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Security of Payments

More government control planned for the NSW construction industry

By 19 February, 2014No Comments

On 30 October 2013 the New South Wales Legislative Assembly passed the first of a number of proposed amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) (Security of Payment Act”)  that will change the construction legal landscape in New South Wales for many years to come.

All that is required now is the bill’s passage through the Legislative Council for the amendment to become law.

In Australia, the Security of Payment legislation exists in some form or another in all States and Territories. The Security of Payment legislation typically governs the contractual relationships of principals (developers), head contractors (builders) and subcontractors.  

The effect of the existing Security of Payment legislation is to override the contractual relations of the players in the construction process. The existing legislation provides a statutory process to circumvent the agreed contractual clauses to determine the amounts due to a claimant for construction work performed by it. The system is far from perfect and provides little more than rough justice to the parties to resolve disputes concerning payment.

Subcontractors are the main users of the Security of Payment legislation. Head contractors do not often use the powers against principals.

No other industry in Australia has such legislative interference in its commercial relationships.

In 2012 the Collins enquiry, headed by Bruce Collins QC, looked into insolvency in the construction industry and made various recommendations to the Government. (This was at approximately the same time as the Reed Constructions Pty Limited insolvency which involved major government contracts). These recommendations are now being enacted in response to the growing number of insolvencies of major head contractors and the knock on effect to subcontractors.  The bill creates yet more legislation reflective of the Queensland legal and regulatory regimes governing its construction industry.  This is in stark contrast to American politics and its swing towards reduced government involvement.  

The new legislative amendment represents a dramatic first “phase” of changes to further limit the way parties contract in commercial construction contracts and residential subcontracts.

Whilst the Minister for Finance and Services, Mr Andrew Constance, admitted in the second reading of the bill that “the majority of the industry does the right thing” the majority of head contractors must by this proposed bill bear yet another burden created by a few.

The proposed amendments dictate when progress payments must be made under head contracts and subcontracts despite what the parties might otherwise agree. This change reflects the Security of Payment legislation (and other legislation) in Queensland. In another section the proposed amendment changes the form in which payments claims are made. The result will be that every demand by subcontractors for payment (whether by letter of invoice) from head contractors will now require a special statutory response, which if missed becomes an automatic debt due to the subcontractor regardless of the work done and its true value.

Australian head contractors and subcontractors have never seen legislation like this.

The amendments further require that a head contractor attach to its own payment claims a declaration (referred to as a “supporting statement”) that all subcontractors and suppliers have been paid all amounts that have become due and payable in relation to the construction work concerned. If they do not, a maximum penalty of $22,000 applies. Further, if a head contractor serves a supporting statement with knowledge that it is false or misleading it will be an offence with a maximum penalty $22,000 or 3 months imprisonment or both.

On major constructions sites a head contractor will manage up to 70 subcontractors, consultants and suppliers to complete the works and each may make monthly or even weekly claims. During the course of any project, thousands of requests for payment will be made. The management of that process created by these proposed laws could have extraordinary consequences if the head contractor’s statement is in error.

Finally, the Government may (by these amendments) appoint public servants who can require a head contractor to provide information and all documents relating to compliance with the new provisions regarding supporting statements. Failure to comply with the requirements of such a notice may result in a maximum penalty of $22,000 or 3 months imprisonment or both.

In this instance the Government’s first legislative phase (as it puts it) comes at a high cost to the majority of the head contractors that do the right thing. The bill represents just the beginning of a legislative and regulatory regime to change the way construction takes place in the State of New South Wales.

The major builders will cope with this proposed legislation and the costs will be passed to principals. The costs will be substantial to ensure compliance, however, it is the mid-tier head contractor that will be forced to increase its administrative workload to accommodate the proposed changes. The bottom of the construction market will ignore the law. As always it’s not about creating yet more laws that will be ignored but about enforcement against those few bad apples.

In the meantime our economy which is highly dependent on new housing starts and capital expenditure for growth staggers on. If construction is the engine room of the State then the drivers of that engine are its builders. These builders continue to have their contractual rights restrained and if all the recommendations are enacted, they will within a short time, be operating under even stricter laws and controls. No doubt the other States and Territories will be looking on to see how the New South Wales economy performs if the bill is passed what affect it will have on its builders.

To find out more about this issue, view The Collins Report.