Departments should better protect subcontractors vulnerable to companies withholding money from them during government projects to build cashflow, a parliamentary inquiry has heard.
The national small business ombudsman told an inquiry into government procurement last week that multinationals and large companies were hurting subcontractors by delaying their payments to reap more interest and credit.
Australian Small Business and Family Enterprise Ombudsman principal adviser Anne Scott said government contracts should protect subcontractors with suitable payment deadlines.
While departments had to pay prime contractors within 30 days, there was no guarantee this term applied to their subcontractors, Ms Scott said.
"What we see sometimes in the construction industry is that the prime and the second-tier prime can hold onto that money, and meanwhile the smaller businesses get longer and longer payment times before they get paid," she said.
"The government gets their building, because the building or the training facility was completed but, in terms of the economic benefit down to the subcontractors - of which the pyramid goes down and there are a broader number of smaller contractors - they tend to be the most vulnerable people that are not protected."
While agencies denied responsibility for subcontractors, businesses were entering projects believing they would be covered by the same protection government work offered prime contractors, Ms Scott said.
Contractors were also punishing subcontractors who complained about them to the government, the inquiry heard.
Ombudsman director of advocacy James Strachan said problems raised by subcontractors were 'blindsiding' government procurement officers.
"They then, obviously, go to the prime, and then the anger at being blindsided trickles down," he said.
Long payment terms also made it harder for subcontractors to leave projects when it became obvious contractors would delay paying them, Ms Scott said.
"By then, they have so much skin in the game that complaining about it is not very well received - sometimes, they can find they are ordered off the site - and they have already invested so much of their business in this thing that they are in a catch 22 situation of having to hold out to get their payment," she said.
The Department of Industry, Innovation and Science had reduced payment times to 14 days, Ms Scott said.
Defence Department deputy secretary of capability acquisition and sustainment Kim Gillis told the joint select committee it was difficult to control subcontractor relationships.
"We deal with this all the time. We do not have a capacity to actually control down into that subcontractor level other than if we hear about performance," he said.
"It would be silly for the Commonwealth to intervene in-between those subcontractor relationships down at that lower level."
Subcontractors had told Defence that large companies were passing too much risk to them, Mr Gillis said.
"The Commonwealth pays its obligations within the 30-day requirement of a correctly rendered invoice. My expectation is that our primes deal with their subcontractors in a fair and equal manner."
The Australian National Audit Office told the inquiry departments it examined needed to improve keeping records of reasons for procurement decisions, and to better manage risks and fill skill gaps among staff involved in procuring contractors.