6th February 2017
Please note: This is not my typical blog post.
I’m publishing below a copy of a letter that I’ve written in my personal capacity to the Victorian Government in relation to gaps in the regulatory system for builders.
While specific to the Victorian system, this letter is also educative. I generally recommend minimal regulation. This letter, however, is a mixed offering. In this I ask for the two following things – one (if implemented) would reduce regulation; the other would increase it:
a) elimination of regulation that blocks reputational effects from operating; and
b) imposing targeted new regulatory requirements to weed out bad builders.
Does this letter have any implications for India? I don’t think so, since the governance system is radically worse in India.
====MY LETTER – as HTML (I will not be posting the Word/PDF copy) ====
From Sanjeev Sabhlok
To The Hon Richard Wynne, Minister for Planning, Victoria
Date: 6 February 2017
Subject: The problem of builders who do not build
One would imagine that builders registered in Victoria would do the most basic thing: build. But that’s not always the case.
More than three years and two months after I signed my building contract, my builder has not only not finished the house he contracted to build, he effectively refuses to finish by refusing to respond either to me or to Consumer Affairs Victoria (refer case No. C2016/11/000691 that was closed by CAV on 4 January 2017 after the builder did not respond. I have thereafter lodged a complaint with the Victorian Building Authority (VBA) on 17 January 2017 – Attachment 1).
The VBA and Department of Environment, Land, Water and Planning (DELWP) are not much help in this regard for, in their view, delays (or even non-completion of work by a builder) are not within their remit. It will not be excessive to suggest that the building system is broken.
In the past two years, I’ve learnt a few things about Victoria’s building system. In this letter I first identify some of the systemic failures that I have found in the system and then make suggestions for improvement. In doing so, I acknowledge that I do not fully understand all aspects of the system and my analysis may need refinement.
A) The many failures of Victoria’s regulation of builders
I am starting, below, with an issue that falls within the remit of the Attorney-General (who is copied into this email), but most of what I have to say is within your purview.
i. Defamation law sabotages reputational effects
Transparency and reputation are a powerful self-regulatory force. Ebay works without regulatory intervention because of reputational effects.
But Victorian laws actively block this essential ingredient of an accountable free market. I don’t quite understand the details of defamation law but note that Section 9(2)(b) of the Defamation Act 2005 allows corporations with fewer than 10 employees to sue. Presumably customers of big building companies can talk about their bad experience but customers of smaller companies cannot. Why should the government shelter bad builders through such restrictive laws?
My builder threatened me with defamation for making the slightest comment on the internet about his work. His many dissatisfied customers are afraid to talk about their case in public. I believe that truth remains a defence, but the average Victorian is not willing to test the law, and would much rather keep quiet – thereby not sharing information in the public domain which can protect future customers of a bad builder.
ii. VBA admit that delays are the primary concern of consumers but argue that these are a contractual matter
The VBA admit (via their email on 17 November 2016 – Attachment 2) that delays are the primary concern of consumers (i.e. even more significant than the quality of the build):
A building delay is a contractual dispute and when a complaint is received about building delays this is referred to Building Advice and Conciliation Victoria (BACV). This is generally the primary concern of the consumer. Building delays in themselves can be complicated as there are many reasons for a delay, such as other contractual disputes, unforeseen difficulties, failure to make payment, or poor conduct of the practitioner.
The VBA have effectively washed their hands off the matter of delays by putting these into the contractual matters basket.
iii. DELWP believe, surprisingly, that delays are “not specified” in the Building Act
The Acting Executive Director, Planning, Building and Heritage, DELWP wrote the following to me on 14 December 2016 (see Attachment 3 which was forwarded to me by your Office on 15 December 2016):
Section 179 of the Building Act sets out the grounds for which a building practitioner may be subject to disciplinary action. Although delay in completing building work is not specified as a ground, such conduct, especially if repeated, may come within other grounds that are specified, for example, a pattern of incompetence or negligence in a particular matter.
The act of building a house is first and foremost a project management task. Without managing timelines there can be no building, hence such person cannot be a builder. This is implicit in the legislation. One can determine the quality of a building only if there is a building. The quality of a build is a secondary issue, timeliness being the primary one. One can’t keep the act of construction going on for 1000 years.
The second reading speech (available in the Hansard) by the then Minister for Planning on 11 November 1993 to explain the Building Bill says:
The Bill proposes the establishment of a Building Practitioners Board [BPB] to be responsible for the registration, oversight and discipline of a range of building practitioners. It is expected that the combination of the [Building Control Commission] commission’s capacity to oversee the system and the Building Practitioners Board’s inspectorial, inquiry and disciplinary powers will achieve maintenance of the existing high quality of building.
The only way the Building Act can be interpreted as not considering delays (given that delays are acknowledge by the VBA as being the primary concern of consumers) is if it specifically excluded delays. For that, the then Minister for Planning would have had to say:
- “I want anyone who claims to be able to build to be registered in Victoria, regardless of whether he actually builds anything”; or that
- “Victorian builders are to be allowed infinite time to build. Delays are specifically not of any concern to the Government, and should not concern the BPB”.
Now, DELWP’s interpretation of the Building Act may well be the legal interpretation given to the matter by courts. If so, the government can fix this by specifying delays as a key disciplinary matter in the Building Act.
iv. The VBA seems to be a captured regulator
The VBA doesn’t much care for consumers but rolls out the red carpet for builders and is solicitous about any red tape it might impose on them.
The Team Leader of Complaint Services from the VBA informed me over the phone in November 2016 that since a builder might potentially build many houses, the VBA doesn’t impose information requirements on them. Apparently, asking them about the work they are undertaking, whether it is being completed in a timely manner, or even whether any of it has been ever completed, would make these poor friends of the VBA get burdened with red tape.
But not all regulatory requirements are red tape. Electricians in Victoria are required – for good reason – to provide certificates to the regulator for even small electrical work. It would definitely not be unreasonable for the VBA to ask essential information from builders. As far as imposing a burden is concerned, that’s a red herring. Someone who takes hundreds of thousands of dollars from customers can surely be asked to provide basic information to confirm whether he is doing his job.
Further, the VBA does not undertake even the most basic regulatory oversight. It does not coordinate with either CAV or the VCAT to pro-actively identify bad builders. As one of my builder’s many unhappy customers wrote to me:
… it was confirmed to me by a VCAT representative that there are no systems set up at VCAT to monitor repeat offenders. … they informed me that a builder can appear 100 times a year at VCAT … and it will not be flagged … as a public concern.
The [VCAT] representative said they do not have the systems in place to search a name, unless the person enquiring knows both parties names.
I also asked about why the cases I’d discovered do not show on the VCAT online searches and was told that not all cases via VCAT are registered online. So how would you know that you are about to enter into a contract with a complete rogue and financial robber with no access to important & relevant records?! VCAT confirmed “You wouldn’t know”. Surely this proves added onus on VBA to protect the public.
v. Insufficient ‘penalty’ for delays, and difficulty in accessing insurance
Accountability requires that if someone doesn’t perform his job, he should feel a financial pinch. But the system doesn’t even rap bad builders with a feather for delays, leave alone penalising them. The only ones who feel a severe financial (and psychological) pinch are honest Victorians.
In my case, the build cost around $600,000 but damages were set at around 3 per cent (on an annualised basis). This is less than the interest I’m paying on the mortgage, even excluding the many severe inconveniences caused by delay. To call this amount “damages” is a play on words, pure deception.
Further, there is the issue of the VMIA and insurance. I understand that even if a builder is deregistered by the VBA, customers of bad builders are not likely to get any relief. Insurance only kicks in if a builder dies or disappears, or becomes insolvent. For policies issued on or after 1 July 2015 (mine was in early 2014, so this doesn’t apply), if a builder fails to comply with a VCAT or court order, that, too, could allow some relief. But even for those who go to VCAT or court, there is a huge associated legal cost.
As you can now see clearly, everything in the system is stacked against consumers. Builders are kings and can do no wrong. I would have imagined that mere deregistration should suffice to get some relief, but that’s not the case.
As a result of all these factors, getting a good builder in Victoria is now a matter of pure luck. It is unclear why the government is going to such great lengths to protect bad builders at the expense of honest Victorians.
B. Consequence: Hell on earth for some Victorians
Once someone gets a bad builder, life becomes hell and there is no recourse, no remedy. My builder has been so emboldened that a few months ago he wrote to me: “let the games begin”. Indeed, it would seem that it is the government that is playing games with honest Victorians.
Builders like mine have a simple strategy: they extract as much money as they can from customers and then stop work. Customers then run from pillar to post, and are ultimately forced to seek cancellation of the contract at great personal and financial expense.
This also makes a mockery of the alleged “statutory” warranty. When such builders don’t respond even to an email or phone call and the government is totally supportive of such builders, what hope can there be of getting them to fix defects in the portion of the house that they did build? There are many defects in my house (in addition to the fact that there are a number of incomplete issues) but the VBA are not impressed. Not only have I brought this builder to the VBA’s notice over the course of more than a year, at least around ten customers of my builder have repeatedly complained about him but the VBA feel that my builder is fit and proper.
C. Here’s how you can help
I believe your intervention, and the intervention of other relevant Ministers, has now become imperative. I’m outlining specific suggestions below:
i. Use the “fit and proper” and renewal provisions of the forthcoming Building Regulations 2017 to eliminate VBA’s discretion
The Victorian Auditor General (VAGO) has, through his May 2015 report, Victoria’s Consumer Protection Framework for Building Construction, advised you of some of these issues. The VAGO recommended that DELWP and the BPB (now VBA) “review the practitioner registration and discipline regimes and advise government accordingly, so that:
- only qualified, competent and suitable practitioners are allowed to trade
- disciplinary systems and sanctions ensure that there is sufficient disincentive to engage in misconduct and that registered practitioners who do so can be excluded from trading
- data from registration and discipline regimes is collected and analysed to inform system improvements.”
I asked DELWP through a Freedom of Information request about what thinking they had put into these matters, particularly in relation to delays. I asked for information regarding:
(A) any official advice received by DELWP (either upon request or suo moto) from the VBA or CAV in relation to (1) the habitual practice of registered builders not completing domestic buildings in time, and (2) any suggestions received by DELWP from these entities in relation to options to address this systemic shortcoming, such as (but not limited to) through making it a requirement for renewal of the registration of a builder by the VBA, for the VBA to require proof of satisfactory and timely completion from all customers of buildings that were due for completion during the year before the date of registration renewal.
(B) summary of any research in this regard (i.e. specifically related to the nature and extent of this chronic problem of incessant delay by builders and use or lack thereof of the renewal system of registration to identify such delinquent builders, and any options identified in this regard) undertaken by the DELWP to potentially inform the forthcoming new Building Regulations 2017 which allow the Minister, under s. 172AA of the Building Act, to prescribe such requirements
The answer was: Nothing! I received a nil response (Ref. FI/03/4237 dated 28 November 2016 – see Attachment 3). DELWP have neither received any advice from anyone (such as the VBA) nor conducted any research of their own in this regard.
Please note that VAGO had asked DELWP to “review the practitioner registration and discipline regime”. Presumably, DELWP were required to do something about this mater. And given delays are the primary concern of consumers, it stands to reason that they’d have found something to say about this issue. But nothing.
One would have imagined that a competent regulator would identify the pattern of complaints it receives and advise government on remedies for these causes, but the VBA do not undertake even such basic analysis.
On 17 November 2016, the VBA wrote to me via email (Team Leader’s email, Attachment 2):
As a result of recent legislative change requiring 5 year registration renewals, the VBA will consider whether a practitioner continues to be a fit and proper person to practise as a building practitioner, when it receives an application for renewal. The VBA would consider a practitioner’s disciplinary history in that process. Practitioners will be transitioned to a 5 year registration progressively over the next 5 years. The fact that a complaint has been made against a practitioner may not on its own mean the VBA refuses to renew that registration.
The last line says it all. It would seem that the VBA are likely to go to any length to protect builders. They intend to use their discretionary power purely for the benefit of builders. It is not a far-fetched statement to make to suggest that they are a captured regulator.
To resolve this matter you will need to provide the VBA with specific directions and eliminate their discretionary powers. Fortunately, there is now a pathway available for you to use.
In response to the VAGO’s report, the Government has enacted (through you) the Building Legislation Amendment (Consumer Protection) Act 2016 No. 15 of 2016 on 19 April 2016. Section 172AA (Renewal of registration) of the new Act empowers you (through the anticipated Building Regulations 2017) to require the VBA to grant renewal of registration of a builder subject to applicant complying with “any other renewal criteria or conditions” beyond those that relate merely to payment of the fee.
I request you to (a) mandate the meaning of “fit and proper” and (2) specify the renewal conditions. In particular, the following requirements should be inserted into the regulations:
a) that the VBA require registered builders to specify, in the relevant contract, the completion date for each stage of construction that they undertake (this requirement should be supported through changes to the Domestic Building Contracts Act 1995, although it may not be necessary to do so);
b) that the VBA ask all registered builders to provide an annual declaration (a tick a box would suffice) to the effect that:
- all their domestic building work is being undertaken in accordance with contractually agreed timelines for each stage. Where any stage has slipped, the guilder should provide details and reasons for slippage; and
- all work that needed to be completed during a previous year/s has been completed within 1.5 times the contractually agreed timeline.
c) that the VBA require builders to not sign up any new work if there has been any slippage in the completion at any stage of any existing work, till such existing work is completed and the project reverts to its planned timelines;
d) that the VBA automatically deregister any builder who has not completed any domestic building work within 1.5 times the contractually agreed duration (in this regard, the duration should be allowed to be amended in writing by both parties: this would allow for legitimate variations); and
e) once a builder is deregistered, the builder’s company should be delicensed as well, else in some cases I understand things get prolonged and consumers get no relief. Basically, as soon as the builder is deregistered, the consumer should have the right to go to the insurer and get the remaining works completed (this is a rather important requirement and needs relevant legislative change. It may lead to increase in insurance premiums, but consumers would much rather pay more for such insurance as part of the building process, than suffer bad builders).
Upon receipt of a builder’s declaration, the VBA should:
- publish the declaration and any associated explanations on its website. This information is of great public interest, being of concern both to current and future customers of the builder. The information asymmetry prevalent today – whereby consumers know next to nothing about someone to whom they entrust their entire lifetime savings – can only be addressed through transparency. Reputational effects are the best cure for this disease of bad builders;
- re-register the builder unconditionally where work is proceeding within contractual timelines; and
- issue conditional re-registration if any delay has occurred beyond the contractual completion date/s for any stage; then, cause an inquiry and publish its findings; where necessary, the VBA should terminate the registration of a builder even though he has not yet reached 1.5 times the contractual period for completion where it becomes obvious that the work simply cannot be completed in time. The key is to weed out the bad elements from the system as soon as possible.
ii. Issue a Statement of Expectations that requires the VBA to create an early warning system
A good regulator must implement a risk-based approach to address market failures. In this case the gaping information asymmetries in the system are being exacerbated by significant government failure (namely, defamation laws to sabotage reputational effects). The VBA needs to develop the capability to distinguish good from bad builders.
The regulatory requirements above will provide the VBA with the data and tools to develop a robust early warning system.
I request you to issue a Statement of Expectations to the VBA to require the development of an early-warning system based on information obtained from: (a) regulatory requirements; (b) the CAV; (c) the VCAT; (d) through VBA’s random inspections; (e) through VBA’s interviews with consumers; and (f) through the internet (where customers sometimes do express some of their experiences even with small builders). The VBA should also engage with building surveyors to proactively identify whether a builder continues to be fit and proper.
This will increase the VBA’s workload and costs. I believe customers will be willing to pay a higher building permit fee in order to get a higher quality service from the VBA.
Alternatively, the VBA can charge extra from those consumers who want a higher level of scrutiny of their builder. I would have happily paid 1 per cent of my build cost to VBA (i.e. $6,000) to supervise my builder more actively. Doing so would be so much cheaper than going through the hell created by my builder.
iii. Amend the Domestic Building Contracts Act 1995
The Domestic Building Contracts Act 1995 has a number of lacunae and should be amended to:
- require builders to specify the time taken by each stage of building, from the day the building permit is approved (this should be the unambiguous legal date of commencement of construction); and
- require weekly damages for delay at an annualised rate of 10 per cent over and above the standard indexation rate for government fees (set by the Treasurer of Victoria each year).
There is also an urgent need to reform the insurance system for homes so it becomes easy to access insurance once a builder is deregistered.
iv. Amend the defamation law
While this matter is not within your portfolio (hence I’m copying the Premier), the defamation law in Victoria needs to let Victorians freely express their views on the performance of all businesses – regardless of their size
I would like to see the system fixed. I am keen to work through any practical obstacles and identify cost-effective solutions that balance the cost of increased regulatory oversight with social benefits. To progress this, I’d be happy to discuss details with your designated representative (and the designated representative/s of other relevant Ministers).
I am copying this letter to others concerned and will also publish it on my personal blog for the benefit of the many affected customers of my builder and for the benefit of other Victorians who are currently suffering from the effects of this ill-designed system.
Copy (I’m excluding attachments in the interest of privacy) to: The Premier; the Attorney General; the Minister for Consumer Affairs; the Secretary of DELWP; the VBA.
Someone found this article: http://www.theage.