Irish Concrete Federation

8 Newlands Business Park, Naas Road, Clondalkin, Dublin 22 Tel: 01 464 0082 Fax: 01 464 0087

info@ irishconcrete.ie

Irish Concrete Federation Submission to theJoint Oireachtas Committee onFinance, Public Expenditure and Reform on the Construction Contracts Bill

February 2012

Concrete Built is Better Built

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President: Jim Farrell,Chief Executive: Gerry Farrell,Company Secretary: John Maguire

Irish Concrete Federation Ltd: Registered in Ireland No. 236008

Directors: J. Farrell, P. Gleeson, M. Guinan, C. Loughnane, J.J. McGrath, D. McKeown, F. O’Neill, C. Quinn, D. Wright.

Background

The Irish Concrete Federation (ICF) is the national representative organisation for the aggregates and concrete industry with approximately 100 members operating in 300 locations throughout Ireland.ICF members are manufacturers of construction products for supply to the construction industry. In recent years ICF members have suffered greatly from bad-debt arising from non-payment for products supplied to both publicly and privately funded construction projects. This bad-debt is severely threatening the future of many businesses in the industry which has already experienced 10,000 job losses since 2007. As an example of the burden of bad-debt being faced by our members, ICF estimates that in one case in late 2010, members located throughout the country were left with unpaid bills totalling €10million as a result of the demise of a single building contractor involved in the construction of a large number of publicly funded construction projects.

The following table outlines a small number of additional examples where suppliers of materials to publicly funded projects, were left unpaid for their products / materials. These examples represent a mere fraction of the overall level of bad-debt experienced by our members in recent times.

Project / County / Publicly Funded / Amount Unpaid
€
Social Housing / Tipperary / Yes / 25,000
Public Library / Wexford / Yes / 32,000
NationalSchool / Kildare / Yes / 88,000
Schools / Laois, Offaly / Yes / 20,000
Nursing Home / Laois / Yes / 27,000
Garda Station,
Government Offices / Donegal / Yes / 7,000
Social Housing / Clare / Yes / 97,000
Public Drainage / Waterford / Yes / 30,000
Hospital / Galway / Yes / 31,000
Hospital / Cork / Yes / 73,000
Social Housing / Galway / Yes / 55,000
Water Scheme / Cork / Yes / 55,000
School / Tipperary / Yes / 9,000
Schools,
Traveller Halting Site / Tipperary / Yes / 60,000
Third Level Institution / Galway / Yes / 63,000
School / Offaly / Yes / 30,000
Schools / Kilkenny, Kildare / Yes / 8,000
Council Housing / Mayo / Yes / 50,000
School / Roscommon / Yes / 32,000
Motorway Service Stops / Meath / Yes / 86,000
GovernmentBuilding / Dublin / Yes / 80,000
Wastewater Treatment Plant / Kerry / Yes / 30,000

ICF fully supports the introduction of legislation to protect suppliers of labour (sub-contractors) and suppliers of construction products to construction projects.However, while providing protection to suppliers of labour (sub-contractors), the current draft legislation specifically excludes suppliers of construction materials (products) from any protection.These suppliers, particularly those whose products form part of the structure of a building or project, often within two hours of production, have no legal protection from non-payment. Put simply, these suppliers are in the exact same position as suppliers of labour (sub-contractors) i.e. they cannot take their product(s) back and sell them elsewhere as they are physically and legally irretrievable. Therefore the draft legislation, which passed Seanad committee stage, needs to be amended to protect these suppliers who are a key part of the construction industry supply chain.

In addition, ICF believes that the ultimate protection for all suppliers can only be guaranteed when public contracts are awarded only to organisations who can demonstrate the ability to pay their suppliers. Currently there is no consideration whatsoever given to the ability or track record of contractors with regard to payment of suppliers in the awarding of both public and private contracts. In the absence of a policy change in this regard, a requirement for the provision of a security for payment, as exists in other countries, is by far the most effective means of protecting suppliers.

ICF participated in the public consultation process, chaired by Minister of State at the Department of Finance, Public Expenditure and Reform, Mr. Brian Hayes T.D in June 2011. In addition, ICF has made a submission to the Department of Public Expenditure & Reform on the Regulatory Impact Analysis (RIA) of the legislation, published by the Department in September 2011.

ICF is grateful for the opportunity to make this submission on the legislation to the Joint Oireachtas Committee on Finance, Public Expenditure and Reform.

Submission Structure

In this submission, ICF will primarily address the following issues:

(a)Inclusion of Suppliers of Construction Products (Materials)in the Bill.

(b)Inclusion of Security Provisions in the Bill

ICF fully supports calls by other organisations for further necessary changes to the legislation, including binding adjudication and removal of thresholds below which the legislation would apply.Given that there is universal support for changes to the provisions in the legislation in relation to these issues from all stakeholders, this submission will not deal with these issues.

However, the submission will clearly show the unique position in which suppliers of construction products (materials) which are incorporated into buildings or works and are therefore irreversibly altered and legally irretrievable, find themselves when presented with the threat of non-payment and the need for protection for these suppliers.

Inclusion of Suppliers of Construction Products (Materials) in the Bill

(a)Regulatory Impact Assessment – September 2011

At the public consultation on the bill which was held on 28th June 2011, ICF called for the scope of the Bill to be extended to cover suppliers of construction products (materials) under construction contracts. However in the Regulatory Impact Assessment (RIA) published by the Department of Public Expenditure and Reform in September 2011, the following two reasons were put forward as a justification for the non-inclusion of goods, supplies, materials or equipment in the legislation:

  1. “Supplies that take place as part of a construction project are already legislated for by the European Communities (Late Payment in Commercial Transactions) Regulations 2002 (SI No 388 of 2002)”.
  1. “The issue of late payment is not confined to the construction sector and is therefore more suited to legislation covering all commercial transactions”.

The following are the ICF views on each of these two points:

1.Supplies already legislated for by the Late Payment in Commercial Transaction Regulations 2002:

(a)The Late Payment in Commercial Transactions Regulations 2002 referred to above provide no protection whatsoever to suppliers of construction products (materials) who are not being paid by their customers. As stated in the RIA, this legislation simply provides for the imposition of interest charges by suppliers in the event of late payment. The reality is that construction products (materials) suppliers have no possibility of charging interest to their customers for late payment. The challenge is simply to get paid for the goods supplied. This challenge is even greater, given the fact that many construction materials are irretrievably altered and therefore cannot be taken back by the supplier and used for another project.

(b)The RIA itself states that these regulations are most effective when payment is not disputed. The facts are that, in practically all cases, payment is disputed and therefore the ability of construction product(material)suppliers to charge interest to a non-paying customer does not exist.

(c)The Late Payment in Commercial Transactions Regulations 2002 applies to commercial transactions which are catered for in the current draft of the Construction Contracts Bill which passed through Seanad Eireann. Hence the logic for excluding a different category of commercial transactions (i.e. supply to construction products) on the basis that they are covered by the late payment regulations is unfounded.

(d)There is a mistaken assumption inherent in the RIA that securing a court judgment represents a major benefit to suppliers. Unfortunately this is no longer the case and the fact is that, in many cases, securing the court judgment against a debtor who is refusing to pay simply represents an additional legal cost to the creditor with no increase in the likelihood of payment being received.

2. Late Payment is not confined to the Construction Sector and is therefore more suited to legislation covering all commercial transactions”.

ICF agrees with the statement in the RIA that the issue of late payment is not confined to the construction sector. However this does not mean that suppliers of key construction materials are catered for under more general legislation covering all commercial transactions. These suppliers are in a much different situation from other product suppliers. The supply of key construction products (materials), which inevitably form part of the structure of a buildingor a construction project,often within hours of production,can be clearly differentiatedfrom the supply of other products or equipment toconstruction projects and indeed, from the supply of products for “non-construction” projects. This can be clearly evidenced in the following examples:

(a)The supply of aggregates for foundations;

(b)The supply of precast floors for buildings;

(c)The supply of readymixed concrete for floors, foundations, walls etc.

(d)The supply of concrete blocks for walls;

(e)The supply of road surfacing materials for road construction;

In each of the above examples, the supplier of the key construction products (materials) is in the unique situation of not being in a position to take their products back if the customer refuses to pay for the products due to the nature of the product and the fact that they form part of the structure of the building or the works, often within hours of production. An obvious example of this is ready-mixed concrete which is a perishable product, normally delivered to site within two hours of production and which is immediately incorporated into the structure of a building. General legislation covering all commercial transactions can not address the unique situation in which suppliers of such materials operate. Therefore the exclusion of such suppliers from the remit of the Construction Contracts Bill is unfair and represents a substantial weakness in the draft legislation.

(b)Current Legal Protection for Suppliers of Building Materials (Products)

Suppliers of construction products (materials) do not have legal protection against non-payment. They do not have the protection of “retention of title”. It is well established law that a “retention of title” clause is defeated once the materials to which it relates are incorporated into the works. They then become a fixture and title automatically passes to the land owner / works owner, regardless of whether the materials have been paid for or not.Of course, there is no practical possibility of returning construction products (materials) to the supplier where such products have been incorporated into the works often within hours of production and are thereby irreversibly altered.

The reality is that such suppliers of materials are in a unique situation. Unlike other suppliers who retain ownership of their products until they are paid for, this protection does not exist for suppliers of many construction products(materials).

(c)“Bespoke Supplies”

The RIA states that there is a reasonable case for including some provision for supplies that have been specifically made for a specific construction project (i.e. bespoke supplies). The proposal to include“bespoke supplies” in the legislation would seem to be an attempt to cater for suppliers who are not in a position to retrieve their products for sale elsewhere in the case of late payment or non-payment.

In effect, the reference to “bespoke supplies”supports the ICF point in relation to the unique difficulties construction product (material) suppliers are faced with, as outlined above. While this acknowledgement is welcome, it is critical that any wording in the legislation to protect such suppliers is clear and unambiguous; i.e. the legislation must cater for suppliers of products (materials) who are not in a position to retrieve their products and sell them elsewhere because they are physically, legally and economically retrievable. Simple references to “bespoke supplies” or “individually manufactured supplies” leave the legislation open to legal interpretation which would render the legislation ineffective despite its intent.

(d)Current Proposed Legislation:

Currently page 5 of the draft legislation states the following:

“(3) Subject to Sub-Section 4, references in this Act to construction operations do not include the manufacture or delivery to a construction site of:

(a)Building or engineering components or equipment

(b)Materials, plant or machinery

(c)Components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection or for security or communication systems”

The following sub-section states:

“Construction operations do include a case where the things referred to above are supplied under a contract which also provides for their installation”

It is ICF’s view that the case of “materials” referred to in (b) above differsgreatly from the “components, equipment, plant, machinery, systems”outlined in this section. As mentioned earlier, materials (products) such as ready-mixed concrete, concrete blocks, aggregates, precast columns, precast floors, road surfacing materials etc inevitably form part of the building structure or project, often within hours of production and are physically, legally and commercially irretrievable by the suppliers,unlike other goods or equipment or components that are retrievable. Therefore there is need for the legislation to differentiate between suppliers who are in a position to retrieve their products and those who are not. The legislation must then protect the latter category of suppliers. In order to achieve this objective, ICF believes that a simple amendment to the legislation, as outlined in point (e) is imperative.

(e)Proposed Amendment

The reference to “materials” in the legislation as referred to above needs to be further qualified as follows:

“Where such materials are by their inherent nature, or upon delivery to the site, either economically or legally irretrievable from the site or are incapable of reuse on another project or are incorporated in to the structure or works then the supply of such materials is included within the definition of construction operations”.

(f)Impact of the Amendment

This proposed amendment to the definition of materials will have the impact of providing protection to suppliers that cannot retrieve their products (materials) in the event of not being paid because these products are incorporated into the building structure or works. It does not apply to products which are not incorporated into the building or works and therefore does not run the risk of widening the scope of the legislation to transactions outside of the construction sector.

Inclusion of Security Provisions in the Bill

Payment Bonds

It is ICF’s strong contention that in order to curb the widespread abuse of suppliers of material and labour on projects funded by taxpayers, that only those companies capable of paying their suppliers of labour and materials should in future be awarded contracts funded by the state. It is not acceptable that a large contractor can walk away owing €50 million to his sub-contractors and suppliers of labour and materials for works completed on public contracts as happened in the very recent past in Ireland. In addition, it is totally unacceptable that contractors, who regularly fail to pay their suppliers and sub-contractors in full should continue to tender successfully for publicly funded projects.

ICF strongly advocates the introduction of payment bonds to protect suppliers of labour and materials, for contractors who tender for publicly funded projectsas is the case in the U.S.A.The Miller Act is a law in the U.S which requires thatboth a performance bond and a separate payment bond is lodged by the contractor before a contract is awarded for the construction of any federally funded project. The performance bond protects the client in the event of the contractor failing to complete the project and such bonds are commonplace in Ireland. However the payment bond is lodged for the protection of suppliers of labour and materials. No such bonds are required in Ireland for publicly (or privately) funded projects.

Provision had been made in earlier drafts of the legislation for the introduction of a security for payment but this was withdrawn before committee stage in the Seanad. ICF believes that the issue of security of payment which was one of the original objectives of the legislation is the ultimate solution to the payment problems being faced by sub-contractors and suppliers and should be provided for in this legislation.

Regulatory Impact Assessment

In the RIA, the inclusion of security provisions was considered unlikely for the following reasons:

(a)An increase in the regulatory burden;

(b)An increase in cost;

(c)A deterioration of the cash flow for smaller contracts;

(d)A reduction in the number of players in the market;

(e)A disproportionate solution to the problem;

(f)Other provisions of the legislation will render the security unnecessary;

The following are the ICF views on each of these points:

(a)Increase in the regulatory burden
Currently a performance bond is required to be lodged by contractors for all major projects. This bond protects the ultimate client in the event of the contractor going out of business before the project is completed. Hence, given that performance bonds are readily available, the requirement for contractors to lodge an additional payment bond should not be seen as a major increase in regulatory burden. As outlined above, in the United States, a payment bond and a performance bond must be lodged by contractors on all federal (publicly funded) projects.

(b)Cost

ICF members have made enquiries from their insurers on the potential cost to contractors of raising a payment bond. Initial estimates from insurers indicated that the cost of such a bond would be 1% to 2% of the overall contract value. While this undoubtedly is an increase in cost, it must be weighed against the cost associated with suppliers and sub-contractors being forced out of business as a result of non-payment. Similarly it must be noted that suppliers will not have to price in the risk of bad debt when tendering for public projects if payments are guaranteed through the introduction of a security.