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13 February 2014 Construction Update - New changes to Security of Payment legislation

By Michelle Harpur, Partner and Tom Johnston, Senior Associate


In Brief

Amendments to the NSW Security of Payment legislation are expected to commence in April 2014.  In this article we take a look at these significant amendments and what they mean for principals, head contractors and subcontractors.


Late last year, following the recommendations of the Collins Inquiry into insolvency in the construction industry, the NSW parliament assented to the Building and Construction Industry Security of Payment Amendment Act 2013 (NSW) (Amendment Act) which amends the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).  The amendments are expected to commence in April 2014.

The main amendments are:

  • Contractors will no longer be required to state on a payment claim that the claim is made in accordance with the SOP Act;
  • Head contractors will be required to include a supporting statement declaring that all subcontractors have been paid all amounts due and payable in relation to the construction work concerned;
  • Mandatory payment deadlines for making progress payments will be introduced (15 business days for principals and 30 days for head contractors); and
  • The Amendment Act provides for the making of regulations which could require head contractors to create a trust account to hold retention money for subcontractors.
Removal of endorsement of SOP Act payment claims

Although contactors will no longer have to make a statement on their payment claim that the claim is made under the SOP Act, the claim must still identify the construction work being claimed and the amount claimed to be due, but although these are now the only requirements.

This amendment fixes the obtuse previous position by which contractors who did not endorse their claim with the magic words "this payment claim is made pursuant to the SOP Act" were powerless under the SOP Act.  The amendment also addresses the practice of contractors applying commercial pressure to subcontractors to lodge payment claims without reference to the SOP Act.

Supporting Statements

A payment claim from a head contractor to a principal will have to include a 'supporting statement' which states that all subcontractors have been paid all amounts due and payable "in relation to the construction work concerned" (as defined in the Amendment Act). 

This amendment will have a significant impact on the cash flow of the head contractor.  Instead of lodging a progress claim and then, on payment, paying its sub-contractors, the head contractor will be required to pay down the chain before claiming from the principal above for the same work.

It is expected that the regulations will provide further clarity on the terms of the supporting statement and what constitutes the "construction work concerned".

The implications of not including the supporting statement are serious. It will be an offence for a head contractor to:

  1. provide a payment claim to a principal without the supporting statement; or
  2. provide a payment claim to a principal with a supporting claim that they know to be false or misleading.

The penalties for not complying with these new laws are significant – a maximum penalty of either $22,000 or 3 months imprisonment.  Further, authorised officers of the Department of Finance and Services will be empowered to investigate compliance and to inspect and seize documents.

Mandatory payment deadlines

The Amendment Act will also introduce mandatory payment deadlines for making progress payments.  Provided a contract does not make provision for earlier payment, progress payments must be made:

  • within 15 business days after a payment claim is made by a head contractor to a principal; and
  • within 30 business days after a payment claim is made by a subcontractor to a head contractor.

These deadlines will apply to all progress payments irrespective of the terms of a contract.  Previously, parties were able to agree to extended time frames.

Trust Account Requirements for Retention Money

The Amendment Act also states that the regulations may make provision for the requirement that all retention moneys be held in trust accounts for subcontractors.  Currently, retention moneys are usually withheld by the head contractor and are at risk, especially in the case of the head contractor becoming insolvent.

The Department of Finance and Services released a consultation paper in relation to this, comments on which have just closed.  The Department reported that the trust fund would be comprised of the subcontractors' cash retentions held by head contractors or other subcontractors and be administered by the Office of Small Business Commissioner.

It is proposed that the regulations will provide further specificity as to the practice and procedure in respect of these trust accounts. 

Conclusion

Contractors must pay closer attention to all payment claims and the timing of progress payments.  Whilst the amendments will further assist subcontractors in obtaining prompt payment for their work, it is likely that subcontractors will still be affected by insolvencies in the industry higher up the payment chain. 

It is anticipated that the regulations (which will contain much of the detail) will be released in April 2014, however regulations in respect of the retention money trust accounts may not be introduced until sometime in the next financial year.

If you wish to discuss these changes, please contact:


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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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