Security of Payment Acts across Australia gives businesses the ability to pursue payment in a fast and affordable way. The various Security of Payment Acts provide an effective and fair procedure. Further, they help secure payment to businesses that perform construction work or provide related goods and services in the construction industry.
Understanding how these procedures work is critical to ensuring that your business understands its rights and obligations under construction contracts. Businesses also need to understand the options available to quickly enforce payments and the consequences of not addressing payment issues in a timely manner and in compliance with the law.
In this article, we explain five things you should know about the Security of Payment Acts.
The Security of Payment Acts differ across States and Territories
The various Security of Payment Acts were enacted to ensure that contractors and subcontractors in the construction industry would be paid for their work. And there were widespread issues with construction contractors being paid on time and in full.
In Australia, there are eight security of payment laws in place. There is no standardised approach to security of payment across Australia. However, the approach is similar across the different States and Territories.
The first State to introduce security of payment legislation in Australia was New South Wales. This happened in 1999. Since then, other Australian States introduced security of payment legislation.
Here’s the list of current security of payment legislation in force in Australia:
- Building and Construction Industry Security of Payment Act 1999 (the NSW Act)
- Building and Construction Industry Security of Payment Act 2002 (the Vic Act)
- Building Industry Fairness (Security of Payment) Act 2017 (the QLD Act)
- Construction Contracts Act 2004, as amended by the Construction Contracts Amendment Bill 2016 (the WA Act)
- Construction Contracts (Security of Payments) Act 2004 (the NT Act)
- Building and Construction Industry (Security of Payment) Act 2009 (the SA Act)
- Building and Construction Industry (Security of Payment) Act 2009 (the ACT Act)
- Building and Construction Industry (Security of Payment) Act 2009 (the Tasmanian Act)
This can be a complicated area of law because there are a lot of different laws.
Two prevailing models for the various Security of Payment Acts in Australia highlight the distinction between the WA and NT Acts approach and the other States and Territories.
The two models are commonly referred to as the “West Coast Model” (Western Australia and Northern Territory) and the “East Coast Model” (New South Wales, Queensland, Victoria, South Australia, Tasmania, and Australian Capital Territory).
Differences between the East Coast Model and West Coast Model
Here are some key differences between the East Coast Model and West Coast Model:
Overriding contractual mechanisms
The East Coast Model prescribes a statutory payment system that overrides all conflicting contractual provisions. The West Coast Model provides legislative support only when the construction contract does not contain agreed-upon payment provisions. This is accomplished by implicitly specifying payment provisions in cases where the construction contract does not contain them.
Procedure for payment claims
The East Coast Model provides for a statutory payment system. Under this system, the claimant (except in NSW) must mark his or her payment claim as having been made under the relevant Act. And they must serve it on the respondent before proceeding under the relevant Act.
Payment claims under the West Coast Model are made under the relevant construction contract procedure. Statutory adjudication is only available if a dispute arises during the contractual payment claim procedure.
Payments able to be claimed
The East Coast Model provides for the recovery of progress payments throughout the contract chain. Contractors and suppliers can use the adjudication process to recover payments from a principal or head contractor. This is available under the East Coast Model provisions.
On the other hand, the scope of the West Coast Model is broader. And it allows any party to file an adjudication application for any payment dispute, including debts and claims for damages.
The East Coast Model penalises a party that fails to respond to a payment claim with a payment schedule by holding it liable for payment of the full amount demanded. The West Coast Model does not impose such a penalty.
Dealing with payment claims across different States and Territories
Many companies have a presence in several Australian states and territories. That is, depending on where the work that is the subject of the claim is performed, they may be subject to different security of payment Acts.
In such cases, complex issues may arise where the work that is the subject of the claim is performed in multiple Australian jurisdictions. Alternatively, there may be issues if some of the work is performed outside Australia.
Each Act contains a provision limiting the usual rules for determining whether the Act applies extraterritorially. This avoids the problem of claims being brought in any number of jurisdictions. And it applies where there is a connection between the subject matter of the claim and the State or Territory.
This avoids the problem of, for example, a Queensland company entering into a construction contract governed by Queensland law involving certain construction work to be performed in New South Wales. In that case, the NSW Act would apply, not Queensland law.
The definition of ‘construction work’ is broad
In the various Security of Payment Acts, construction work is defined as any work carried out in connection with the construction, alteration, conversion, fitting-out, commissioning, renovation, repair, maintenance, refurbishment, demolition, decommissioning or dismantling of a structure.
What is included in the definition of construction work
Construction work includes the following:
- any installation or testing carried out in connection with an activity referred to in the above definition
- the removal from the workplace of any product or waste resulting from demolition
- the prefabrication or testing of elements, at a place specifically established for the construction work, for use in construction work
- the assembly of prefabricated elements to form a structure, or the disassembly of prefabricated elements forming part of a structure
- the installation, testing or maintenance of an essential service in relation to a structure
- any work connected with an excavation
- any work connected with any preparatory work or site preparation (including landscaping as part of site preparation) carried out in connection with an activity referred to in the above definition
- an activity referred to in the above definition that is carried out on, under or near water. This includes work on buoys and obstructions to navigation
What is not included in the definition of construction work
However, construction work does not include any of the following:
- the manufacture of plant
- the prefabrication of elements, other than at a place specifically established for the construction work for use in the construction work. For example, making precast concrete panels or roof trusses at a workshop of a person conducting a business or undertaking who is not involved in the construction work
- the construction or assembly of a structure that, once constructed or assembled, is intended to be transported to another place. For example, mobile or prefabricated homes
- testing, maintenance or repair work of a minor nature carried out in connection with a structure, for example:
- undertaking regular inspections of a building’s fire equipment or lifts
- replacing or repairing a sprinkler or smoke detector replacing carpet in an office
- servicing or minor repair of an air-conditioning system or solar panel unit
- regular testing and repair of pressure piping
- mining or the exploration for or extraction of minerals, for example:
- extracting sand or rock from a quarry or an open-cut mine
- removing overburden at an open-cut mine
Examples of construction work
Examples of construction work may include:
- removing an internal office wall
- building, fitting out or refitting an office building
- building a driveway crossover
- repointing a tile roof
Construction work also includes the following activities as listed in the table below:
|Any installation or testing carried out in connection with an activity referred to in the above definition of construction work.||● Installing an alarm system in a building during the fit-out phase of its construction|
● Testing an electrical installation in a high-rise building under construction (but testing, maintenance and repair work is not covered if the floor has been completed and handed over to the building owner with a certificate of occupancy, unless it is fixing defects arising from the construction work)
|The removal from the workplace of any product or waste resulting from demolition.||● Loading trucks, waste bins and rubbish skips with demolition waste.|
|The prefabrication or testing of elements, at a place specifically established for the construction work, for use in construction work.||● Making concrete panels or roof trusses at the construction site|
● Preparing bitumen at a bitumen plant specifically established for road construction work
● Undertaking on-site concrete batch testing.
|The assembly or disassembly of prefabricated elements to form a structure or part of a structure.||● Constructing a factory using precast concrete panels|
● Dismantling a prefabricated building
● Installing prefabricated power poles
● Installing bridge beams
|Any work connected with an excavation. Any work connected with any preparatory work or site preparation (including landscaping as part of site preparation) carried out in connection with an activity referred to in the above definition of construction work.||● Preparatory site clearing, benching or levelling done before construction|
● Soil-testing the ground for design purposes before construction of a structure
● Installing an in-ground swimming pool or spa
● Doing excavations while constructing a golf course
● Assembling temporary fencing for a building site
● Carrying out remediation excavation work on a contaminated site.
|The installation, testing or maintenance of an essential service in relation to a structure.||● Roughing-in telephone, television and internet cables|
● Major drainage repair works
● Installing a grey water recycling system Installing solar heating units.
|An activity referred to in the above definition of construction work that is carried out on, under or near water, including work on buoys and obstructions to navigation.||● Dredging to prepare for the erection of a structure|
● Re-piling jetties and piers
● Driving navigation markers into the seabed.
Payment disputes in the construction industry were the main reason for the enactment of the Security of Payment Acts. Many small subcontractors and suppliers were not being paid for their work. As a result, they may have experienced cash flow issues.
Some of these subcontractors and suppliers are small, family-run businesses. Financial issues can affect not only their businesses or companies but also their families.
The Security of Payment Acts can help subcontractors and suppliers in the construction industry. It can speed up the process for them to receive progress payments from builders and/or principals.
The application of the Security of Payment legislation is based on two pillars. These are Payment Claims and Payment Schedules. Our contract attorneys understand how important it is for businesses to understand these concepts.
The process of recovering progress payments begins with the submission of a “payment claim” by the contractor.
A claimant makes a payment claim by sending a statement of claim to the entity that is obligated to pay under the contract.
In other words, a Payment Claim is a contractor’s (or subcontractor or consultant) claim for payment from its client under the relevant building contract and the SOP legislation. A Payment Claim, which to be valid under the Act, must:
- be in writing
- contain sufficient details to identify the contract to which it relates
- identify the work and relevant period to which the Payment Claim relates
- state the claimed amount and the due date for payment
- indicate how the claimed amount was calculated (for example, by attaching or incorporating a spreadsheet table)
- state on the document that it is a payment claim made under the SOP legislation
Steps to making a payment claim
Here’s how to make a payment claim under the Security of Payment Acts:
Step 1: Make sure you are covered by the Act.
Step 2: Check if there is an available date for making the claim.
Step 3: Plan to serve the claim at the right time.
Step 4: Address the claim to the right person.
Step 5: Ensure the claim contains the correct information.
Step 6: If you are a head contractor, include a correctly completed Supporting Statement.
Step 7: Serve the claim properly.
Step 8: Keep evidence of service.
All about payment claims
Payment Claims are generally issued once per month unless the contract provides otherwise. The first payment claim will generally be calculated from the date work begins until the end of the month. Therefore, the first payment claim may only be for a short period of time. However, subsequent claims will then be billed from month to calendar month.
In the event that the payer issues payment claims late, the construction contract may expressly provide for this. For example, the Payment Claim may be treated as received on the next due date. By default, this will be the following month.
However, a late payment claim may be invalid if the contract does not provide for late invoicing. In such a case, it would be better to wait until the next month to issue it. But if within the prescribed time frame, a client:
- does not pay
- fails to issue a payment schedule or
- issues a payment schedule in which a partial amount is disputed but the undisputed amount is not paid
the payee is entitled to stop the work. This entitlement arises even if there is no right to stop the work under the contract.
Not all contracts contain an express term stipulating the time for payment. However, Security of Payment laws do provide a time for payment. This time for payment is stipulated to be a certain number of days from receipt of the payment claim.
The payee is even entitled to seek adjudication or initiate court proceedings to recover the entire debt.
All about payment schedules
The payment regime under the various Security of Payment Acts provides for regular and timely payments during a construction project. The payer must respond within a strict time frame. They can do this by either paying the full amount or issuing a “payment schedule” and paying a lesser amount (as explained in that payment schedule) if any portion of the payment claim is disputed.
Once a request for payment claim has been made, the principal (or head contractor) must respond in writing. Such a response is called a “payment schedule” in most jurisdictions.
A Payment Schedule is issued by a client after receiving a Payment Claim if they dispute part or all of the claimed amount. There is no standard form for a Payment Schedule, but it must:
- be in writing
- identify the Payment Claim to which it relates
- state an amount of the Payment Claim (if any) which is not disputed and which it proposes to pay (which is referred to as the “scheduled amount” and can be $0
If the client-payer wishes to issue a payment schedule, they must do so within 20 working days. This time starts from the issuance of the payment claim. That is, unless the construction contract specifically provides for a different period.
How to determine the amount of a progress payment
Under the East Coast Model, there are two ways of determining the amount of a progress payment:
The method of calculating the value of a progress payment should be in accordance with the construction contract. In Victoria, this is subject to the following limitations (notwithstanding anything to the contrary in the construction contract):
- claimable variations may be taken into account
- excluded amounts must not be taken into account.
Where the construction contract does not state how to calculate a progress payment, the amount shall be calculated on the basis of the value of the work performed or to be performed. For instance, the value of the work shall be calculated taking into account the contract price, other prices, defects and deviations.
For contractors and clients who value certainty, determining the calculation method for a progress payment is essential. If the parties do not agree on a calculation method for the progress payment, the claim may include a number of costs that the client did not agree to.
Under the West Coast model, where there is no provision in the underlying contract, there is an implied term that the contractor is entitled to a “reasonable amount for performing its obligations.”
If the parties do not specify how to calculate a progress payment, the issue becomes more complicated. There may be a greater discrepancy between the amount claimed and the amount of a payment schedule.
There are time limits that apply under the various Security of Payment Acts
The various Security of Payment Acts contain deadlines throughout, which must be strictly complied with. This is because one missed deadline may be the end of a claim. The deadlines and time constraints in the Act are defined in Business Days.
Business days are generally Monday to Friday, excluding public holidays and the period between Christmas and New Year.
The finality of the deadlines cannot be stressed enough. Extensions of time are not available. Because of this, the failure to meet some of the deadlines can bypass normal legal procedures and entitle a party to a judgment debt.
An example of deadlines
For example, where a university has engaged a contractor, Security of Payment legislation grants the contractor a statutory entitlement to ‘serve’ a payment claim on the University and ‘receive’ progress payments.
After receiving a payment claim, the university must produce a response. This response is called a ‘payment schedule’ and make payments on time or refer the matter to an adjudicator for determination.
If the university fails to provide its payment schedule within 10 business days, then the university can be liable to pay the whole amount claimed. That is, even if the claim is baseless.
Under the East Coast Model, a progress payment is due in accordance with the terms of the contract. Due dates for payments not specifically provided for in the contract are listed below:
|Jurisdiction||Days (after claim is made) when payment is due|
|Victoria||10 business days|
|Queensland||10 business days|
|New South Wales||15 business days for Head Contractors and 30 business days for sub-contractors|
|South Australia||15 business days|
|Tasmania||20 business days for claims relating to residential structures, where the respondent is the Owner of the land or where the respondent is not a building practitioner and 10 business days for any other case|
|ACT||10 business days|
Late payment claims
Parties entering into construction contracts under the East Coast Model should carefully consider late payment provisions. Parties should ensure that the payment terms comply with relevant statutory payment terms.
For parties operating in Western Australia and the Northern Territory, payment terms of more than 50 days are prohibited.
And in Western Australia, this period is shortened to require payment to be made within 50 days of the demand for payment. Moreover, in the Northern Territory, this period is shortened to 28 days after payment is claimed.
The adjudication process under the Security of Payment Acts
Payments under SOP legislation are made “on account” and therefore subject to being recovered by a principal in court proceedings. However, recovery of overpayments in such court proceedings may take years.
SOP legislation was introduced primarily for the benefit of subcontractors. This included ensuring that companies do not fail due to bona fide payments being withheld.
The security of payment legislation provides for an adjudication process that results in an interim determination of the dispute pending a final determination in a court proceeding or settlement of claims.
Starting the adjudication process
The adjudication process is commenced by the Claimant where they have not received a Payment Schedule in response to the Payment Claim or the Payment Schedule is not agreed upon.
An appointed arbiter reviews the evidence and documentation each party has put forward and comes to a binding decision. The process is designed to be straightforward and prescriptive. The process resolves payment disputes quickly, fairly and at a lower cost than going to court.
Under the Act, an Authorised Nominating Authority (ANA) must be used for adjudication. The application made to ANA must:
- be in writing;
- identify the payment claim and the payment schedule to which it relates;
- be accompanied by any application fee charged by the ANA.
The claimant may make submissions that are relevant to the application, including the reasons for disagreeing with the payment schedule.
The ANA will appoint an adjudicator within two Business Days. The adjudicator notifies the parties that the application has been accepted. If the adjudicator does not notify them within four business days after the application was made, the claimant can withdraw it and make a new one.
What happens once the adjudication application has been lodged
A copy of the application must be given to the respondent. The respondent has up to five business days to give the adjudicator a written response, but only if they have given the claimant a payment schedule. The claimant gets a copy of the adjudication response.
After agreeing to adjudicate, the adjudicator has 10 business days (or up to 15 business days if the claimant agrees) to reach a decision. Moreover, in conducting the adjudication, the adjudicator may do any of the following things:
- request further written submissions from either party, in which case the other party must be given an opportunity to comment on those submissions
- set deadlines for further submissions and comments by the parties
- call a conference, which must be conducted informally – legal representation is not allowed unless the adjudicator permits it
- carry out an inspection of any matter to which the payment claim relates.
The adjudicator must notify any relevant principal and any other person identified as having a financial or contractual interest in the adjudication application.
The decision of an adjudicator
At the completion of the process, the adjudicator determines the amount (if any) that the respondent must pay the claimant when it is to be paid and the rate of interest payable. The determination is given to the ANA, which gives a copy to the parties as soon as practicable.
While determining the amount must consider the following things only:
- the SOP Act and Regulations
- the contract
- the payment claim
- the payment schedule (if any)
- the claimant’s and respondent’s submissions
- the results of any inspection.
An adjudicator may require the full payment of their fee before releasing their determination.
Before you lodge an adjudication application
Claimants may apply for adjudication when they have served a payment claim on a respondent under the SOP Act and, as a result, one of the following circumstances has arisen:
- The respondent provides a payment schedule showing that the amount they propose to pay (the ‘scheduled amount’) is less than the amount claimed on the payment claim (the ‘claimed amount’).
- The respondent provides a payment schedule but does not pay any or all of the ‘scheduled amount’ when it is due.
- The respondent fails to provide a payment schedule and fails to pay any or all of the ‘claimed amount’ when it is due.
Prosper Law is an online commercial law firm for Australian businesses. We deliver online legal advice that is quick, commercial, and affordable. Our director, Farrah Motley, has over 10 years of experience in dealing with construction law.
We can help your business with the much-needed legal advice that will allow you to have a greater understanding and appreciation for construction contract law.
Prosper Law regularly represents homeowners, developers, builders and contractors in residential, commercial, strata, and infrastructure matters. Contact us today for a no-obligation, free legal consultation and quote from an Australian online lawyer.
Farrah Motley | Director
PROSPER LAW– Australia’s Online Law Firm
M – 1300 003 077
E – email@example.com
W – www.prosperlaw.com.au