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Joint Committee on Finance, Public Expenditure and Reform
Correspondence Item No. 2012/153(a)
Irish Concrete Federation
8 Newlands Business Park, Naas Road, Clondalkin, Dublin 22 Tel: 01 464 0082
info@ irishconcrete.ie
www.irishconcrete.ie
Fax: 01 464 0087
Irish Concrete Federation Submission to the Joint
Oireachtas Committee on Finance, Public Expenditure and
Reform on the Construction Contracts Bill
February 2012
Concrete Built is Better Built
………………………………………………………………………………………………………………………………………………………….....................................
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.
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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
Social Housing
Public Library
National School
Schools
Nursing Home
Garda Station,
Government Offices
Social Housing
Public Drainage
Hospital
Hospital
Social Housing
Water Scheme
School
Schools,
Traveller Halting Site
Third Level Institution
School
Schools
Tipperary
Wexford
Kildare
Laois, Offaly
Laois
Donegal
Yes
Yes
Yes
Yes
Yes
Yes
Amount
Unpaid
€
25,000
32,000
88,000
20,000
27,000
7,000
Clare
Waterford
Galway
Cork
Galway
Cork
Tipperary
Tipperary
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
97,000
30,000
31,000
73,000
55,000
55,000
9,000
60,000
Galway
Offaly
Kilkenny,
Kildare
Mayo
Roscommon
Meath
Yes
Yes
Yes
63,000
30,000
8,000
Yes
Yes
Yes
50,000
32,000
86,000
Dublin
Kerry
Yes
Yes
80,000
30,000
Council Housing
School
Motorway Service
Stops
Government Building
Wastewater Treatment
Plant
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-
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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)
(b)
Inclusion of Suppliers of Construction Products (Materials) in the Bill.
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.
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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)”.
2. “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
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product suppliers. The supply of key construction products (materials), which inevitably form part of the structure
of a building or a construction project, often within hours of production, can be clearly differentiated from the
supply of other products or equipment to construction projects and indeed, from the supply of products for “nonconstruction” projects. This can be clearly evidenced in the following examples:
(a)
(b)
(c)
(d)
(e)
The supply of aggregates for foundations;
The supply of precast floors for buildings;
The supply of ready mixed concrete for floors, foundations, walls etc.
The supply of concrete blocks for walls;
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:
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“(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)
(b)
(c)
Building or engineering components or equipment
Materials, plant or machinery
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 differs greatly 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.
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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 projects as is the case in the U.S.A. The Miller Act is a law in the U.S
which requires that both 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 subcontractors 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)
(b)
(c)
(d)
(e)
(f)
An increase in the regulatory burden;
An increase in cost;
A deterioration of the cash flow for smaller contracts;
A reduction in the number of players in the market;
A disproportionate solution to the problem;
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
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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.
(c)
Smaller Contractors
It is the ICF’s view that all contractors, whether big or small, should be in a position to pay their suppliers.
Similarly, it is our information that insurance companies will provide payment bonds for both large and small
companies. The dictating factor is not the size of the company, rather it is its ability to pay its suppliers and this will
determine the cost of the bond.
(d)
Reduce the number of players in the market.
The requirement to provide a payment bond on publicly funded projects may reduce the number of players in a
position to tender for Government projects. However any such loss would be confined to those players who are not
in a position to raise payment bonds due to their inability to pay their suppliers. As outlined above, it is ICF’s view
that contractors who are not in a position to pay their suppliers should not be operating in the market place.
(e)
A disproportionate solution to the problem
ICF disagrees with the statement in the RIA that the requirement for a security may be a disproportionate solution to
the problem due to the anecdotal evidence of non-payment issues in the industry. As shown earlier in this
submission, there has been widespread evidence of material suppliers being left with massive unpaid bills for
products supplied to contractors on publicly funded projects.
(f) Other Provisions will render the Security unnecessary
ICF’s view is that the ultimate guarantee of the ability of any contractor to fulfil its obligations to pay its suppliers is
by the provision of a security. It is possible that if the requirement for a security was in place, then the need for the
other provisions in the Bill would not be as great.
Conclusion
ICF greatly welcomes the introduction of legislation to protect suppliers in construction contracts.
However it would be unfair for legislators, who have seen fit to include sub-contractors, professions and advisors to
the construction industry within the remit of the legislation, to exclude companies such as concrete manufacturers
who are an equally crucial part of the construction supply chain.
In this submission ICF clearly distinguishes suppliers of construction products (materials) who are totally exposed
in situations where their customers are refusing to pay for products received, from suppliers of other products. Such
suppliers are not in a position to retrieve their products as they form part of the building or project structure, often
within hours of manufacture.
ICF has proposed an amendment in this submission which would protect such suppliers without extending the scope
of the legislation beyond construction transactions.
The requirement for the posting of a security or payment bond by contractors on public projects to protect suppliers
is the ultimate solution to the issue of non-payment in the construction chain and the legislation should contain such
a provision.
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