Cash flow is King
In any business, cash flow is king. In construction, this is true at all points in the contractual chain.
For head contractors, this means having to coordinate carefully, payments from principals and payments to subcontractors against the backdrop of statutory requirements which have recently changed in WA. Specifically, from 3 April 2017, the maximum payment term for construction contractors under section 10 of the Construction Contracts Act 2004 (WA) (“CCA”) has been reduced from 50 to 42 days.
BCA’s Supplier Payment Code
Meanwhile, on 29 May 2017, the Business Council of Australia unveiled its Australian Supplier Payment Code. This voluntary initiative sees some of Australia’s biggest businesses commit to ensuring that small business suppliers are paid within 30 days of issuing a correct invoice. Amongst the signatories, a notable, large-scale employer of construct contractors’ services is Rio Tinto.
In a media release on 18 May 2017, Rio Tinto announced it would “reduce the payment terms for Australian suppliers under $1 million of expenditure to 30 days to help improve the cash flow for thousands of small businesses”. The reduced payment term for small businesses is set to commence on 1 July 2017.
We applaud BCA’s and Rio Tinto’s efforts to support small businesses which collectively employ the majority of Australia’ workforce and make a tremendous contribution to our economy. However, whilst not doubting the good intentions of signatories involved in construction, we foresee the potential for some unintended consequences arising in the construction sector as a result of:
(a) the legislative changes applying uniformly to all construction contractors; and
(b) conversely, the BCA/Rio Tinto proposal creating a “two speed” payment regime for large and small construction contractors respectively.
Technical effect of section 10, CCA
Technically, section 10 of CCA has the effect of amending payment terms in construction contracts that provide for payment to be made longer than 42 days after it is claimed, by treating that longer payment term as if it were only 42 days. In other words, a longer payment term in a construction contract is, by force of statute, deleted and substituted with a 42-day time for payment.
This was the effect of section 10, CCA even before its amendment, save that the deemed payment term used to be 50 days.
Practical effects of proposed “two-speed” payment proposal
Rio Tinto’s current supply contracts, which are set to change for smaller contractors but not for larger contractors, typically provide for payment within 45 days of the end of the month following approval of payment claims submitted by the 20th day of that month. This may mean that Rio Tinto’s initiative, as it applies to construction contractors, will increase pressure on larger contractors’ cash flow whilst making no real difference to smaller contractors.
Potential unintended effect of proposal on larger contractors
Because of the statutory reforms, larger contractors, who will still have to wait about sixty days to be paid, will have to pay their own subcontractors’ payment claims within 42, rather than 50, days (with possibly a few days’ grace being allowed in practice). This might increase the cash flow pressures on larger contractors, which deal with substantially larger sums of money than do their smaller subcontractors, past acceptable tolerances. Construction contractors may find themselves particularly sensitive to such pressures given current, weaker economic conditions.
Will the proposal make any practical difference to smaller contractors?
As it applies to smaller construction contractors, Rio Tinto’s pledge may in practice do little more than reflect what CCA, as amended, already requires. This is likely, if Rio Tinto continues its current practice of requiring payment claims to be made by the 20th of the month and the approved amount of that claim to be invoiced by the end of the same month. If, as announced, that invoice is then paid within a further 30 days, the result for smaller construction contractors will be payment within about the 42 day maximum period that CCA, as amended, already prescribes.