Michelle Cirson (00:00)
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 explain to you why, if you're a commercial subcontractor or if you're a Subby working for commercial builders, there is a very good chance your builder is being paid to pay you in arrears if they're requiring you to sign up and submit your payment claims or sign up to
A early payment platform. Now, need to caveat this podcast. I think I caveat every podcast, but the information that I have about this process comes from feedback from our Subbies Toolbox members about their experience using payment platforms with builders, but it also comes from clients who are not toolbox members where I do contract reviews for subcontractors who are working for builders all over the country.
So I have a very good cross-section of insight into the different ways that different builders are using different platforms or payment processes and how some of them are being monetized. So let's get into what the ins and outs are of this allegation. My allegation that I'm making, and I would love to be proved wrong, but what I suspect is happening out there is that builders are being paid by banks to
Pay you in arrears. So they will get a percentage of an amount of your payment claim paid to them by a financier if that financier pays your invoice before the builder's due date. So many of you will have encountered payment providers like this.
I'm not going to name them, so I'm not silly enough to name them, but there are providers out there that are effectively lenders who will finance your invoices. So if your invoice is not due to be paid for 25 business days or however long it is that you're going to wait for the builder to pay you, the the financier will pay you in the intervening period, and the builder will pay the financier in the back end of that process. And it requires you to sign up to a platform or
Get an account with that financier so that they can facilitate that payment process. Now, when these first started being used in the industry, when I first started seeing them, it required the subcontractor to approach the financier to get this service. And the subcontractor would sign an agreement with that company or that bank to say that if they
If the financier did not recover the money from the builder for any reason that the subcontractor would pay or guarantee that the money would be paid back to the bank. So I'm just going to call these financiers a bank in this process because that's effectively what they're doing. They're lending you money in the intervening period, and instead of you paying the money back, the builder pays the money back when the invoice is due. But if something goes pear-shaped in that intervening period between when you get paid and when the builder pays the bank,
Like, for example, the builder goes broke, these financiers or banks can come after subcontractors to recover that money from you. So I'll give you a couple of scenarios. We had a situation a few years ago where a builder went broke and a subcontractor had been using this process where he was getting paid his invoice in the intervening period and the builder went broke. Now the bank had a trade credit insurance policy built into
the service that they were providing for this subcontractor. So on face value, it all looked very safe because the subby thought, Well, I'm paying this bank for this insurance policy. So if the builder goes broke, the insurance should pay out, and the only amount that I would have to be on the hook for would be the 10% that the policy doesn't cover. But in this particular situation, the trade the bank actually got an insurance policy over the wrong building entity. And the building entity that
They got the insurance policy over, did not go broke. A different the entity that the subcontractor was working for the builder under, and the entity that owed the money was the one that went broke. Now this opened up a whole can of worms because the subcontractor had projects with that same builder that he was not using the bank to have his payment claims paid in the intervening period for. So he had some projects that he was using them for and some that he wasn't. And
In that process, the subcontractor had to go back to the bank and say, Hey, we under my trade credit insurance policy are going to be commencing proceedings to pursue this debt from this developer, the person above the chain where the builder had gone broke. If you want us to also try to recover the amounts that you're chasing, you need to assign the debt back to me so that I can chase it through that court proceeding. And that bank.
laughed at him and said, You don't know what you're doing, we've got a trade credit insurance policy, we'll be fine. And that was actually not the case. So the the company that had been paying him in the intervening period, when it came to light that they couldn't recover that money the way that they thought they had, they did end up coming after that subcontractor. And that had to be resolved through through a legal matter basically. So there are some risks involved with this. So the first thing I want to talk about here today on this podcast is
Subcontractors and the risks of using a bank to pay your invoice before the builder's due date so that you can have your cash flow propped up sooner. There are risks like that where if the builder goes broke, you need to be very aware of what you are signing up to terms and conditions-wise with these people who are providing this service with these banks that are basically going to pay you in the meantime. Because the ones that I've seen have got directors' guarantees written into them. So
In the instance that I just explained to you, there was a guarantee from the director himself, and also his wife had given a director's a guarantee for the amount that the builder, if the builder never paid, those two human beings, not their company, but personally, they were liable to pay the bank back if the builder never paid. So there are risks in that process. So that's the very granular level of sometimes you can get your invoices paid in the intervening period.
Now, the other thing I want to draw to your attention is oftentimes the builder will trade on credit terms with those mobs, with the banks, that exceed the maximum due dates for security of payment laws around Australia. So in ACT, maximum time frame you can be paid is 15 business days after you give your invoice. In New South Wales, it's 20 business days. In Queensland, it's 25 business days. So you see how there are differences around the country. In Victoria, it's 20 business days.
In Western Australia, it's 25 business days. So there's all these maximum due dates around the country for the amount of time that you're able to be paid under a construction contract. But where these financiers come into play, the builders can have trading on credit terms that sometimes exceed that duration. So if the builder has a clause in their contract saying you're going to be paid 30 days end of month, and you have not marked that up to say that you are going to be paid 15 business days after you give your payment claim.
The amount of time that that bank is financing that debt for is longer than the maximum time frame the builder is legally allowed to pay to wait to pay you. So you could be in what you're paying that bank to pay you in the meantime. You're financing the builder breaking the law in the background to pay that financier back for a later amount of time. So I want to bring that to your attention: is that you need to intimately understand the inner workings of.
When is the builder required to pay the bank for my invoice? If the bank pays me in the meantime, need to be really on top of what those time frames are. Because if you're facilitating and effectively paying that bank a percentage of your payment claim to get paid early, and you're letting the builder pay that bank later and longer, you are part of the problem in the construction industry where everybody is so prolifically paid late that you're enabling the builder
To pay their debts later, which is a self-fulfilling prophecy where the later the builder pays, the further behind the Mexican wave is, until eventually the builder's debts are lagging so long that they can't end up paying anyway. So that's the first scenario about how that came into play in the industry: that the subby would approach the bank and say, I need to have my invoice paid before this builder's gonna pay me. Will you please pay me in the meantime?
And I will sacrifice a percentage of my invoice to you, Mr. Bank, to be paid early. This new hybrid model that has come in in the last 18 months, that I've started seeing it in the last 18 months, is why I accuse builders of being paid to pay subcontractors in arrears. I think builders are getting commissions or at least a portion of progress claims to pay subcontractors in arrears.
So I need to just really contextualize this for a moment because when we put an invoice in the industry and the security of payment law says that we're entitled to be paid within so many business days, or the contract says we're entitled to be paid within so many business days, you're not being paid early if you get paid before the deadline in the contract. You're still giving the builder a trading on credit account terms. You're still being paid in arrears.
You are providing a valuable service, you're providing credit to the builder under the contract if you are being paid in arrears. And now the builder will get paid to get a credit account by the bank if they're getting a commission for you to have your invoice financed in the meantime. And the process and the experience that some of our Toolbox members are describing is having a platform where they can log into this system.
And say I want to be paid within seven days, 14 days, 21 days, whatever the time frame is they want to be paid, and there is a percentage, a dollar figure, or a cost that they will have to forfeit from their progress claim to effectively get that invoice paid early. Portion of that invoice, and I've had this verified now from two different sources inside building companies who have verified to me face to face that builders get paid.
Commission or a portion of that percentage. So if you are participating in a regime where you're giving a builder a trading on credit account time frame because you're being paid in arrears in the first place, they should be paying for the benefit of being getting a trading account. It should be them that is actually paying for the benefit of the financing you're providing them. But subcontractors don't get paid to give
trading on credit accounts subcontractors don't get paid a percentage or an interest figure for giving a trading on credit account to builders and so now banks are paying the builders not the subcontractors they're paying the builders to get the credit on trading account so
I'm hoping that you listening to me are understanding the bigger public policy implications for the construction industry of incentivising an upstream party to pay you late. And the later they pay you, the bigger the percentage or the the more amount of money that they're going to be able to get as a commission or a kickback.
will be because you're more motivated to go into that little portal and say, I want the earliest possible payment time frames. So I think there's a real issue here that that needs to be spoken about in the industry and really digested. The other thing that I want to talk about is hidden commissions because I firmly believe that the builders have a responsibility at least morally and also in terms of the legal implications of hidden commissions. I think builders need to disclose what they're being paid for you to be paid early.
Under these processes. And I've only ever seen one contract that has a clause in it that says that the builder is the subcontractor agrees that the builder is allowed to get commissions or kickbacks or take any kind of benefit from any part or transaction of the contract. And when you read that clause at face value, it seems like there could be rebates or some kind of you know.
Christmas present or something from suppliers where the builder gets a benefit for specifying a particular supplier. But I actually think it's got to do with this being paid early by a bank while the builder in the meantime is incentivised to trade on terms where they pay you as late as possible. So that's something that you need to be on the lookout for and at least aware of so that.
If you need to go and get paid early for your own cash flow, you can make a concerted decision between do I have a genuine need to speed up the time frame in which I get paid? In which case that's a commercial decision for you, and perhaps you're happy to pay the interest or pay the concession that you have to make to so that they can clip the ticket off your payment claim and you get paid less. That is a commercial reality of being in business.
And there is no judgment from me if you need to have that ability to get paid early for that reason. But if you are doing this routinely and not understanding what the implications are without having any genuine commercial need for this, I just want subcontractors to be aware that you are feeding a machine and a culture in the industry that is giving the builders a kickback or
Pat on the back or some kind of incentive to pay you as late as they possibly can. And at worst, it's possible that it may be facilitating a way that the builder can pay you later than the maximum due date for payment under security of payment laws. So if you are signing up to a platform like this and you're going down the path of saying I need to have that money effectively paid earlier.
Second, guess how much it would actually cost you to implement an account's receivable escalation procedure and negotiate upfront earlier payments under your contract. Particularly if you are the type of trade that has unfixed goods that are off-site or bespoke manufactured items or genuine costs at the front end of the project that you might be able to be paid for.
At an earlier point in time in the contract. I think there will be ways that you can actually educate yourself and empower yourself and arm yourself with the ability to negotiate better payment terms in your contract. And if you spent that on upgrading your systems and procedures instead of paying a financier every month into eternity for as long as you have this problem and perpetuating a problem that is only going to make it
Harder for you to get paid, which is going to send you running straight back to that bank to get paid. So a little bit of a political rant today, but this is something that has got me very concerned. I would encourage anybody who would like to have a guest podcast flesh-out discussion, a robust discussion about the policy implications for this in construction, and also any of these financiers who are actually providing this service
Who wanna come forth and explain how the process works and rebut some of the things that I've said today in this podcast, I would welcome that. If I am wrong, I will correct the record, but I have it on good authority that builders are being paid to pay you late. And because builders are being paid by the banks in that process, not the subcontractor being paid for the builder to facilitate an early payment, instead of the builder having to go to the bank and say,
I need to pay this subcontractor and it's in my commercial interest to pay this subcontract, or the Security of Payment Act says I have to pay this subcontractor within 15 business days. If the builder instead of going to the bank themselves and paying interest on that loan so that they can pay you on time, they are now sending the subcontractor to the bank to pay the interest so that the builder can pay you on time. We have a real problem in our industry. So just want to bring that to everyone's attention. Talk to me.
Let me know what you think. Let me know if you think that I'm being overly dogmatic about the whole thing, about whether it's no different to having an overdraft or it is different to having an overdraft. What are your thoughts? For me, I'm fairly upset about this being the way forward for the industry. I think there should be better ways that cash flow can be facilitated in ways that supports the downstream parties in being able to finance jobs.
It seems to me like it's preying on the most desperate party in the process. It's preying on the person who's done the work, paid for the equipment, paid the labour, paid the wages, paid the payroll tax to be able to give the upstream party the benefit of the work. And they're just waiting for time to pass before they get paid for doing that. And it's now making that person in their moment of desperation go and opt for paying a portion of their payment claim
to be paid in an appropriate time frame. I just think it flies in the face of the way we should be heading in our industry. So reach out, love to hear from you.
