Security of payment has been a contentious issue with sub-contractors in the construction industry for some time. This matter has increased in profile with the recent liquidation of a number of large head contractors that undertook work for both the public and private sectors. As a result, numbers of sub-contractors have not been paid monies owning to them.

To provide greater security with respect to monies due to sub-con tractors, the Government's Construction Policy Steering Committee has developed the following strategy for application to NSW Government construction projects.

1. Sub-contractors to have the option of providing approved unconditional undertakings (Bank Guarantees) in lieu of cash security and cash retentions.
2. Cash Security and Retention Monies be placed in Trust Accounts by the holders of those monies.
3. The use of reflective payment clauses to ensure the following:

a) Equitable terms of payment are observed for all parties down the payment chain.
b) Alternative Dispute Resolution is available down the contract chain.
c) Interest on late payments in subcontracts to be the same as in the Head Contract.
Breaches of the above provisions to be subject to sanction under NSW Government's Code of Practice for the Construction
Industry.

The effect this strategy will have is that the potential extent of sub-contractor exposure to non-payment for work done
on Government projects will be dramatically reduced by:

Ensuring the payment period between head contractor and subcontractor is linked to that between the
principal and head contractor. The generally shorter period than is current practice will reduce the
quantum of money owing.

Preventing the practice of "pay-if-paid".

Placing security and retention monies in trust thus providing subcontractors with better than a secured
creditor status in respect of these monies.

The CPSC proposals ensure that the amount of unpaid work is kept to a minimum on Government
projects and that the sub-contractors monies are better protected.

This strategy will ensure NSW has the most effective measure in place in Australia in protecting
sub-contractors on Government construction projects and demonstrating clear leadership by Government.
It will also provide a model for private sector projects.

I would request that Ministers ensure that all agencies under their administration become familiar with the
strategy covered in this memorandum to ensure that the initiative is applied to all construction projects
within their portfolio(s).

Contract clauses to give effect to this initiative can be obtained from the Executive Director, Construction
Policy Steering Committee Secretariat, Level 23 McKell Building, Rawson Place, Sydney (02) 372 8885
Fax (02) 372 8822.

John Fahey
Premier