Security of Payment Guide

Security of Payment Guide

Get Paid, when it matters most.

Isn’t it time you really understood how the Security of Payment Laws work?

QUICK REFERENCE GUIDE

>    Introduction to Security of Payment Laws

>    Overview of How the Security of Payment Act Works

>    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

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.

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Introduction

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:

  • the right to recover payment of a progress claim through the Courts as an indisputable Statutory Debt where the other party fails to provide a Payment Schedule in time (see Statutory Right to Payment),
  • the prompt, cost effective and enforceable Determination of disputed Payment Claims by an independent Adjudicator (see Adjudication Applications),
  • the Maximum Time Limits for Due Dates for payment of Progress Claims (see Due Dates),
  • the entitlement to Interest on overdue Progress Claims,
  • the bypassing of Head Contractors and obtaining of payments directly from a Principal Contractor or other Contractor next up the contracting ladder (see Payment Withholding Requests) and,
  • the suspending of work without liability and despite the terms of a Construction Contract (see Statutory Rights to Suspend Work).

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.

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When does the Security of Payment Act NSW Apply?

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:

  • to the extent that it deals with construction work carried out, or related goods and services supplied in respect of construction work carried out, outside New South Wales. and
  • in other limited circumstances.

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How the Security of Payment Act NSW Works

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:

  1. by creating virtual indisputable Statutory Rights to Payment,
  2. enabling parties to have disputed Payment Claims swiftly and independently Adjudicated upon, and
  3. enabling parties to by-pass the other party and seek payment from a Head Contractor or Principal next up the contracting ladder.

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Statutory Rights to Payment

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.

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Statutory Rights to Suspend Work

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:

  • the Respondent did not provide a Payment Schedule in response to the Payment Claim and fails to pay the amount claimed in full by the Due Date for payment,
  • the Respondent has provided a Payment Schedule in response to the Payment Claim but fails to pay the Scheduled Amount by the Due Date for payment, or
  • the amount payable in relation to the Payment Claim has been determined following an Adjudication Application and the Respondent fails to pay the Adjudicated Amount within 5 Business Days of the date of the Adjudication Determination or such later date as the Adjudicator determines.

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.

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Security of Payment Adjudication of Payment Claims

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:

  • the other party typically may only provide an Adjudication Response with Supporting Submissions and provide evidence in response to the Adjudication Application within 5 Business Days of receiving the Adjudication Application, and
  • the Adjudicator must determine the Adjudication Application by issuing a Certificate setting out the amount payable and Due Date for payment within 10 Business Days of notifying the parties of their acceptance of the Adjudication Application.

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Payment Withholding Requests

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:

  • the withdrawal of the Adjudication Application,
  • the payment of the Claimed Amount by the Respondent,
  • the service by the Subcontractor of a Notice of Claim on the Principal Contractor under the Contractors Debts Act, and
  • the lapsing of a period of 20 Business Days after a copy of the Adjudicator’s Determination of the Adjudication Application is served on the Principal Contractor.

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Why is it Important to Serve Valid Payment Claims?

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.

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When is a Tax Invoice a Valid Payment Claim?

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:

  1. identifies and sufficiently describes the construction work (or related goods and services) to which the progress payment relates,
  2. indicates the amount of the progress payment that the contractor claims to be payable (“the Claimed Amount”),
  3. includes a statement to the following effect: ‘This is a Payment Claim made under the Building & Construction Industry Security of Payment Act’
  4. is issued on or after a “Reference Date” [for contracts entered into before 21 October 2019], 
  5. is served on the other party to the Construction Contract,
  6. where the Payment Claim is to be served by a Head Contract under a Main Contract it must be accompanied by a Supporting Statement in the prescribed form.

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).

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Supporting Statements

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:

  1. A reference to an amount due and payable to a Subcontractor does not include a reference to an amount in dispute between the Head Contractor and a Subcontractor.
  2. Any Subcontractors with whom an amount is in dispute with the Head Contract must be separate identified in the second table to the attachment to the Supporting Statement.
  3. A reference to an amount due and payable includes a reference to a retention amount due and payable.
  4. The Supporting Statement need only relate to those Subcontractors and suppliers engaged directly be the Head Contractor.

 Significantly, it is an offence for a Head Contractor to serve a Payment Claim on a Principal:

  • that is not accompanied by a Supporting Statement, or
  • accompanied by a Supporting Statement knowing that the statement is false or misleading in a material particular in the particular circumstances.

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Serving Payment Claims

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:

  1. delivering it to the party personally,
  2. lodging it during normal office hours at the party’s ordinary place of business,
  3. sending it by post addressed to the party’s ordinary place of business,
  4. Sending it by email to an email address specified by the party for service of Payment Claims,
  5. without limiting the above, where a party is a company, by:
    • leaving it at, or posting it to, the company’s registered office; or
    • delivering a copy of the Payment Claim personally to a director of the company who resides in Australia, or
    • any other manner that may be permitted under the relevant Construction Contract.

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.

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Payment Schedules

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:

  1. identify the Payment Claim to which it relates,
  2. indicate the amount of the payment (if any) that the party considers is payable (“the Scheduled Amount”),
  3. If the Scheduled Amount is less than the Claimed Amount, the Payment Schedule, must indicate why the Scheduled Amount is less and (if it is less because the party is withholding payment for any reason) the party’s reasons for withholding payment *,
  4. be provided to the Head Contractor or Subcontractor (as the case may be) by the earlier of:
    • the time required by the relevant Construction Contract for provision of a Payment Schedule, and
    • 10 Business Days.

*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.

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Due Dates for Payment of Claimed Amounts

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.

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Time Limits for Adjudication Applications

The following time limits apply strictly in relation to Adjudication Applications:

  1. Where the other party provides a Payment Schedule, an Adjudication Application may only be made within 10 Business Days of the contractor receiving the Payment Schedule.
  2. Where the other party provides a Payment Schedule and subsequently fails to pay the Scheduled Amount by the relevant due date, an Adjudication Application may only be made within 20 Business Days of the due date for the payment.
  3. If no Payment Schedule was provided, the party who served the Payment Claim may not apply for Adjudication unless they have first, within 20 Business Days following the due date for the payment, notified the other party of their intention to apply for Adjudication and allowed the party 5 Business Days thereafter to provide a Payment Schedule. In this case, the Adjudication Application may only be made within 10 Business Days of the expiration of the said 5 Business Day period.

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Time Limits for Adjudication Responses

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:

  1. 5 Business Days after receiving a copy of the Adjudication Application, and
  2. 2 Business Days after receiving notice of an Adjudicator’s acceptance of the Adjudication Application.

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Preparing Your Business to be Able to Use Security of Payments when it Counts

Frequently, when a problem arises and a Subcontractor wants to rely upon the Security of Payment Act to recover payment:

  1. The Subcontractor has failed to ensure that there was a statutory entitlement to serve the Payment Claim, and/or
  2. There is uncertainty about the validity of the Payment Claim due to the Subcontractor’s poor contracting practices.

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.

The Solution

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:

  1. Preparation of standard form contracting documents including Quotation forms, Terms & Conditions of Trade, Variation forms and Credit Applications,
  2. Preparation of long form plain English Construction Contracts and Contract Matrices for larger projects, and
  3. Advice in relation to one-off Construction Contracts and the preparation of a Contract Matrix for future reference.

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Key Definitions

Business Days
“Business Day” under the Act means any day other than:

  1. a Saturday, Sunday or public holiday, or
  2. 27, 28, 29, 30 or 31 December.

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:

  1. the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of:
    • buildings or structures forming, or to form, part of land (including temporary buildings and structures),
    • walls, roadworks, power-lines, telecommunications apparatus, pipelines, water mains, sewers and industrial plant and installations for the purposes of land drainage,
  2. the installation in any building, structure or works of fittings including heating, lighting, air conditioning, ventilation, power supply, drainage, water supply, fire protection, security and communications systems,
  3. the external or internal cleaning of buildings, structures or works, so far as it is carried out in the course of their construction, alteration, repair, restoration, maintenance or extension,
  4. the painting or decorating of the internal or external surfaces of any building, structure or works,
  5. any operation which forms an integral part, or is preparatory to or is for rendering complete, works referred to in paragraphs 1 and 2 above, including:
    • site clearance, earthmoving, excavation, tunnelling and boring,
    • the laying of foundations,
    • the erection, maintenance or dismantling of scaffolding,
    • the prefabrication of components to form part of any building, structure or works (wherever carried out), and
    • site restoration, landscaping and the provision of roadways and other access works.

However, “construction work” does not include any of the following work:

  1. the drilling for, or extraction of, oil or natural gas,
  2. the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works, for that purpose,
  3. any other work of a kind prescribed by the regulations for the purposes of this subsection.

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):

  1. who is to carry out construction work or supply related goods and services for the Principal under a Construction Contract (“the Main Contract“), and
  2. for whom construction work is to be carried out or related goods and services supplied under a Construction Contract as part of or incidental to the work or goods and services carried out or supplied under the Main Contract.

 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):

  1. for whom construction work is to be carried out or related goods and services supplied under a Construction Contract (“the Main Contract“), and
  2. who is not themselves engaged under a Construction Contract to carry out construction work or supply related goods and services as part of or incidental to the work or goods and services carried out or supplied under the Main Contract.

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:

  1. materials and components to form part of any building, structure or working arising from construction work, and
  2. plant or materials (whether supplied by sale, hire or otherwise) for use in connection with the carrying out of construction work.

Section 6 further provides that “related services” means services of the following kind:

  1. the provision of labour to carry out construction work,
  2. architectural, design, surveying or quantity surveying services in relation to the construction work,

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.

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