Some of the federal government's biggest spending departments could require contractors to pay their supply chain businesses within 30 days, as part of a campaign by Small Business Ombudsman Kate Carnell.
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As the government considers the former ACT Liberal leader's inquiry into payment times and contract practices in the Australian economy, Ms Carnell has written to seven public service departments and agencies including Defence, the tax office and Human Services seeking their views on contract terms and conditions, project bank accounts and 30-day payments.
An inquiry completed in April has helped bring down payment times for small businesses and Ms Carnell said moves by the public service to favour larger prime contracts meant extra protections for smaller sub-contractors were needed.
"The policy right across the federal government is to go to bigger, prime contracts and they're quite open about that," she said.
"The cost and expertise required to manage contracts is something that is often a challenge and with some downsizing in the federal public service there are skills where some areas are struggling, like large contract management.
"We're saying that's fine, but with large contracts that are often multi-sector small businesses and contractors down the supply chain are often paid incredibly slowly. If a company falls over, they're not paid at all."
The departments, along with Finance, Education and Training, Foreign Affairs and Trade and Immigration have been asked to give their views on extending standard government terms and conditions to see 30-day payments from prime contractors as well as wider use of project bank accounts to protect small businesses when things go wrong.
"The federal government pays in 30 days and so should the prime contractor require the supply chain to be paid in 30 days," Ms Carnell said.
Research published by accounting firm Xerox last month found small businesses were slowly being paid sooner.
Invoices with 30-day payment terms were now settled in an average of 36 days in June, down from almost 40 days a year earlier.
By August, the figure had fallen for the third straight month, reaching 34 days, and down 3.3 per cent year on year.
United States and United Kingdom government contracts have boosted terms and conditions already, and Ms Carnell said a cultural change was needed in Australia.
"This is taxpayers' money. The situation with the ASIO building in Canberra, when Urban Contractors fell over, was they took 100 small businesses with them," she said.
"Should there have been better terms and conditions in the head contract to put more checks and balances around the requirements to ensure that the smaller businesses were paid?"
"I don't believe it is overly difficult."
Some state government construction projects in Western Australia are already using project bank accounts.
The special trust account is established for payments and retention monies, protecting funds for payments in case of insolvency of the prime contractor.
A 2015 Senate inquiry into insolvency in the construction industry recommended the trial of the accounts on federal government construction projects.
