Disputes and withheld payments are common occurrence in the construction industry. Contractors and suppliers operate with increased risk of these occurrences if they are not prepared to use the Building & Construction Industry Security of Payment Act 1999 (“the Act”) immediately when a problem arises.
I regularly get people downloading our Security of Payment Guide looking for general information so that they can be prepared to use the regimes created by the Act to recover progress payments and resolve disputes promptly when the need arises in future. Too often, however, when the need arises the business is ill-prepared due to a lack of appreciation of some of the fundamental mechanics of the Act and importance of having clear written contracts both generally and in order to use the Act to its fullest potential.
How the Security of Payment Act Bites
The Act provides a fast, low-cost debt recovery and dispute resolution process that empowers subcontractors, contractors, supplies and consultants who have served a valid Payment Claim to get fair and timely payment for construction work or the supply or related goods and services. It does this by:
- Creating a right to have an independent Adjudicator make a binding determination in relation to the amount payable where a Payment Claim is disputed, or
- Creating a right to enforce an indisputable statutory debt where no response is provided in relation to a Payment Claim within the required time.
When used effectively, businesses in the construction industry can to avoid lengthy and expensive legal battles. Conversely, ignorance of the Act can lead to an obligation to pay an amount claimed with no right to have a dispute heard unless the amount has already been paid.
Reference Dates: The Gateway to Security of Payment
The force of the Act is only invoked when a valid Payment Claim has been served. Importantly, a Payment Claim can only be served on or after an available reference date (subject to a 12-month limitation).
A reference date is the date specified in the contract on which a claim for a progress payment can be made. If the contract does not deal with such a date expressly, the reference date is the last date of the month in which work is carried out.
As reference dates can not be banked for future use, there can only ever be one reference date available at any time.
Frequently, when a problem arises and a contractor wants to rely upon the Act to recover payment:
- The contractor has failed to ensure that there was an available reference date when serving the Payment Claim, and/or
- There is uncertainty about the validity of the Payment Claim due to the contractor’s poor contracting practices and the lack of any expressly agreed reference dates.
For example, if a contractor has poor contracting procedures and does not make contracts that either specify or incorporate relevant standard form Terms of Trade dealing with reference dates, there can be uncertainty in relation to the reference dates applicable to the contract. This in turn leads to uncertainty in relation to whether a Payment Claim is issued on or after any reference date on which it depends for its validity.
Similarly, where a contractor 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 due to the lack of any available reference date. 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 no reference date or 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 reference date 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.
Contractors 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 contract template and/or short form contract templates including Quotations and Order Forms incorporating standard form Terms 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 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 contract is put forward by the other party, it is essential that the contractor gets legal advice, understands the essential terms of the contract including reference dates and prepares a Contract Matrix (summary) that they can refer to to confidently serve valid Payment Claims and otherwise effectively administer the contract.
Any business that extends credit should only do so if they have clear written contracts in place. This is particularly the case for businesses in the construction industry who need to ensure that there are available reference dates under the Act when serving Payment Claims.
Whilst many businesses are reluctant to use Lawyers when they should, the reality is that disputes and delayed payments frequently arise in relation to building claims and learning lessons the hard way can be far more expensive or even fatal to the business.
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 reference dates 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 contractors and suppliers including:
- Preparation of standard form contracting documents including Quotation forms, Terms of Trade, Variation forms and Credit Applications,
- Preparation of long form plain English Construction Contracts and Contract Matrices for larger projects, and
- Advice in relation to one-off Construction Contracts and the preparation of a Contract Matrix for future reference.
If you have an existing issue that you require assistance with or would like to find out how we can work together to protect your business from claims and disputes, we would love to hear from you.
We offer a no obligation telephone consult for all new enquiries, so feel free to call on 1300 553 343 anytime.