ASIO Building: The costs of
poor contracting practices
Report to the Minister for Small Business, the Hon Bruce Billson MP,
on the small business concerns raised in the construction of the
ASIO Building (Commonwealth New Building Project).
ASBC Report │ January 2014
Contents
Executive summary ................................................................................................................. 3
Role ............................................................................................................................................ 5
Background .............................................................................................................................. 5
The Ben Chifley Building........................................................................................................ 6
Purpose ..................................................................................................................................... 7
Issues ........................................................................................................................................ 8
Procurement/contracting process .......................................................................................... 8
Contracting and subcontracting practices ............................................................................. 9
Latent conditions in contracts ............................................................................................ 9
Imbalance of power .......................................................................................................... 11
Secondary subcontracting concerns................................................................................ 12
Security of payments............................................................................................................ 13
Misconceptions regarding government work ....................................................................... 13
Discretionary payment mechanisms .................................................................................... 14
Observations .......................................................................................................................... 15
External Administration of Urban Contractors ..................................................................... 16
Improving professional performance ................................................................................... 16
The Government’s role......................................................................................................... 17
Conclusions ............................................................................................................................ 19
Improved contract management by Commonwealth agencies ........................................... 19
Subcontracting documentation ........................................................................................ 19
Construction contracts ......................................................................................................... 20
Construction trust accounts ................................................................................................. 20
Review of regulatory approach ............................................................................................ 21
Scope for awarding contracts to companies in administrative actions in exceptional
circumstances ...................................................................................................................... 21
Lessons for the future ........................................................................................................... 22
Recommendations ................................................................................................................. 23
Recommendation 1 – Improved Government contracting process and management ....... 23
Recommendation 2 – Better regulatory oversight ............................................................... 24
Recommendation 3 – Improving professional performance and standards ....................... 24
Recommendation 4 – Support the provision of information and education ........................ 24
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Executive summary
In March 2013, the Australian Small Business Commissioner was contacted by a small
business regarding underpayment and/or non-payment to small business contractors for
external works carried out on the Commonwealth New Building Project (Ben Chifley Building)
in Canberra.
This is not an isolated incident. For various reasons, small businesses right across the
country are continuing to be caught up in insolvencies and administrative actions on major
building and construction projects. This is happening on projects commissioned by
government agencies across all jurisdictions as well as private sector projects.
There can be a perception within the business community that obtaining work on a large
government project brings in more revenue, provides an opportunity to promote reputation
and consequent profits. This can be very appealing to small business contractors, particularly
those wanting to grow. However, while there can be benefits, a large project also brings with
it a higher level of complexity and compliance issues, often resulting in more risk and higher
levels of investment.
The purpose of our enquiries leading to this report was to consider:
1. What led to the non-payment to the small business contractors on this particular
project?
2. Whether there is any recourse available through the Government for the affected
small businesses?
3. Can procurement and contracting practices on large Government projects such as
this be improved to minimise the incidence rates of business failures in the future?
On this project, the Australian taxpayers paid for a new building, which was built. The prime
contractor and major subcontractors were paid to deliver the new building, which they
delivered. However, a number of the small businesses that actually carried out the work did
not get paid.
While taxpayers should not have to effectively pay twice for this work, there is something
fundamentally wrong with this scenario that leaves the smallest participants high and dry.
The primary observation from our enquiries on this project is that a great deal of the issues
can be attributed directly to poor contracting practices by subcontractors and secondary
subcontractors, including the lack of appropriate professional advice.
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What became apparent is that every player in the business community can get better at what
they do. Government procurement practices and contract management can improve.
Contract and management skills of business can get better and communication between all
parties can also improve.
In recent years there have been several inquiries and reports into insolvencies on building
and construction projects. As a result, some state governments are heading down similar
paths in regard to improving the operating environment for subcontractors. A number of
measures to better protect subcontractors from the effects of insolvency have been or are in
the process of being implemented. This presents the Government with an opportunity to
monitor and review the impact of these measures with the possibility for wider
implementation.
Accordingly, the thrust of the recommendations of this report are directed to supporting the
provision of information and education, improvements in Government practices and
oversight, and improvements in contracting by all participants in the business community.
If the Government is to consider any form of intervention on contracts for Government
building and construction projects, we would encourage the Government to not unduly
encroach on the freedom of contracting between businesses. Any form of intervention should
be well thought through, succinct and have a clear purpose. It should strike the right balance
between protections for small contractors from unlawful or unacceptable behaviour while not
stifling innovation and competition, adding significant compliance costs for any party to the
contract, or creating unintended ‘collateral damage’.
The impact that this saga has had on families and the people behind the 180 small
businesses involved is clearly unfortunate and highlights the need for small businesses to be
hungry for information to improve their practices and for governments to work together to
ensure that impacts of this kind are avoided in the future.
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Role
The role of the Australian Small Business Commissioner (ASBC) is to:

provide information and assistance to small businesses, including referral to dispute
resolution services;

represent small business interests and concerns to the Australian Government; and

work with industry and government to promote a consistent and coordinated
approach to small business matters.
At its core, our role is about improving the business environment by working with
governments to ensure that small business needs are taken into account and helping small
business (including navigating regulation and processes, assisting in the resolution of
disputes and providing relevant information).
Background
In March 2013, the ASBC was contacted by the Director of Tread Lightly Earthmoving Pty
Ltd regarding underpayment and/or non-payment to small business contractors for external
works carried out on the Commonwealth New Building Project (Ben Chifley Building).
Lend Lease Project Management & Construction (Australia) Pty Limited (Lend Lease) was
engaged as Managing Contractor on the Project by the Department of Finance and
Deregulation (Finance). Delivery of the Project has continued for approximately 5 years, and
is nearing completion.
Urban Contractors (UC) was engaged by Lend Lease in October 2011 under the terms of a
duly executed Major Works Subcontract, following a competitive tender and evaluation
process, to perform external civil and landscaping works on the Project.
Due to the scale of the works, UC subsequently engaged the services of some 180
secondary subcontractors.
During the Project, UC entered into voluntary administration, with BCR Advisory appointed
as Administrators on 9 October 2012. This was a contributing factor in a number of
secondary subcontractor insolvency issues, including the liquidation of Tread Lightly
Earthmoving Pty Ltd.
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The Ben Chifley Building
ASIO’s new central office was officially opened on 23 July 2013. The building was named the
‘Ben Chifley Building’, after Australia’s sixteenth Prime Minister, Joseph Benedict ‘Ben’
Chifley. The Australian Cyber Security Centre (ACSC) will also be located in the new
building.
The Ben Chifley Building was constructed as a joint venture with Finance. This special
purpose, high-security building has been designed with the capacity and flexibility to meet
the long term national security needs now and in the future.
The Ben Chifley Building is located at 70 Constitution Avenue, Parkes ACT, adjacent to the
Department of Defence at Russell. It covers a 7 hectare site in Canberra’s Parliamentary
Triangle and contains 40,000 square metres of office space. It has a life expectancy of 80
years and will accommodate up to 1800 staff. Lend Lease advise that more than 7000
workers were involved in its construction.
Figure 1: The Ben Chifley Building during construction (source: www.asio.gov.au)
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During construction, media reports suggested that the Project was plagued by delays, cost
blowouts (reportedly in excess of $170M), insolvencies of subcontractors and an alleged
cyber-attack by Chinese computer hackers resulting in the theft of blueprints of the building.
However, nothing from our enquiries indicated that Lend Lease or other subcontractors were
responsible for these reported issues.
Purpose
The purpose of our enquiries leading to this report was to consider:
1. What led to the non-payment of the small business contractors on this particular
project?
2. Whether there is any recourse available through the Government for the affected
small businesses?
3. Can procurement and contracting practices on large Government projects such as
this be improved to minimise the incidence rates of business failures in the future?
In considering the issues, the ASBC engaged with a number of interested stakeholders,
including:

Mr David Tune PSM, Secretary, Department of Finance and Deregulation;

Mr Steve McCann, Group Chief Executive Officer and Managing Director, Lend
Lease;

Mr David Saxelby, Chief Executive Officer, Construction & Infrastructure, Lend Lease;

Mr John Morgan, Director NSW, BCR Advisory (appointed administrator for UC);

Mr David Cocker, Supervisor, BCR Advisory;

Senator the Hon Peter Whish-Wilson; and

a number of secondary subcontractors.
We also spoke to several other interested parties, including some with an intricate knowledge
of procurement processes and dealing with disputes on large building projects.
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Issues
This is not an isolated incident. It appears that for a number of reasons, small businesses
right across the country are continuing to be caught up in insolvencies and administrative
actions on major building and construction projects. This is happening on projects
commissioned by government agencies across all jurisdictions as well as private sector
projects and our enquiries provided further evidence of this.
In March 2013 the Western Australian Small Business Commissioner, Mr David Eaton,
released a report on his investigation into the non-payment of subcontractors on construction
projects administered by Building Management and Works (WA SBC Report).1 While Mr
Eaton’s investigation and report focused on prime contractor insolvencies, the key issues
from our preliminary enquiries, namely the impact on smaller subcontractors, appear to be
very similar.
In August 2012, the NSW Government commissioned Mr Bruce Collins QC to chair an
Independent Inquiry into Construction Industry Insolvency (the Collins Inquiry), to assess the
cause and extent of insolvency in the building and construction industry, and recommend
measures to better protect subcontractors from the effects of insolvency. The NSW
government announced its response to the inquiry’s recommendations on 18 April 2013.2
It is not our intent to duplicate or simply rehash previous inquiries. However we have drawn
on the evidence and findings where they align with the purpose of our enquiries on the
issues associated with this project.
Procurement/contracting process
At the Commonwealth level, all departments and agencies subject to the Financial
Management and Accountability Act 1997 and relevant Commonwealth Authorities and
Companies Act 1997 bodies are required to comply with the Commonwealth Procurement
Rules (CPRs).
The CPRs represent the Government Policy Framework under which agencies govern and
undertake their own procurement and combine both Australia's international obligations and
good practice. Together, these are intended to enable agencies to design processes that are
robust, transparent and instill confidence in the Australian Government's procurement.
1
2
http://www.smallbusiness.wa.gov.au/report-on-the-construction-subcontractor-investigation/
http://www.finance.nsw.gov.au/updates/independent-inquiry-construction-industry-insolvency-response
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The primary rules for all procurements include:
1. Value for money
2. Encouraging competition
3. Efficient, effective and ethical procurement
4. Accountability and transparency in procurement
5. Managing procurement risk
6. Procurement methods
For this project, Lend Lease was engaged by Finance as the Managing Contractor (or prime
contractor). For projects of this size and complexity, it is common practice for the Managing
Contractor to engage subcontractors to carry out specific aspects of the project, who in turn
often engage secondary subcontractors. In this scenario, the contracting department
(Finance) does not have any direct contractual relationship with any of Lend Lease’s
subcontractors or secondary subcontractors.
Contracting and subcontracting practices
Poor contracting and subcontracting practices can have a major impact on business cashflow and result in protracted and costly disputes. In 2010, the Department of Innovation,
Industry, Science and Research (as it then was) conducted a survey of small businesses to
better understand the nature of small business (business to business) disputes. This survey
found that of the small businesses who indicated that they had experienced a serious
disagreement, 65% indicated that it had been a disagreement over payment for goods or
services; and 30% indicated that the dispute was over other contractual obligations
(excluding payment, retail tenancy and franchising issues). 3
Latent Conditions in contracts
During our enquiries, the issue of how Latent Conditions were dealt with in the contracting
process was raised. In general terms, a Latent Condition arises when the conditions of the
site are substantially different to the conditions which could reasonably have been expected
by the contractor or subcontractor when the contract was executed.
Some common examples of what might constitute Latent Conditions on construction projects
could include underground utilities and site conditions affected by contamination, water
courses and rock (not only its existence, but also key features such as quantity and type). 4
3
4
http://www.innovation.gov.au/SmallBusiness/Support/Documents/DisputeResolutionSurveyReport.pdf
http://www.earthmover.com.au/news/2010/december/latent-conditions-dealing-with-the-unexpected
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The term “Latent Condition” normally has a very explicit contractual term and what
constitutes a contractual Latent Condition would need to be assessed on a case-by-case
basis. Each project’s contractual arrangements may define and establish a different process
to deal with Latent Conditions. Finance has emphasised that what is a contractual Latent
Condition between the client (in this case Finance) and its Managing or Prime Contractor,
may not be continued as a contractual Latent Condition in sub-contracting arrangements.
The financial risk associated with a Latent Condition will normally reside with the client. The
client will also normally wear the program risk associated with that Latent Condition. The
Managing or Prime Contractor is expected to factor into its tender and price site conditions
which were known (or could reasonably have been expected) when the contract was
executed based on the information made available to it and, where permissible, additional
investigations. This is because they are assumed to be better informed concerning the
known site conditions. The knowledge of the conditions of the site are provided to
subcontractors so they can then be factored into the subcontractor’s tender and priced
accordingly. If the conditions are unknown, then the possible risk of these unknown variables
can be assessed and dealt with prior to executing the contract. Accordingly, parties to the
contract should seek to limit any ambiguity regarding how Latent Conditions will be dealt with
by clarifying the terms of the contract. Professional legal advice should be obtained to ensure
the best outcomes.
An observation from Finance is that the big issue, and the one which is normally the main
point of contention, is for the parties (client and contractor) to agree upon what is a Latent
Condition. To be a Latent Condition the contractor would need to clearly demonstrate that
the contractor (being in a position of having, or having access to, certain experience and
expertise) was not able to reasonably identify the Latent Condition (or the likelihood of such a
Latent Condition) at the time of entering into the contract or establishing the project’s costs
plan. If the issue is not clearly identified as a Latent Condition then the risk resides with the
contractor.
One such Latent Condition on this project was the discovery of asbestos contaminated
material on the site. While variations to the contract were permissible for removal of the
asbestos contaminated material (if considered outside the agreed Scope of Works), the costs
associated with doing this work was disputed between the parties. This formed part of UC’s
Security of Payment claim (discussed later).
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Imbalance of power
A recurring issue raised by stakeholders when discussing contracting and subcontracting
practices (not specifically limited to this project) was that of prime contractors transferring the
risk and responsibilities, particularly for contract variations 5, on to subcontractors.
From a Commonwealth perspective, as a general principle, risks should be borne by the
party best placed to manage them, that is, agencies should generally not accept risk which
another party is better placed to manage. Where an agency is best placed to manage a
particular risk, it should not seek to inappropriately transfer that risk to the supplier. 6
However, there is no directive within the Commonwealth Procurement Rules or policies for
this principle to be adhered to by contractors or subcontractors.
The primary concern raised by some stakeholders is that more sophisticated prime (or even
subcontractors) can abuse the imbalance of power to transfer the responsibility, risk and cost
for variations on to smaller subcontractors and secondary subcontractors that do not
generally have access to the same level of professional skills to determine which party is
obligated under the contract.
An observation by Lend Lease is that risk transfer from a client to the Prime contractor, from
the Prime contractor to subcontractors, and from subcontractors to secondary subcontractors
is quite common and based on the principle that the contractor actually performing the work
is best placed to manage the risk. Lend Lease suggests that subcontractors and secondary
subcontractors usually run into difficulty because they don’t have the skills necessary to
properly assess the risk, price tenders and/or administer their contracts during the delivery
phase.
The possession of market power of itself is not unlawful. In fact, it would be impossible to
undertake projects of this size and complexity without the participation of significantly
powerful players in the construction industry.
During our enquiries we were not made aware of specific instances of misuse of power
imbalance between Lend Lease and UC. BCR Advisory instructs that UC did not have the
right people, skills or structures in place to adequately understand its contractual obligations
or responsibilities or deal with these variations. We are of the view that this is not a misuse of
power as it could be reasonably expected that for a contract of this size and complexity that
UC should have the wherewithal to perform and manage any variations to the contract.
5
Building and construction contracts commonly contain a contract variation clause. In general terms, a variation in
construction contracts means changes to the scope or character of the works.
6
http://www.finance.gov.au/procurement/procurement-policy-and-guidance/commonwealth-procurement-rules/cprsprocurement-risk.html
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Secondary subcontracting concerns
In addition to the contracting issues already discussed, there have been concerns raised in
regard to the quality and adequacy of the contracts between UC and a number of the
secondary subcontractors.
UC had a strong track record in the Canberra region over a number of years on commercial
projects. This is one of the significant aspects that led them to successfully tendering for this
project. According to a number of the stakeholders we engaged with, the contracting
practices primarily utilised on this project were “fairly informal”. A number of the parties had
worked together previously on various projects and noted that “we had not had any problems
before”. It was almost the case of a ‘hand-shake’ deal, with the spending of tens of
thousands of dollars tooling up for the job prior to proper contracts being executed. One of
the secondary subcontracts we reviewed consisted of a short letter that stated:
“This letter, the back to back contract with our client, current drawings and other
documents referred to, will constitute the contract document between us, for these
works.”
Lend Lease confirmed that it was usual practice for subcontracts to refer or mirror specific
sections of the primary contract. This can occur by either providing a copy of the primary
contract and referring to specific clauses that the subcontractor is obligated to abide by, or by
replicating the applicable clauses in the subcontract.
In this instance, a copy of the “back to back contract with our client (Lend Lease)” which
constituted part of the subsequent contract was not provided by UC to the secondary
subcontractor. Despite this, the secondary subcontractor signed the contract apparently
without any legal advice and carried out the work.
It could be speculated that circumstances requiring a small business operator to comply with
the primary contract, without a full explanation of the specific clauses of the contract that are
applicable to a subsequent subcontract could be unconscionable or constitute misleading or
deceptive conduct. It would be unreasonable to assume that the small business operator
would have the level of sophistication required to understand its contractual obligations of a
‘back to back’ contract in full.
We are advised that this type of practice and use of ‘informal’ contracting practices is
commonplace in the construction industry particularly among secondary subcontractors,
often with a belief that a signed off quote is sufficient, even on larger projects.
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Security of payments
‘Security of payment’ is a general term used to describe the entitlement of contractors,
subcontractors, consultants or suppliers in the contractual chain, to receive payments due to
them.
Security of payment laws are in place for the building and construction industry in every state
and territory and are administered by the state and territory governments. These laws are
aimed at avoiding costly project delays and stopping some principals and contractors
holding-up or reducing payments owed, in order to inflate their positive cash flow. 7
During the Project, disputes arose between the parties as to UC’s payment entitlements.
Between October 2012 and January 2013, UC served two separate claims on Lend Lease
under the Building & Construction Industry (Security of Payment) Act (ACT) totalling
approximately $10m, and proceeded to adjudication under the Act in respect of both claims.
Both adjudications (by separate adjudicators) were determined entirely in Lend Lease’s
favour, with $Nil being determined payable by Lend Lease.
The secondary subcontractors could have made a claim under the Security of Payment Act
against UC. However given UC were placed into voluntary administration, the ability of the
debtor to pay was effectively dealt with by the Administrator and it appears to have been
considered unfruitful to pursue this avenue. While Security of Payments gives a claimant
great leverage to recover money, it is reliant on there being funds available to pay a claim.
Some stakeholders have also suggested that Security of Payments legislation would be
more effective is it was uniform across the states and territories.
Misconceptions regarding government work
There can be a perception within the business community that obtaining work on a large
government project brings in more revenue, provides an opportunity to promote reputation
and consequent profits. This can be very appealing to small business contractors , particularly
those wanting to grow. However, while there can be benefits, a large project also brings with
it a higher level of complexity and red tape, often resulting in more risk and higher levels of
investment. A greater level of project management, risk management and contract
management is required. Financial management also becomes even more critical.
Overdrafts or borrowings may need to be bigger to cover the increased investment or to
manage cash flow as progress payments trickle down the supply chain. This increased
complexity and broader skill set needs to be factored into the tender process.
7
http://www.fwbc.gov.au/security -payment
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It was put to Lend Lease to comment on whether subcontracting on large government
projects is more rigorous or has different levels of complexity and red tape compared to large
private sector projects. In Lend Lease’s view, there is no difference.
Another common view amongst smaller secondary subcontractors on large projects such as
this is that “this is a government job, so I’m eventually going to get paid”. This seems to be
the case on this project where some secondary subcontractors continued working and
running up significant costs for several months without getting paid, believing that because it
was a “government job” that they would eventually receive their payment. Whereas on a nongovernment project they may have stopped work until payment was received.
There were also heavy penalties (as per the prime contract) to be passed on to the
secondary subcontractors for delays affecting the completion dates. This had a domino effect
resulting in some secondary subcontractors being owed hundreds of thousands for many
months work.
These consequences led to calls from a number of stakeholders and the media for the
Government to step in and bail them out, even though there was no contractual relationship
between the Government and the subcontractor (UC) or the secondary subcontractors. The
capacity for the Government to do this is covered below.
Discretionary payment mechanisms
As advised by Finance, there are three discretionary payment mechanisms which are
available to government:
1. waiver of debt, under s34(1)(a) the Financial Management and Accountability Act
1997 (FMA Act);
2. act of grace under s33 of the FMA Act; and
3. the Scheme for Compensation for Detriment Caused by Defective Administration
(CDDA Scheme).
We are advised by Finance that none of the three discretionary options available to the
Commonwealth are applicable under the particular set of circumstances surrounding UC’s
voluntary administration.
The application and UC’s subcontractors’ eligibility for the three discretionary mechanisms
available to the Commonwealth are discussed below:
a) Waiver of Debt – as there are no amounts owing to the Commonwealth in this
situation, s34(1)(a) of the FMA Act is not applicable.
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b) Act of Grace – s33 of the FMA Act allows the Finance Minister (or delegate) to
authorise payment if he or she considers it appropriate to do so “because of special
circumstances”, and where there is no other viable avenue of redress. “Special
circumstances” are not defined but are considered to include matters relating to
agencies governed by the FMA Act, the application of Commonwealth legislation or
policy and broader policy implications. There is no automatic entitlement to an act of
grace payment, which is at the discretion of the decision maker, and the mechanism
is generally one of last resort. The actions of and/or contractual arrangements
between third parties, independent of the Australian Government, do not fall within
the parameters of the act of grace mechanism.
c) CDDA Scheme – This scheme, in effect, enables the payment of compensation for
detriment caused by government administration. Based on the circumstances, there
does not appear to be any causal link between the administration of the Australian
Government and the non-payment under an independent contractual arrangement
between parties independent to the Australian Government.
Observations
Tough economic environments create more competitive markets and tighter margins,
sometimes tending to result in more businesses getting into financial stress, requiring tighter
contracting processes.
What has become apparent from our enquiries into this matter is that every player in the
business community can get better at what they do. Government procurement practices and
contract management can be improved. Contract and management skills of business can get
better, and communication between all parties can also improve.
On this project, the Australian taxpayers paid for a new building, which was built. Lend Lease
was paid to deliver a new building, which it delivered. Urban Contractors was contracted to
deliver external works for the new building and was paid as per the contract (prior to its
termination with 85% complete). However, the small businesses that actually carried out the
work did not get paid.
While taxpayers should not have to effectively pay twice for this work, there is something
fundamentally wrong with this scenario that leaves the smallest players to deliver and not get
paid.
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External Administration of Urban Contractors
Based on its investigations, BCR Advisory has informed us that the key reason for UC’s
failure (which lead to the numerous small business contractors not being paid or being under
paid) was UC’s poor management and contracting practices. This primarily involved:

Being under-prepared and not having the structures and management skills in place
to deal with a contract of this size and complexity;

Not receiving sufficient professional advice in relation to the contract with Lend
Lease; and

Deficient finance facilities and structures to cope with a contract of this size and
complexity.
There has been some suggestion that Lend Lease were in a position of power and should
have taken more responsibility to ensure that contractual obligations were understood by the
other parties down the supply chain.
It is reasonable to assume that all contractors involved in the delivery of the Project entered
into it with the intent of making a profit. Lend Lease, by anyone’s definition, is a big business
that has excelled commercially. The contract between Lend Lease and UC is complex and
would require a high level of professional advice and ongoing professional contract
management. The contract between Lend Lease and UC was a multi-million dollar contract.
In what is essentially a private commercial arrangement, it is beyond commercial expectation
or practice to impose a responsibility on Lend Lease (or the Government for that matter) to
confirm the validity or thoroughness of the professional advice obtained by UC or the
secondary subcontractors.
What is clear is that Lend Lease was well aware of the rights and obligations of each party to
the prime contract and managed the Project accordingly. The outcome may have been
significantly improved for the small business subcontractors if this was the case with UC.
However, in the ordinary course it is reasonable for Lend Lease, having undertaken its due
diligence, to assume UC had the requisite commercial wherewithal to perform the contract.
Improving professional performance
The primary observation from our enquiries on this project is that a great deal of the issues
experienced can be attributed to poor contracting practices by subcontractors and secondary
subcontractors, including the lack of appropriate professional advice.
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Some sections of the building and construction industry have recognised the importance of
professional performance of the individuals in the sector. The Professional Performance
Innovation and Risk Protocol (PPIR Protocol), developed by the Warren Centre for Advanced
Engineering, defines the standard of performance of an engineering task which can be
expected by employers, clients and other stakeholders. 8
The PPIR Protocol is a holistic professional performance suite that informs and guides:

the professional engineer acting individually or as a team member on the essentials
of performance in undertaking an engineering task; and

all parties to, and stakeholders in, an engineering task on the role and obligations of
the professional engineer and the effective use of such services.
The PPIR Protocol was developed partly in response to rising insurance costs on large
projects. It was developed as an integrated risk management process that helped to contain
costs and limit the impact of the more fragmented approach to risk assessment that was
typical of Australian projects.
To make the professional performance process robust, the PPIR Protocol ensures there is
an appropriate trigger for dealing with supplier disputes at an early stage. If parties on the
project follow the guidelines, this results in fewer protracted disputes and can help to ensure
that small business suppliers on big projects don’t fall through the cracks.
This process provides a win for large engineering and construction firms by improving their
professional performance and cost profile, and benefits small suppliers by ensuring they are
properly contracted, appropriate risk allocated and included in the professional performance
process. This is all about transparency up front in the contracting relationship.
Roll-out of the PPIR Protocol in Australian engineering offices is currently being undertaken
with the support of a number of organisations in both public and private sectors, as well as
industry associations.
The Government’s role
It is our view that no small business should fail through a lack of access to information. A
core responsibility of government is to provide information to small businesses to educate
them about government laws and help them to understand what it is they’ve got to do. It is a
matter of their own personal responsibility how they use the information, but it should be
available to them.
8
http://thewarrencentre.org.au/ppir/
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There is a view by government agencies that the most efficient use of taxpayer funds when it
comes to large projects is to appoint a managing contractor, who is subsequently responsible
for the tendering of all trade packages on the project. As there is not a contractual
relationship with the subcontractors, the agency takes an "arm's length" approach in respect
of the relationship with, and payment of, the subcontractors. Any disputes between the
contractor and subcontractors then become a “commercial contractual matter” and not the
responsibility of the agency.
While on most accounts engaging a private sector contractor would be the most appropriate
and efficient approach to manage large projects, we do not believe that this should
completely absolve the agency of all responsibility for robust project management. When
government agencies are behaving as a business, it is the view of this office that they have
an obligation to act as a “model business” to influence industry behaviour positively, setting
best practice standards, being a good corporate citizen and demanding similar behaviour
from its suppliers, even when this may come at an additional cost.
One simple practical example of best practice arises in the Statutory Declaration process.
While Finance was able to confirm that invoices submitted by UC to Lend Lease were
accompanied by a Statutory Declaration that all subcontractors had been paid for monies
due, a further check, such as a mere phone call from a project manager within Finance to the
secondary subcontractors to verify this would have alerted the parties that this was in fact not
the case.
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Conclusions
If the Government is to consider any form of intervention on contracts for Government
building and construction projects, we would encourage the Government to not unduly
encroach on the freedom of contracting between businesses. Any form of intervention should
be well thought through, succinct and have a clear purpose. It should strike the right balance
between protections for small contractors from unlawful or unacceptable behaviour while not
stifling innovation and competition, adding significant compliance costs for any party to the
contract or creating unintended ‘collateral damage’.
Improved contract management by Commonwealth agencies
Based on our enquiries, it generally appears that the contracting process (carried out in
accordance with the CPR’s) for the primary contract on large construction projects is quite
robust—particularly by those agencies which are regular large procurers.
However, procuring agencies can improve the contract management and project
management throughout the supply chain on large projects. Taking a hands-on approach to
checking the validity of Statutory Declarations as mentioned is one possible approach.
Subcontracting documentation
One of the key messages of our office when engaging with small business is to stress the
importance of seeking professional advice from an accountant, business advisor or a lawyer,
particularly in relation to contracts and leases, as these have obligations which need to be
fully understood. For example, taking a lease or contract to a lawyer and asking them to
explain it whilst highlighting in one colour all the business owners rights and obligations and
in another colour all the rights and obligations of the other party will improve understanding
and leave the business owner with an easy to reference resource. In our experience, this can
significantly reduce contract related disputes and bring about improvements in the
contracting practices of both parties.
The Department of Finance has recently developed a new suite of standard procurement
documents for low risk procurement under $200,000. As a result of discussions with our
office, to clearly highlight the rights and responsibilities of each of the contracting parties, a
colour-coded version of the contract has been included. It is expected that the small business
sector will be a major beneficiary of this initiative.
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If colour coding of contracts proves to be successful on contracts under $200,000, this could
potentially be rolled out to all Commonwealth contracts and include all subcontracts within
the supply chain on Commonwealth projects.
Construction contracts
While the Government currently has a Standard Contract Document Suite which provides
standard templates, standard form contracts and related guidance to agencies and their
suppliers, it could also consider a specific standard contract suite for general conditions for
construction contracts. This approach is used for information and communications
technology (ICT) procurement, recognising that a tailored approach is required to achieve the
objectives of the Government’s ICT strategy.
It was indicated as part of our enquiries that the NSW government’s GC21 construction
contracts have proved to be effective in emphasising co-operative contracting and enhanced
communication between the parties. Edition 2 of GC21 provides a short list of mandatory
requirements to give the contractor and subcontractors flexibility in their commercial
arrangements. One stakeholder interviewed suggested that the defects free completion
approach in GC21, ensuring that all commercial arrangements are finalised before the
practical completion of the project, helps to promote a consultative approach between the
contractor and subcontractor.
Construction trust accounts
One of the potential remedies proposed to assist in reducing small business insolvencies on
large construction projects such as this was the introduction of construction trusts or
retention sums. This effectively retains the funds in a trust account to ensure that the money
is only used for the intended purpose throughout the supply chain. Trusts of this type have
been used, and are reported to be effective, for a number of years in Canada and the United
States.
One of the recommendations of the Collins Inquiry was to establish a statutory Construction
Trust for the purposes of paying the subcontractors and suppliers on all building projects
valued at $1,000,000 or more. In its response to the Inquiry, the NSW Government
announced it will establish a Retention Trust Scheme for subcontractors to be administered
by the NSW Small Business Commissioner.
While there is some vocal opposition within the construction industry, believing that it will add
additional layers of red tape and slow down the payment process, or that corralling the
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money will not fix having poor systems and people in place, construction or retention trusts
have support amongst other stakeholders. There appears to be sufficient evidence to
suggest that the NSW scheme should be closely monitored with a view to a potential trial at
the Commonwealth level.
Review of regulatory approach
The Collins Inquiry considered that much more could be done by the Australian Securities
and Investment Commission (ASIC) to check the health of businesses in the construction
industry. This appears to be worth exploring further and perhaps consideration could be
given to re-establishing the National Insolvent Trading Program or similar.
Our enquiries also revealed that while Statutory Declarations are required to prove that
subcontractors have been paid, this process is not being taken seriously and treated as just
part of the paperwork. This is reiterated in the WA SBC Report where Mr Eaton noted that
the Statutory Declaration process is a poor tool that has failed to ensure security of payment.
One of the reasons suggested for this was limited prosecutions relating to falsely signed
Statutory Declarations.
Scope for awarding contracts to companies in administrative actions in
exceptional circumstances
Prior to this project, UC were successful at completing medium sized projects, often for the
ACT government. Prior to being placed into Voluntary Administration, UC met ACT
Government Shared Services pre-qualification for contracts to the value of $10 million. Once
entering into an External Administration, this removed UC’s pre-qualification. This affected
the ability of UC to continue to trade, and appears to be inconsistent with the intent of the
Voluntary Administration regime under the Corporations Act 2001.
We raised this issue with the ACT Deputy Chief Minister, the Hon Andrew Barr MLA. Noting
that while there could be risks with awarding contracts to a company in an External
Administration, UC had a strong track record on ACT government projects and may have
been in a better position to trade out of its situation if there were ongoing and future contract
opportunities.
We discussed with Minister Barr the potential scope for awarding contracts for exceptional
circumstances where it was in the public interest. In this case, it could have led to better
outcomes for UC’s 180 local small business contractors if UC had been permitted to retain its
pre-qualification status under the ACT system. If a test of “exceptional circumstances” had
been in place, it is strongly arguable that the circumstances UC found itself in were
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exceptional, particularly if access to ACT Government work resulted in UC trading out of its
difficulties and enabled it to meet its obligations to the 180 unpaid small business
contractors.
Lessons for the future
The impact that this saga has had on families and the people behind the 180 small
businesses that were either not paid or underpaid is clearly unfortunate. It is important that
measures are put in place to avoid this situation occurring in the future. Educative
opportunities should be explored and pursued so that the lessons learned from this matter
benefit future projects and contractors.
It highlights the need for small businesses to learn of the potential pitfalls of contracting on
large building and construction projects and to ensure that impacts of this kind are avoided in
the future.
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Recommendations
In light of the concerns raised on this project, and based on the observations and
conclusions from our enquiries, we pose the following recommendations for the
Government’s consideration to assist in improving the outcomes for small business
subcontractors on large Government building and construction projects.
Recommendation 1 – Improved Government contracting process and
management
1.1. We recommend that options for improved contract and project management on large
Commonwealth construction projects be considered by the Government’s Procurement
Consultation Committee (or similar).
1.2. We recommend that the Government considers the introduction of specific
construction contracts for Commonwealth projects. This would follow consultation
with the NSW government and building and construction stakeholders in NSW on
whether any aspects of GC21 could be adapted to suit the Commonwealth’s current
standard contracting suite.
1.3. We recommend that the Government considers amending the Commonwealth
Procurement Rules to ensure that the principle of risks being borne by the party best
placed to manage them are applied to subcontracts and secondary subcontracts. The
same standards should be applied throughout the supply chain, with terms no less
favourable than the prime contract.
1.4. We recommend the wider use of colour-coded contracts to explain the rights and
obligations of each party to the contract. This would follow feedback received on the
trial of colour-coded documents for low risk procurements under $200,000.
1.5. We recommend that the Government should closely monitor the outcomes of the NSW
Retention Trust Scheme with the view to a potential trial at the Commonwealth level.
This could be in the form of a pilot on a specific project.
1.6. We recommend that governments across jurisdictions consider exceptional
circumstances prior to removing businesses in external administration from
procurement panels.
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Recommendation 2 – Better regulatory oversight
2.1. We recommend that as part of the Financial System Inquiry announced by the
Treasurer on 16 October 2013, that the Government considers a more proactive role
for ASIC in regular and ongoing health checks of companies in the building and
construction industry.
2.2. We also recommend that consideration be given to a review of the way Statutory
Declarations are treated within the industry. We would be supportive of an educative
approach where directors of companies found to be in breach are forced to undertake
training on the proper use of Statutory Declarations. This approach has had a positive
impact on changing behaviours in other areas of business regulation.9 Prosecutions
would remain for serious and repeated breaches.
It is the view of this office that, as a regulator, there is an opportunity for ASIC to have
a more prominent role, through better education activities as well as clamping down on
serial offenders, to ensure the Statutory Declaration process is more robust and taken
seriously by the industry.
Recommendation 3 – Improving professional performance and standards
3.1. We recommend that the Government considers working with the Warren Centre, the
major building and construction companies, and industry associations (such as Consult
Australia) on the suitability of expanding the take-up of the PPIR Protocol
throughout the industry.
Recommendation 4 – Support the provision of information and education
4.1. In addition to recommendation 2.2 to review the way Statutory Declarations are
treated, we recommend that the Government support the provision of education and
information on tools to assist small businesses avoid insolvencies.
There are a number of potential avenues for the delivery of targeted education and
information, such as the provision of specific funding through the Small Business
Advisory Service (SBAS) program (for private sector initiatives), online mechanisms
(such as www.business.gov.au) and through the Small Business Commissioners.
9
For example, the ACCC often uses enforceable undertakings with education as an alternative measure to prosecution.
Another example is in the liquor industry in Victoria, where mandatory training on the responsibilities of company directors
of licensed premises (whose establishments had liquor license breaches), improved compliance and standards of staff within
these establishments.
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