Isn’t it time you really understood how Security of Payment Laws work?
Our Security of Payment Act NSW Guide helps Developers, Contractors, Subcontractors, Suppliers and Consultants in the building industry gain a better understanding of how the security of payment regime works and when and why to seek our professional help. The guide is written in plain English and is easy to understand.
These laws are unlike any other and can be the source of significant rights as well as severe adverse consequences for most businesses in the building industry. These laws should not be taken lightly nor should the potential benefits be overlooked by small or medium businesses.
WARNING: The information on this page relates to the laws in New South Wales. Whilst the security of payment laws are similar in the various States, there are subtle differences. We recommend that you call us if your enquiry relates to work carried out outside of New South Wales.
Introduction to Security of Payment Laws
When does the Security of Payment Act Apply?
Overview of How the Security of Payment Act Works
Statutory Rights to Payment
Statutory Rights to Suspend Works
Adjudication of Payment Claims
Payment Withholding Requests
Why is it important to Serve Valid Payment Claims?
When is a Tax Invoice a Valid Payment Claim?
What is a Reference Date?
Supporting Statements
Serving Payment Claims
Payment Schedules
Due Dates for Payment of Claimed Amounts
Time Limits for Adjudication Applications
Time Limits for Adjudication Responses
Preparing Your Business to be Able to Use Security of Payments when it Counts
Key Definitions
Most business owners in the building industry are aware of the Building & Construction Industry Security of Payment Act 1999 (NSW) (or interstate equivalents) but readily admit that they do not have a proper understanding of how they operate.
Security of Payment Laws create statutory rights that exist despite the terms of a Construction Contract. These rights relate to:
Importantly, all rights flow from the service of a valid Payment Claim and strict compliance with the Act is necessary in terms of both the issue of valid Payment Claims and time limits for responding to them with a Payment Schedule.
The Building & Construction Industry Security of Payment Act (NSW) applies to all parties that enter into a contract other arrangement, whether in writing or not, under which a party agrees to carry out “construction work” or supply “related goods or services” (“Construction Contract”) with limited exceptions.
See below for information about Preparing Your Business to be Able to Use Security of Payments when it Counts.
Exceptions
The Security of Payment Act does not apply to a Construction Contract:
The main purpose of the Building & Construction Industry Security of Payment Act 1999 (NSW) is to ensure that any person who carries out construction work, or provides related goods and services, is able to promptly recover progress payments. Progress payments include single or lump sum payments, final payments and milestone payments.
All rights under the SOP Act flow from the issue of a valid Payment Claim. The Security of Payment Act provides a statutory regime for ensuring that Head Contractors and Subcontractors can promptly recover payment, thereby creating security of payment.
The Security of Payment Act does this in three (3) significant ways, namely:
Where a Head Contractor or Subcontractor serves a valid Payment Claim and the other party does not respond by providing a written Payment Schedule within the allowed time, that other party is prohibited from bringing any Cross-Claim or Defence in relation to matters arising under the contract if Court proceedings become necessary to recover the Claimed Amount. This applies even if there is a genuine dispute.
This prohibition is significant and unique to the building industry. What arises is effectively an indisputable statutory right to payment of an amount claimed in a Payment Claim (“Statutory Right To Payment”).
In Court proceedings to enforce a statutory right to payment, the other party must first pay the amount claimed in the relevant Payment Claim before the Court will permit them to bring any claim for damages against the contractor, consultant or supplier under the Construction Contract.
Importantly, the Building and Construction Industry Security of Payment Act 1999 creates a statutory right for businesses to suspend work in certain circumstances regardless of whether any right to suspend exists in the relevant Construction Contract and without risk of liability for loss or damage suffered by the other party as a consequence of work not being carried out during the period of suspension.
This right is significant as the ability to suspend work is a critical factor in prioritising payment and avoiding further losses where the other party the Construction Contract becomes insolvent.
A Claimant who has served a valid Payment Claim may give at least 2 Business Days’ notice of their intention to suspend carrying out construction work (or to suspend supplying relates goods and services) under a Construction Contract where:
Where a Claimant has served notice of intention to suspend work in one of the above circumstances, the Claimant may then suspend work without further notice if at least 2 Business Days have passed. The right of suspension will then exist until the end of the period of 3 Business Days immediately following the date on which payment of the relevant amount is received by the Claimant.
Additionally, if a Claimant who has validly exercised a right to suspend works incurs any loss or expense as a result of the removal by the Respondent of any part of the work from the contracted scope, the Claimant is entitled to recover such loss or expense from the Respondent.
The Building and Construction Industry Security of Payment Act 1999 also provides a right for a Head Contractor or Subcontractor who has served a valid Payment Claim to apply to have the amount payable by the other party assessed by an independent Adjudicator.
This is a very appealing option where the Statutory Right to Payment has not arisen because the other party has provided a Payment Schedule in response to a Payment Claim. However, Adjudication may also be preferred where there is a genuine dispute which the Head Contractor or Subcontractor wants to be determined quickly and cost effectively.
Significantly, the Certificate of an Adjudicator can be registered with the Courts and enforced as Judgement debt if the amount payable is not paid by the due date.
Importantly, for Respondent parties being served with Payment Claims, an Adjudicator may NOT consider any reasons for withholding payment contained in any Adjudication Response or Supporting Submissions unless the reasons had already been included in the relevant Payment Schedule.
Strict time limits apply in relation to Adjudication Applications and Adjudication Responses.
Where an Adjudication Application is made:
A Subcontractor has the ability to require a Principal or Head Contractor to withhold payments owing to a Contractor against whom the Subcontractor has lodged an Adjudication Application by serving a Payment Withholding Request.
A Principal Contractor who receives a Payment Withholding Request must retain, out of money owed to the Respondent, the amount of money to which the Payment Claim relates (or the amount owed by the Principal Contractor to the Respondent if that amount is less than the amount to which the Payment Claim relates).
The obligation to retain money in accordance with a Payment Withholding Request remains in force until the earlier of the following:
All rights under the Building and Construction Industry Security of Payment Act 1999 (NSW) flow from the service of a valid Payment Claim. Therefore, if your business fails to serve valid Payment Claims you will be exposing yourself to delay tactics and expensive litigation if a dispute arises or if the other party simply refuses to pay as you will be unable to utilise the regimes created by the Security of Payment Act to recover payment promptly.
In most cases, where a valid Payment Claim has not been served, we can work with you to serve a valid Payment Claim. However, in these instances it is more likely that the other party will be ready to serve a Payment Schedule and Adjudication is more likely.
When businesses serve valid Payment Claims from the outset, they are more likely to accrue Statutory Rights to Payment and be in a far better position to recover payment quickly should then need to invoke the force of the Security of Payment Act arise.
Similarly, if the Payment Claim is valid and a Payment Schedule has been provided, the business can quickly seek independent adjudication of the amount payable, provided the time for making an Adjudication Application has not lapsed.
A Payment Claim need not also be a Tax Invoice. However, for a Tax Invoice to be a valid Payment Claim it must satisfy the requirements in Section 13 of the Building and Construction Industry Security of Payment Act 1999.
Due to the Statutory Right to Payment that arises where a party fails to respond to a Payment Claim, the Courts have strictly interpreted the Act when determining the validity of a Payment Claim.
Under the Security of Payment Act, a document will only be a valid Payment Claim if it at least:
A Payment Claim can only be made on or after the last day of the month where work has been performed, unless the Contract provides for an earlier date or dates. However, a party can include an amount that has been the subject of a previous Payment Claim in a subsequent Payment Claim.
Generally, a Payment Claim cannot be served later than 12 months after the construction work to which the claim relates was last carried out (or the related goods and services to which the claim relates were last supplied).
A Head Contractor must not serve a Payment Claim on a Principal unless it is accompanied by a Supporting Statement that indicates that it relates to the Payment Claim. There is otherwise no requirement under the Act for a Subcontractor to provide a Supporting Statement with a Payment Claim.
A “Supporting Statement” is a Statement in the form prescribed by the Building and Construction Industry Security of Payment Regulation 2008 and (without limitation) includes 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 Contact concerned.
Importantly, amounts referred to in a Supporting Statement as due and payable and which are not in dispute, must be paid in fully before the declaration forming part of the Supporting Statement is signed.
When preparing a Supporting Statement, the Regulations have clarified that:
Significantly, it is an offence for a Head Contractor to serve a Payment Claim on a Principal:
A Payment Claim will only be valid if it is served on the other party. The following methods of service of a Payment Claim are expressly permitted under the Building and Construction Industry Security of Payment Act:
Whilst service by alternate methods may be proven to result in valid service of a Payment Claim the actual date of service may be less certain and, therefore, it will often be difficult to known if or when the other party has failed to provide a Payment Schedule.
A Payment Schedule is a document or email (or potentially an SMS message) that a party who is served with a Payment Claim may provide to avoid a Statutory Right to Payment accruing under the Building and Construction Industry Security of Payment Act in favour of the party who served the Payment Claim.
A Payment Schedule must:
*Significantly, where a party provides a Payment Schedule and subsequently the Head Contractor or Subcontractor who served the Payment Claim makes an Adjudication Application, the party (the Respondent) is prohibited by the Security of Payment Act from including in an Adjudication Response any reasons for withholding payment unless those reasons were included in the relevant Payment Schedule.
The Building and Construction Industry Security of Payment Act 1999 (NSW) provides that the Due Date for an amount payable under a valid Payment Claim is the earlier of the date provided in accordance with terms of the Construction Contract and:
It should be noted that no Due Date arises in respect of an invalid Payment Claim.
The following time limits apply strictly in relation to Adjudication Applications:
If you are party (Respondent) served with an Adjudication Application, the Adjudicator will be prohibited from considering any Adjudication Response (Submissions and evidence) that you wish to make in relation to the Application unless that Response is lodged with the Adjudicator by the later of:
Frequently, when a problem arises and a Subcontractor wants to rely upon the Security of Payment Act to recover payment:
For example, if a Subcontractor has poor contracting procedures and does not make Construction Contracts that either specify or incorporate relevant standard form Terms & Conditions of Trade dealing with dates on which Progress Claims can be made, there can be uncertainty in relation to the contractual entitlement to payment under the Act.
Similarly, where a Subcontractor services Payment Claims without regard to the Act, for example, where multiple claims are made each month or separate claims are made for variations, one of the Payment Claims may be valid but the rest may not be. This problem is also common where a claim for payment is made on completion despite there being no express contractual right to claim payment on completion.
Where there is uncertainty as to the validity of a Payment Claim, to avoid legal costs and arguments about technicalities, the solution is usually to wait until a new valid date for claim arises and to start again with a new Payment Claim. However, this delay will generally increase the period that the business is deprived of funds and the financial pressure on the shoulders of the owners.
Subcontractors and suppliers can easily address these problems by making better contracts.
Depending on your business and how you are suited to make contracts, this may be by adopting a long form Construction Contract template and/or short form contract templates including Quotations and Purchase Order Forms incorporating standard form Terms & Conditions of Trade. In either case, the contract terms should make express provision in relation to when your business can claim a progress payment and your business should be conscious of ensuring that claims are only made on or after such dates. If you serve Payment Claims by email, the contracts should also directly address this. If you would prefer to continue your existing practices, all you need to do is ensure that your contracts are drafted to accommodate them.
Alternatively, if the proposed form of Construction Contract is put forward by the other party, it is essential that the Subcontractor gets legal advice, understands the essential terms of the contract including dates on which Payment Claim can be made and methods for serving Payment Claims and prepares a Contract Matrix (summary) that they can refer to to confidently serve valid Payment Claims and otherwise effectively administer the contract.
The Security of Payment laws are specifically designed to assist businesses in the construction industry to avoid costly disputes and cashflow nightmares. However, these businesses still need to be aware of the fundamental mechanics of the Act and work with their Lawyers to ensure that they are making contracts that create suitable entitlements to make Payment Claims so that they (and their Lawyers) can rely on the Act immediately when it counts.
We offer a number of practical solutions to everyday contracting for subcontractors and suppliers including:
Business Days
“Business Day” under the Act means any day other than:
Claimant
“Claimant” means a person by whom a Payment Claim is served.
Construction Contract
“Construction Contract” is a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party. Significantly, the words “other arrangement” extent the reach of the Security of Payment Laws beyond contracts in the purest form.
Construction Work
Section 5 of the Act provides that “construction work”means any of the following:
However, “construction work” does not include any of the following work:
Exempt Residential Construction Contract
“Exempt Residential Construction Contract” is a construction contract for the carrying out of residential building work (within the meaning of the Home Building Act 1989 (NSW) on such part of any premises as the party for whom the work is carried out resides or proposes to reside in.
The Security of Payment Act does not apply to “exempt residential construction contracts”. However, where residential building work is carried by a subcontractor on behalf of a builder or by a builder or subcontractor on behalf of a developer or investor, the Act will apply as the person does not propose to reside in the premises to which the contract relates.
Head Contractor
“Head Contractor” means the person (or company):
Note: There is no Head Contractor when the Principal contracts directly with Subcontractors.
Main Contract
The ‘Main Contract’ is the Construction Contract between the Principal and the Head Contractor.
Payment Claim
“Payment Claim” means a claimed referred to in Section 13 of the Act. See here for more information about Payment Claims.
Payment Schedule
“Payment Schedule” means a schedule referred to in Section 14 of the Act. See here for more information about Payment Schedules.
Principal
“Principal” means the person (or company):
Principal Contractor
“Principal Contractor” is a name used to describe the party on whom a Payment Withholding Request may be served in the event that an Adjudication Application has been lodged. Section 26A(4) of the Act defines “Principal Contractor” as the person (or company) by whom money is or becomes payable to the Respondent party to the Adjudication Application for work carried out or materials supplied by the Respondent to the person as part of or incidental to the work or materials that the Respondent engaged the Claimant party to the Adjudication Application to carry out or supply.
Related Goods & Services
Section 6 of the Security of Payment Act provides that “related goods” means goods of the following kind:
Section 6 further provides that “related services” means services of the following kind:
building, engineering, interior or exterior decoration or landscape advisory services in relation to construction work.
Respondent
“Respondent” means a person on whom a Payment Claim is served.
Scheduled Amount
“Scheduled Amount” means the amount of a progress payment that is proposed to be made under Payment Schedule.
Subcontractor
“Subcontractor” means as the person (or company) who is to carry out construction work or supply related goods and services under a Construction Contract otherwise than as Head Contractor.
Supporting Statement
“Supporting Statement” means a statement that is in the form prescribed the Building and Construction Industry Security of Payment Regulations 2008 and (without limitation) includes 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 Contact concerned. See here for more information about Supporting Statements.
