Michelle Cirson (00:01.56)
Hello, welcome to the Subbies Toolbox podcast. I'm your host, Michelle Cirson, construction adjudicator, lawyer, and the founder of the Subbies Toolbox. Today on my podcast, I want to tell you how so many of our Subbies Toolbox members are being paid deposits routinely and they never give bank guarantees. Now I want to lead by saying none of our toolbox members have ever given a bank guarantee for a deposit. So
It's possible for you to get that too, but you need to know how to pitch it to your builder. So if you're in the builder's shoes and you're parting with a bunch of money and I'm talking hundreds of thousands of dollars, one of our toolbox members got paid a million dollar deposit with no bank guarantee. And from the builder's perspective, it's easy to understand why the builder would be nervous giving away all of that money. It makes complete sense from the head contract camp that the bank
would be really unhappy with the builder if the builder gave the subcontractor that much money without a bank guarantee. And you can sort of understand why builders are worried about subcontractors taking that cash and disappearing into the sunset or sinking their business because the market's volatile and businesses are going broke, not just builders, but subcontractors as well. So it's your job to understand intimately how the structure of the deal is going to take place.
and give your builder those logic based assurances that you're not going anywhere, that even if you do go somewhere, the builder will still get the benefit of the work or those goods that that big fat deposit has ideally paid for. Now, when it comes to bank guarantees, a lot of subcontractors will agree to this when they're signing the contract and say, look, I'll agree to give you a bank guarantee if you want to pay me for unfixed goods. And then when the
the subcontractor goes to the bank to get the bank guarantee, they realize they actually have to keep the cash in the bank account or give a personal guarantee over their personal land or property in order to be able to secure the bank guarantee itself. So oftentimes a bank guarantee will cancel out the benefit of a deposit in the first place. And builders often will overlook that in that transaction. They usually really tunnel vision on, well, if you disappear with my money,
Michelle Cirson (02:26.786)
I want to be able to get that money back in the other hand by just cashing in that bank guarantee. It does sound good in theory, but when it comes to the actual practical scenario, oftentimes the money in the hand is just going to put the builder back to square one. Yes, they might get their money back for the deposit that they've given, but what about the equipment or the goods that might be offsite being manufactured somewhere? And usually in the construction sequence,
there will come a point where those goods that are being manufactured or the offsite unfixed goods are more valuable to the builder than having their money back because most building companies should be in a position to be able to go and procure those goods from somewhere else. But it's the time suck in the construction program that puts them back to square one. So usually the reason that a subcontractor needs to be paid for unfixed offsite goods is because there's a big long lead time.
in having those goods manufactured where the subcontractor is effectively bankrolling having to pay for those goods to be off-site manufactured or perhaps they're being imported from overseas. So a really good example is your Lyft subcontractors who are effectively importing a Lyft and then when the Lyft gets into Australia it is possibly going to be stored somewhere for a period of time until it's installed in the building.
And you'll often see lift subcontractors will get paid 85 % of the value of their subcontract before they even show up to site with a product. So it is possible that it can be done. Builders are used to doing it, but lift subcontractors historically would give a bank guarantee for the lift deposit to the principal. So the builder wouldn't hold that bank guarantee. It would go up the chain. It would be paid to the principal. The principal would hold it because the bank needed it.
And the builder was being paid that deposit as well, because the principal recognized that the builder had to pay the subcontractor to procure the lift in the first place. lot of other trades that this takes place with is structural steel subcontractors. And even if you're looking at certain piling subcontractors who might be importing a big chunk of anchors or steel for a particular project,
Michelle Cirson (04:48.226)
joinery subcontractors where they're importing a bunch of flat pack goods effectively and the builder is working with that subcontractor to ensure that what's being imported from overseas is done so for the benefit of the project, for value management, things like that. But we often see it happen too with specialist subcontractors. Say for example, we have a subcontractor client who does water treatment systems. They will import
typically specialist pumping and pipe systems that will do water filtration. Now those subcontractors are buying equipment from Germany and the builder knows that this specialist equipment needs to come from overseas. So they will arrange for a deposit to be paid to the subcontractor so that they can procure those goods. So you might be wondering yet Michelle, look, I know, I know these things happen, but how do they convince the builder to pay the deposit without the bank guarantee?
Well, helping the builder understand that at a point in time, those offsite unfixed goods are more valuable to the builder than having their money back. Because if the builder could choose, can I have the gear that I've already paid for and not lose the time in my program? Or can I go back to square one, have my money back? Yes, I'm put back in the position financially I was for now.
but I've lost two or three months in the program where I now have to go back to a new subcontractor, start that whole process all over again, pay a deposit to the subcontractor all over again, and then have that subcontractor deliver those unfixed offsite goods. So in terms of other alternatives that are usually more appealing to a builder than a bank guarantee. Now, if your builder is smart, they will see the logic in this that if you disappear from the mix,
you're actually doing them a favour if you can set them up to prove that they own the unfixed offsite goods, so the builder is the owner, that they are the named owner on the insurance policy for those unfixed offsite goods. So typically suppliers will have a insurance policy that covers the goods while they're in transit to the project site. A letter from the supplier confirming first of all that they've been paid, so that there's no outstanding payments in respect to those goods.
Michelle Cirson (07:10.286)
and that the builder is the owner of those goods. And then the cherry on top, which is what the builder really should be making sure is in place, is that they have their appropriate PPS registration. So registrations made on the personal property security register so that the builder is recorded as the true owner of the unfixed offsite goods. So all of those things can be done and achieved using what we use in the toolbox as a deed of ownership for unfixed offsite goods.
And inside that deed, it promises to the builder that the subcontractor will make sure there's an appropriate insurance policy over those goods that names the builder. It has a security agreement written into it, allowing the builder to register over the goods. Requires the subcontractor to keep track of where those goods are. And so for example, if we were procuring some kind of metal fabricated
item and that item had to go for a little holiday over to the powder coders to be powder coated then the subcontractor would have the appropriate terms and conditions with that powder coating subcontractor and ensure that at all times those goods are noted as owned by the builder and ultimately able to be retrieved by the builder if the subcontractor were to disappear in the mix. Particularly where subcontractor or sub subcontractors who
if a subby was to disappear and that sub subby had done some work and hadn't been paid for it, that's where you're at high risk of that subcontractor holding those goods to ransom over the builder. So ensuring that you've got that deed of ownership for unfixed offsite goods and deposits paid in respect of those goods, that agreement can be more powerful, particularly if those PPS registrations are made properly. And if the subcontractor was to disappear,
the builder would be able to take those registrations to a liquidator and say, that's my gear. I want it back here. Give it to me. Or if those goods were lost or damaged, then the builder would be able to make a claim under that insurance policy because the insurance policy names the builder as the owner of those goods. Now being able to articulate all of that to your builder in a contract negotiation is not always straightforward. Builders, contracts, administrators, and staff of building companies,
Michelle Cirson (09:34.484)
often will not properly understand the transaction that they're doing. Sometimes they're not experts in your trade. So what we recommend with the Subbies Toolbox is logic based assurances. So if you can help those staffers understand the scenario and the ways in which that a circumstance is likely to play out, they're more likely to go to their manager or someone within the building company that does have the authority to say that you can be paid a deposit without a bank guarantee and explain.
Hey, listen, if we had a bank guarantee and that subby went broke with our deposit, yes, the bank guarantee will get us the money back, but it's just going to get us back to square one. It's actually better for us if we have the deed of ownership for unfixed offsite goods. We're named on the insurance policy for the product. And that way, and we have our PPS registrations in place. So that way, if things were to go pear shaped, we could actually get the gear back.
and get a different subcontractor to install that material or equipment. Now, in light of what's going on at the moment with material price increases, and thank you again to COVID for educating the construction industry or the next generation of construction industry, I should say, about this type of volatile supply issue. Builders are recognizing at the moment that there is a need
to pay for materials that are going to be used in projects and time is of the essence to just pay for those materials and lock them in because every quarter when CPI is reassessed and suppliers are realizing that fuel levies are being applied to things that they're buying or you may even have manufacturers themselves going these are our routine March and October price increases here are the letters.
notifying of the percentage price in decrease. We've seen some of those on social media being as high as 30%. So putting their price up by as high as 30 % on the supply of equipment and materials in the construction industry. So it's a great time to have this conversation with your builder and say, Hey, you want me to lock in this many sheets of roofing material or, you know,
Michelle Cirson (11:56.386)
this much jip rock or whatever the big supply item is for your trade. If you want me to sign a fixed price contract with no rise and fall today and you want to lock me in at this price so that you've got certainty, I'm going to need you to give me a deposit so I can pay the supplier so that we can fix our prices. Otherwise it's not viable for us to sign this contract. Now we're better off not signing, waiting and seeing what the prices are like when you actually need us on site.
And if you can find another subcontractor who's silly enough to just sign up to your contract under a fixed price at this time, then we're probably better off letting our competitors take those contracts and do their bum on them because we'll be left standing after they go broke trying to finish your job for free. Builders recognize that logic and that's the basis on which we've been tabling these negotiations. during contract negotiations, oftentimes by the time you get
offered a contract is two or three months since you price the job. That's if it's done efficiently. Sometimes our quotes are six to 12 months old and the builders are coming back going, hey, I'm ready to use you now. Can you sign this big scary contract and agree to fix your price? So I would challenge subcontractors to take a more commercial approach with their contract negotiations. Deposits are incredibly important, not just for cashflow, but
for your certainty in being able to perform the services under the contract for the price that you promised. So if a builder is actually commercially street smart, they're gonna recognize that it's better for them to make sure you're not gonna go broke on their job by making sure your suppliers are paid than it is for them to just throw you to the wolves and go, well, if you're silly enough to sign my contract, we'll roll the dice and see if you can get to the end of the job without going broke. So hopefully that's helpful.
That is some words of wisdom from some of our toolbox members who have been using those logic based reasons to get deposits paid by builders without using bank guarantees. The other thing I would add to this as well is that if your builder is asking you to give a personal guarantee or a parent company guarantee for these types of agreements, it's not really necessary when you can give them direct line of sight over security for the actual materials and equipment that they're purchasing.
Michelle Cirson (14:19.553)
because there's no risk there. If they're put in a position where they have to sue your company or sue you personally to try to recover money, the cost that they're to have to outlay to spend time in court with you to enforce those parent or personal company, parent company guarantees or personal guarantees. Most likely in most instances will outweigh the value of the deposit or the payment that they've made to you in the first place. So.
It doesn't make much sense. It's not a good strategy for a builder to rely on a personal guarantee or a parent company guarantee. If they're giving a deposit for a particular piece of equipment or a particular bunch of materials, it's actually better for them to get that security from the supplier, the person who is actually going to deliver the goods eventually and make sure that they are on the legal record as the true owner of those materials.
