Council of Australian Governments
disbanded the National Occupational Licensing Authority in 2013. In its place,
the Council for the Australian Federation is working with state and territory
regulators and industry, toward external equivalence for selected licences
across jurisdictional boundaries. As such, it appears that national
harmonisation is unlikely to be a viable option into the future. The committee
therefore stresses that states and territories should develop their
construction licensing regimes in a manner that protects industry participants
and clients from the damaging effects of insolvencies.
Notwithstanding the failure of the then QBSA (now QBCC) to
prevent the collapse of Walton Constructions, the committee believes that a
graduated licensing scheme, similar to that currently operating in Queensland
and recommended by the Collins Inquiry, which requires all builders to
demonstrate they hold adequate financial backing for the scale of intended
project is a necessary first step.
The committee believes further that, in light of the low barriers
to entry and incidence of insolvencies in the construction industry, some form
of financial and business skills training should be a pre-requisite for the
registration of a builder's or contractor's licence. In many states and
territories this is already the case. The committee therefore encourages the states
and territories to engage with industry and develop appropriate and consistent standards.
Advanced training in business, including principles of construction contract
law, should be undertaken at post-trade level.
The committee believes that a fit and proper person test would
improve the rigor and integrity of the licensing regime. Consideration should
be given by each state and territory to either: (a) introduce such a test where
no test exists; and (b) extend it across the entire construction industry. The
committee notes further that a critical element of any fit and proper person
test is the regularity and responsiveness of the test to a change in
circumstance. Automated cross-agency data sharing could trigger an alert on
matters such as bankruptcy, fraud conviction, director disqualification, and/or
liquidation, leading the regulator to satisfy itself that the licence-holder
remains a fit and proper person.
It is important to recall that any licensing standard is only
effective if it is enforced. The committee believes that greater resources need
to be directed to appropriate regulators in order to ensure that all
participants within the industry maintain conditions appropriate to their
11.37 The committee recommends that the Council for the
Australian Federation and state and territory regulators continue to develop
external equivalence for licences in the building and construction industry.
11.38 The committee recommends that each state and territory
licensing regime contain three key requirements:
that licence holders demonstrate that they hold adequate
financial backing for the scale of their intended project. This capital backing
requirement should be graduated, with increased levels of proof required for
more significant projects;
that on registration, licence holders provide evidence they
have completed an agreed level of financial and business training program(s),
including principles of commercial contract law, developed in consultation with
industry bodies; and
that licence holders demonstrate that they are a fit and
proper person to hold a licence.
11.39 The committee recommends that automated
cross-agency data sharing should trigger an alert when an individual: declares
bankruptcy; is convicted of fraud; is disqualified as a director; or liquidates
a company. This alert should require the relevant state or territory regulator
to satisfy itself that the licence-holder remains a fit and proper person.
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