Imminent changes to Security of Payment Laws will empower Residential Builders to maintain positive cash flow and maximise project profits from 1 March 2021.
Managing cash flow in the building industry is critical as many businesses operate on thin profit margins and carry a real risk of insolvency in the event of disruption caused by a dispute, project delay or the insolvency of a head contractor or homeowner.
The sums involved in residential building disputes are often substantial and the disputes frequently involve complex issues relating to defects and contract variations. The risks and consequences of such disputes are heightened for residential builders as the business owners will typically have either significant paid up capital or personal financial exposure when problems arise as a result of the requirements for obtaining Home Building Compensation Cover (Insurance).
To make matters worse, when disputes with homeowners arise, to date the unavoidable forum for resolution of the dispute is the NSW Civil & Administrative Tribunal. Proceedings in the Tribunal can be protracted and expensive meaning that residential builders will typically experience a significant impact on their cash flow as a result of the dispute in addition to facing ongoing legal costs and Barrister’s fees.
The Building and Construction Industry Security of Payment Act 1999 (NSW) and interstate equivalents exist to empower head contractors, subcontractors and suppliers to manage these risks and maintain reliable cash flow, however, to date has not been available for residential builders to rely upon in relation to residential building contracts with owner occupiers.
Changes for Residential Builders
Significantly, from 1 March 2021 residential builders will be able to utilise the hard-hitting security of payment laws to resolve disputes with owner occupiers, promptly recover progress payments and avoid drawn out and expensive litigation in the NSW Civil & Administrative Tribunal. This will be the case even for contracts entered into prior to 1 March 2021 provided that the builder has served a valid Payment Claim on or after 1 March 2021.
SOP Statutory Rights!
The Act seeks to achieve its objectives by creating a number of significant rights including:
1. A statutory right to payment of a progress payment where an amount claimed in a valid Payment Claim is not challenged in a Payment Schedule provided strictly within the allowed time.
Significantly, no Cross-Claim or Defence relating to the contract can be raised by the other party in any proceedings relating to enforcement of these statutory debts. Hence, swift recovery is generally assured at minimal legal costs and your company’s bargaining power is significantly enhanced when a genuine dispute exists.
2. A right to seek swift and independent Adjudication and recovery of adjudicated progress claims when a Payment Schedule is provided in response to a valid Payment Claim, and
3. A right to suspend work without liability upon giving 2 business days’ notice in writing where an amount payable by virtue of the Act is not paid on time, despite the terms of the relevant contract.
Importantly, from 1 March 2021, when a residential builder encounters a dispute the existence of these rights will enable our Specialist Building & Construction Lawyers to promptly recover progress payments and resolve the disputes cost effectively by enforcing a statutory debt or applying for independent Adjudication of a disputed Payment Claim.
In this way, our expert team can assist your business to maximise profits and remain cash flow positive whilst minimising legal costs that can arise from drawn out proceedings in the NSW Civil & Administrative Tribunal.
All rights under the Act are dependent upon the service of a valid Payment Claim and the Courts have strictly enforced compliance with the Act because of the generous rights that can accrue when a Payment Claim is overlooked. As such, in anticipation of 1 March 2021 it is essential that Directors and Contract Administrators of residential building companies:
- have a firm grasp of security of payment laws when negotiating and administering construction contracts (including pre-1 March 2021 contracts), and
- understand the importance of satisfying the contracting requirements under the Home Building Act (including in relation to variations) in order to obtain the best possible outcome in any Adjudication.
Pre-1 March 2021 Recommendations
In readiness for 1 March 2021, we recommend that residential builders:
1. Review and amend their form of progress claim to ensure that they serve valid Payment Claims from 1 March 2021.
2. Adopt a form of complying Supporting Statement and ensure that all Payment Claims served from 1 March 2021 are accompanied by a complete and accurate Supporting Statement signed and dated on or after the date of the Payment Claim.
3. Review your standard form of residential building contract (including contract variations) and contracting procedures to ensure that they are compliant and will include Special Conditions that will enhance your ability to utilise security of payment laws when necessary.
4. Consider what unpaid progress claims or disputes in relation to pre-1 March 2021 contracts might now be able to be resolved and recovered utilising security of payment laws.
Executive Liability & Penalty Notice Offenders
Residential builders and managers should also be wary of the Executive Liability and Penalty Notice Offences that will apply to them under the security of payment laws from 1 March 2021 and the need to review and update their practices to avoid committing offences unwittingly.
For example, the penalty for failing to include a Supporting Statement with the Payment Claim served on a homeowner is $2,200 for individuals and $11,000 for a company. Penalties of up to $22,000 also apply for directors and managers who knowingly or recklessly provide Supporting Statements with Payment Claims that are false or inaccurate.
Security of Payment Guide
Our popular Security of Payment Guide (5th Edition) will help residential builders and persons contracting with them for residential building work gain a better understanding of security of payment laws, the unique rights they create, the technical compliance necessary to accrue them and the options available if a problem arises.
This Guide was rewritten in early 2020 following major changes to the Act affecting construction contracts entered into from 21 October 2019 and has recently been updated again to cover further changes arising from the Building and Construction Industry Security of Payment Regulation 2020 which, among other things, extends the operation of the Act to contracts between residential builders and owner occupiers from 1 March 2021.
The latest edition includes new chapters dealing with Retention Money Trust Accounts, Investigation & Enforcement Powers of Authorised Officers, Executive Liability and Penalty Notice Offences affecting contractors and their directors and managers as well as a selection of related Articles.
Free Case Evaluations
If you have any questions in relation to security of payment laws or would like to discuss any legal matter, please contact us. We offer a free initial case evaluation for all new enquiries