Changes to payment claims for construction work in NSW commence

Construction eBulletin - 14 April 2014

Summary

Significant changes have been introduced to the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOP Act).

The changes will apply to construction contracts entered into on or after 21 April 2014 for construction work undertaken in NSW.

Some of the key changes that have been introduced in relation to the security of payments process include:

  • removing the requirement for a payment claim to include a statement that the claim is made under the NSW SOP Act;
  • introducing a requirement that a payment claim be accompanied by a supporting statement to the effect that all subcontractors have already been paid amounts due to them;
  • introducing deadlines for paying payment claims; and
  • an option to introduce regulations that cover trust account requirements for retention money.

 

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Removal of requirement for statement that payment claim is made under the NSW SOP Act

There will no longer be a requirement for a payment claim made under a construction contract entered into on or after 21 April 2014 to state that it is made under the NSW SOP Act. This will apply to all payment claims, except where the payment claim is made under an exempt residential construction contract, ie a contract that is connected with a residential construction contract between a head contractor and a consumer.

Previously, if a contractor wanted to make a payment claim under the NSW SOP Act, the payment claim had to state it was made under the NSW SOP Act. Receiving a payment claim stating it was made under the NSW SOP Act used to act as an alert to superintendents, principal's representatives and head contractors that they had to take specific action in relation a claim received.

The removal of this requirement means that the receiver of claims must be diligent in their review of every claim received. If there is doubt about whether the claim has been made under the NSW SOP Act, we recommend that you assume it has been made under the NSW SOP Act and respond to it accordingly.

 

Payment claims from head contractors to be accompanied by a supporting statement

A payment claim made by a head contractor to a principal under a construction contract entered into on or after 21 April 2014 must now be accompanied by a supporting statement. The supporting statement should include a declaration to the effect that all subcontractors, if any, have been paid all amounts that have become due and payable in relation to the construction work concerned.

The form that the supporting statement is required to take has been published in new regulations.

It is an offence for a head contractor not to provide a supporting statement and non-compliance may result in penalties of up to $22,000. It is also an offence for the head contractor to provide a supporting statement which is knowingly false or misleading. Doing so carries a penalty of up to $22,000 or up to three months imprisonment, or both.

Head contractors should be aware that compliance with the provisions regarding supporting statements may also be subject to investigation and scrutiny by authorised officers appointed by the Department of Finance and Services.

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Prompt payments - earlier deadlines for paying payment claims

A significant change has been made to the timing for making payments, in that there are now earlier deadlines for paying payment claims. This is intended to expedite the flow of cash from principals through to head contractors and then through to subcontractors and suppliers:

  • A progress payment to a head contractor by the principal must now be paid with 15 business days after a payment claim is made, or at an earlier date if specified by the contract. 
  • A progress payment to be made to a subcontractor must now be paid within 30 business days after a payment claim is made, or at an earlier date if specified by the contract.

A progress payment to be made under an exempt residential construction contract (being a contract that is connected with a residential construction contract between a head contractor and a consumer) will continue to be paid accordance with the terms of the contract. However, if the contract does not say when the payment is to be made, the payment must be made within 10 business days after a payment claim is made.

Previously, there was no maximum length of time which a construction contract could specify for payment of a payment claim. However, if the construction contract did not specify any date for payment the default time was 10 business days.

Principals, developers and head-contractors should review their payment processes to ensure that they are able to make payment of payment claims within the time now required by the NSW SOP Act for claims made under construction contracts entered into on or after 21 April 2014.

Although the time for making payment is likely to now be earlier than what has usually been specified in most construction contracts, the effect of non-payment remains unchanged. That is, if payments are not made within the (earlier) required time a contractor is entitled to be paid interest (at the rate specified by the construction contract or at a statutory specified rate whichever is the greater). Contractors may also choose to take a range of other action, including:

  • taking a lien over certain unfixed plant or equipment; 
  • taking legal action to obtain a default judgment of the amount due or applying for adjudication; or 
  • suspending work.

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Trust account requirements for subcontractor retention money

The changes to the NSW SOP Act also include the option to introduce a requirement for retention moneys to be held in trust. This is in response to concerns about the inability of subcontractors to recover or claim retention amounts held by head contractors where the head contractor becomes insolvent.

Under the Act, regulations may be made which require that retention moneys be paid into a trust account (to be established and operated in accordance with the Regulations) by a head contractor and held on trust for the subcontractor entitled to the money.

Retention money is defined broadly as "money retained by a head contractor out of money payable by the head contractor to a subcontractor under a construction contract as security for the performance of obligations of the subcontractor under the contract", and in this way is expected to capture the various retention arrangements that are routinely found in construction contracts.

At this time, no such regulations requiring retention money to be held in prescribed trust accounts have been made. We will keep you posted if this situation changes.

 

Guidance for making or responding to payment claims

The changes to the NSW SOP Act only apply to construction contracts entered into on or after 21 April 2014. Construction contracts entered into before this date continue to be subject to the NSW SOP Act provisions which existed prior to the changes.

While the central focus of the changes appears to be about facilitating prompt payment of claims made under construction contracts, it may also make the preparation of payment claims and, in particular, responding to payment claims more cumbersome for principals and head contractors.

Provided a claim identifies the construction work or the goods and services to which it relates and includes the claimed amount, principals and head contractors should consider it likely that the claim is a payment claim under the NSW SOP Act and issue a payment schedule and make payment accordingly.

Head contractors should also be diligent and accurate in preparing supporting statements which must now accompany payments claims. They should also be cognisant of the applicable penalties if they fail to make a supporting statement or if they make a supporting statement knowing it to be false or misleading.

If your business makes claims for payment or is required to make payments under construction contracts for work undertaken in NSW, we recommend that you review your processes for making claims, responding to claims and paying claims to ensure compliance with the changes to the NSW SOP Act.

Finally, if you are uncertain about how the changes to the NSW SOP Act affect any claims you make or receive in relation to construction contracts for work undertaken in NSW, or if you have any queries about the security of payment regime generally, you should seek legal advice promptly. The time frames specified in the legislation cannot be extended and have financial consequences that may impact the cash flow of your business if you are not compliant with the new laws.

Authors
Natale Ilardo, Lawyer
Nicole Feeney, Special Counsel

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Further information

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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