Australia: Corrs High Vis: Episode 9 - Heading west: WA construction market update

This week Corrs High Vis heads west to consider some of trends emerging in Western Australia's construction industry. In the midst of a five-year demand recession, where do opportunities lie? Corrs Construction Partner Sarah Leonard considers the landscape as funds tighten and disputes rise. Corrs High Vis tackles the issues that matter in the construction industry.

The podcast series, brought to you by the Corrs Construction team, offers analysis and insights to help you make smarter decisions.

Ben Stephenson: Corrs Chambers Westgarth, Commentator

Sarah Leonard: Corrs Chambers Westgarth - Construction Partner, Perth

BEN: Hello and welcome to Corrs High Vis Podcast. I'm Ben Stephenson and today we're heading west. In particular, we're looking at the current market for construction and infrastructure in Western Australia and some of the changes that have taken place in the last six months. We have with us today Sarah Leonard, a partner here in the Perth construction team. Sarah, welcome. What are some of the changes that you've seen in the last six months here in WA?

SARAH: Thanks, Ben. There are four main changes that we will deal with in the podcast today. These are the impact of the new policies from the recent election of the McGowan Labor government. Secondly, amendments to the WA Security of Payment Legislation. Thirdly, the introduction of a WA Building Code for State funded building work. And fourthly, the use of project bank accounts for State building work.

BEN: That's great. It seems like there are a lot of changes happening. Should we start with just a quick overview of how you're seeing the current trends in the West Australian construction industry at the moment?

SARAH: So WA's just come off a peak construction boom from the mining and resources industry and also the petroleum industry. But it seems that we are now in the midst of a five year demand recession. Construction work demand likely peaked in September 2013 and since then it's dropped 8% and is continuing to decline. That's had some immediate impacts on the WA industry. Firstly as funds have tightened and work has become more scarce, the amount of payment disputes and insolvency in the construction industry has increased. Secondly, that has led to a lot more dispute work but hopefully that will shift back to the front end over the coming years and thirdly as private infrastructure declines the key area of growth is in publicly funded infrastructure although in saying that the iron ore price has started to stabilise, possibly leading to the next wave of capital replacement projects from iron ore miners.

BEN: Thanks, Sarah. That's really quite interesting. The last point, I guess, makes our next topic all the more important: the recent results of the State election. How do you see the fallout from the WA State election in terms of infrastructure?

SARAH: The McGowan Labor government had a comprehensive victory, particularly in the Lower House, winning 41 seats out of the 59 available. The major change in terms of infrastructure is that the Labor government has stopped work on the Row 8 Extension which was a key policy of the previous Liberal government and will focus instead on its Metronet Heavy Rail project. The Metronet Heavy Rail project is a $2.5 billion rail project in and around the Perth metropolitan area, targeted to be completed by 2023.

BEN: Yes. That will be a major change. The largest rail project since the Perth to Mandurah line was built back in 2004 to 2007. The financing of these projects is always interesting. How has the government tackled that problem?

SARAH: It's certainly an interesting issue, particularly given the amount of State debt and the current status of the WA budget. I understand that the Labor government is looking to use existing funds and to negotiate with the Federal Government for the reallocation of funding that was to be used for the Row 8 Extension. The government's also proposing to look at a number of new funding mechanisms, including funding of $667 million from land sales along the new rail line. And $267 million from value capture. Value capture is a new funding mechanism that allows the government to capture the increase in the land adjacent to the new rail line caused by the construction of that rail line.

BEN: Yes, it will be interesting to see how that financing and the negotiations play out. Now let's quickly talk about the new Building Code for WA. How does it operate and what should industry participants do to comply?

SARAH: The WA Code has been introduced by the State government to ensure that its contractors are complying with their obligations under the law. In particular, laws in relation to security of payment, industrial relations and safety. So contractors who are doing work for the WA government need to make sure that they comply with security of payment laws, pay their subcontractors in a timely way, resolve any payment disputes in a reasonable and timely manner, not engage in collusive tendering, comply with IR and safety requirements, comply with their obligations under the law in relation to unfair contracts. The Code contains obligations on those contractors to make sure that they report any non-compliances to the Code monitoring unit. And it's really important that any contractors doing State work comply with this obligation in relation to both their State funded work and private building work because failure to comply can result in an investigation by the monitoring unit and sanctions which disentitle those contractors to bid for and receive further State funded work. The obligations in the WA Code mirror those in the Commonwealth Code in relation to Commonwealth funded building work.

BEN: Yes, I'm sensing a bit of a theme here of greater protection for subcontractors. Another way that the government is tackling that problem is through the use of project bank accounts. Are you able to take us through what a project bank account is and how WA has introduced them?

SARAH: Yes, that's right. From September last year the WA government commenced a trial of project bank accounts on all government funded projects between $1.5 million and $100 million, starting with those contracts based on the AS2124 form.

BEN: Okay, sure. So what exactly is a project bank account and how does it work?

SARAH: A project bank account is a project specific bank account that's set up as a trust arrangement. The way that it works is that the government pays progress payments due to the contractor into that trust account and payments that are due out of that progress payment to first tier subcontractors are immediately dispersed to those subcontractors through the account. The monies held on trust by the head contractor for the benefit of those subcontractors and this means that it can't be accessed by a liquidator or an administrator in the event of an insolvency.

BEN: Thank you for that. So moving on now to our last topic, which is security of payment - another one that has been introduced for more protection of subcontractors – are you able to take us through some of those amendments and maybe the background to those amendments?

SARAH: That's right, Ben. In December 2016 the State government introduced amendments to the Construction Contracts Act which is Western Australia's security of payment legislation. These amendments were as a result of a review of the Act that had been carried out by the government and also the pressure in the WA construction industry due to a number of insolvencies that had occurred prior to that time. The amendments broadly have the purpose of allowing lower tier subcontractors to more easily access their rights under the Act, including an increase in the time for those subcontractors to make an adjudication application from 28 days to 90 business days and also allowing, I guess, repeat or claims recycling which had previously been prohibited under the Act. The process for enforcing adjudication determination has also been simplified so that leave of the court is no longer required and enforcement becomes a simply registration exercise. A number of other amendments have also been made. The Christmas period and public holidays are now excluded from certain timeframes under the Act. Certainly that was a Christmas gift for lawyers. The scope of the mining exception has also been narrowed which is probably consistent with the way that adjudicators were applying the Act in any event. And adjudicators now have discretion in relation to a number of non-substantive matters, including the right to determine two or more disputes together and also to waive minor procedural non-compliances with the regulations. A further amendment was also made in April 2017 and that amendment had the effect of reducing the maximum allowable time for payment in WA construction contracts from 50 days down to 42 days. That amendment was made by the government in response to concerns that certain principals and contractors had payment periods that exceeding 50 days in their contracts.

BEN: My name is Ben Stephenson and thank you for listening. We look forward to your company again on the next edition of Corrs High Vis. This podcast is for reference purposes only and does not constitute legal or other professional advice. Its contents should not be relied upon as such. Formal legal and other professional advice should be sought in particular matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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