Monthly Snapshot (July 2021)
RETENTIONS ARE SUCH A HOT TOPIC RIGHT NOW!
Queensland legislation requiring builders to create a special purpose retention trust bank account has now come into effect to include all State Government projects over $1M in Queensland.
This legislation was brought in by way of a staged implementation by Queensland Government, and it is now trickling into the final stages of roll out. Before Project Bank Accounts and Project Trust Accounts, builders could continue to hold any retentions in their everyday business bank accounts.
That means that the builder was able to use your retention to prop up its cash flow. In other words, there was nothing stopping a builder from spending your retention on something else. And if he did spend it on something else, he now needs to come up with new cash to release your old retentions.
Moving forward, builders now must put your retention into a special bank account as they withhold it from your payment claims. To add to the builder’s pinch point, he also still needs to give bank guarantees, or have cash retention held under the Head Contract.
We are not saying that these provisions are bad for subcontractors – quite the opposite. But we do think that the changes to cash flow practices regarding retention is contributing to builders trying to hold onto your old retentions as long as they can.
Increased cost of building materials
This one needs little explanation. Most of our clients are talking about getting contractually ‘stuck’ on a fixed price with the cost to buy materials skyrocketing, and lead times unpredictable.
The builder is feeling this too. Competition in the commercial construction market is still dog eat dog. Unless the builder is a residential builder, price wars continue.
Builders typically need to have a minimum of 90 day validity periods on their tenders. That means that they are holding their breath for an entire fiscal quarter before they know whether they can still build the job for the price they bid – and worse, by the time they are signed up and can start signing subbies up, these builders are likely to be at least four months after they originally estimated the project.
Residential builders are not immune to this. Word on the street is that law firms are being inundated with enquiries from land owners who have signed contracts with builders who now can’t complete the home for the original price.
COVID welfare is gone, and the holiday on personal liability for Director’s trading insolvent are over.
Builders who battened down the hatches to tread water for most of 2020 are tired.
Unless some miraculous cash influx hit their bank account (such as a low interest loan from the Government and some BAS concessions), there is little reason for them to still be alive at sea.
Last year when COVID hit, the Federal Government relaxed penalties surrounding personal liability for Directors of companies who are continuing to trade, despite being legally insolvent.
This was a free kick for builders whose cashflow was running on fumes pre-COVID, allowing them to buy a few jobs to keep the revenue turning over.
Thing is, those desperate decisions don’t lead to margin. In fact, builders who downsized to skeleton resources have little to no capacity to deliver quality construction work on bought jobs. Worse than that, when a decent job opportunity presents itself, the builder is already “too busy” delivering the first job with no money in it.
He can’t take his eyes off the first job for a moment, because if he does, he’s paying the Principal to build the building for him.
We also saw zombie companies trading purely for the opportunity to claim Job-keeper and BAS concessions. BAS payments are now due, and companies that created a snowball during COVID now need to try to outrun it before it crushes their business.
The holiday on personal liability for Directors has now ended, and Directors are once again able to be held liable for trading insolvent. At the end of the holiday (on 1 January) the Government further amended the law to allow a company in financial distress to restructure to avoid liquidation entirely.
Companies taking advantage of those amendments are likely to come to their creditors to discuss what that arrangement might look like in terms of a payment plan.
If this is happening to you, we recommend that you seek legal advice immediately. This is also the type of information you need to pass onto your Trade Credit Insurer promptly so that you don’t unintentionally void your policy.
How can we get retentions back?
You’ll get sick of me hearing this, but it’s not just one thing. There is not a magic silver bullet that will solve all of your “get my retentions back” problems. If magic wands existed builders wouldn’t hold your retentions in the first place.
Like all good things, that which gets measured gets actioned and improved. You need a systematic approach.
