Soon to be enforced changes to the security of payment regime in New South Wales brought about by the Building and Construction Industry Security of Payment Amendment Act 2013 (NSW) (Amendment Act) are likely to impact the “bankability” of a project. The amendments, which aim to provide greater protection for subcontractors, promote cash flow and create greater transparency in the construction industry, are expected to take effect in April 2014.
Amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW)
The key changes to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) are:
Changes affecting “bankability”
Times for payment
Currently, the parties to a construction contract can agree when payments are to be made under a construction contract. The Amendment Act will change this by imposing maximum time limits on when payments are to be made. In the case of a payment to a head contractor, it will become due and payable no later than 15 business days after the payment claim is made, and in the case of a progress payment to a subcontractor, it will become due and payable no later than 30 business days after the payment claim is made.
These statutory deadlines will apply notwithstanding any contractual provisions to the contrary. A provision of a construction contract will have no effect to the extent it allows payment of a progress payment at a later date.
It is important for principals and head contractors to review, and to the extent required, adjust accounting practices and payment authorisation procedures to enable payment of payment claims to be made within the maximum time frames required by the amended SOP Act.
Principals should also consider the impact shorter payment cycles will have on finance arrangements which typically have longer drawdown and repayment periods to accommodate the requirement for an independent certifier to approve the claims. Similar statutory payment cycles are currently in force in Queensland allowing financiers and developers to draw on practices and arrangements within the Queensland building industry when financing projects.
Retention Money Trust Accounts
The Amendment Act provides for the introduction of regulations under which retention monies are to be held by head contractors in a segregated trust account. This amendment serves to address the practice of some head contractors failing to release retention monies to subcontractors and instead using it to increase cash flow and working capital.
The Amendment Act does not provide for any detailed regime for the creation of a statutory trust for retention money and instead simply lays the foundation for such a scheme to be established through regulations after consultation with industry stakeholders. The Amendment Act specifically provides for the regulations to address:
- the establishment by the head contractor of a trust account with its own financial institution into which the retention money is to be paid or to use a trust account established and operated by the Office of Small Business Commissioner;
- the procedures for authorising payments, the keeping of records and the resolution of disputes; and
- the creation of an offence for a failure to comply with the procedures set down in the regulations with a maximum penalty of $22,000.
This new trust arrangement is likely to provide principals (and by extension, financiers) with more comfort in circumstances where the head contractor becomes insolvent and the subcontractor is owed money by the head contractor for work carried out. Under the SOP Act and Contractors Debts Act (1997) (NSW) the subcontractor has direct right against the principal to secure payments owed to it by the head contractor. The principal’s exposure to any money payable to the subcontractor in such circumstances will be reduced through the proposed trust arrangement.
Other changes to the security of payments regime
Removal of requirement to endorse payment claim
The SOP Act requires a contractor to include an endorsement on its payment claim stating that it is made under the SOP Act. The Amendment Act will remove this requirement on the contractor. This means that any payment claim can be the basis for action under the SOP Act. The absence of an endorsement will mean that principals and head contractors will need to be attentive and respond to all claims for payment or be at risk of being liable in subsequent adjudications for amounts claimed in excess of contractual entitlements.
In order not to be caught out, all principals and head contractors should implement management processes to ensure all payment claims are appropriately scrutinised and managed. This is a significant change and has the effect of throwing the industry into turmoil as every claim will now enliven the SOP Act and will need to be responded to accordingly.
Supporting statement to accompany payment claims
The Amendment Act will place an obligation on the head contractor to serve every payment claim with a corresponding supporting statement which includes a declaration to the effect that all subcontractors have been paid all amounts that have become due and payable. The exact form of the supporting statement will be prescribed in the regulations.
The maximum penalty for failing to provide a supporting statement with a payment claim will be $22,000. Furthermore, knowingly providing a false or misleading statement will render the head contractor guilty of an offence and could attract either a $22,000 fine or 3 months imprisonment, or a combination of both.
Head contractors must ensure that supporting statements (that are not false or misleading) are provided with every payment claim to avoid potential criminal sanctions.