The legislation of the new law may result in the collapse of construction companies as two tiers will be created, says James MacQueen, advisory partner in the construction and real estate sector for business advisory and accountancy firm BDO.
The amendment was a response to the collapse of Mainzeal in 2013, which leaves unsecured creditor debts of at least $112m and subcontractors are the major affected party.
“Some construction companies will come out of this stronger and will be preferred partners for property owners and sub-contractors. But the current boom has provided an opportunity for many new constructions companies to set up- and some will not survive due to the change in the law”, he adds.
Under the new law, developers, construction companies and property owners with projects undergoing are required to make provisions to retention payments. To ensure the required remedial work is completed, sub-contractors’ pay is retained after project is finished. The retentions will take up 6-7 per cent of construction companies’ total turnover.
“The catch is insurers will currently only provide insurance to companies whose financial statements they have reviewed and found satisfactor; in other words, an insurance product for those that don’t really need it and no insurance for those that desperately do.” He says.
The new law also allows sub-contractors to check the company records to ensure sufficient funds in trust or insurance are in place to keep the tank full.
As a result, construction industry is divided into two tiers- those among the top tier are equipped with sufficient financial strength to receive insurance cover, while the second-tiers with scant resources fail to receive protection.
A number of construction companies is to fail over the next 12 months and the attrition rate will run higher than the normal drop out rate, MacQueen says.