The commercial construction industry in NSW is bracing for significant changes to existing contractual payment procedures as the NSW Government begins to deliver on planned reforms following the Collins Inquiry into NSW Construction Industry Insolvency earlier in the year.

The changes were introduced via amendments to the Building and Construction Industry Security of Payment Act 1999 NSW (SOPA) in an amending Act which received Royal Assent last week. 

Timing

The new laws will commence on a date by proclamation (anticipated to be April 2014).  The Department of Finance and Services has indicated that further industry consultation will be undertaken and regulations (which will contain much of the detail particularly in respect of the statutory retention trust) will be drafted prior to the date for commencement. 

Interestingly, the new laws will only apply to construction contracts entered into after the commencement of the amending legislation and not the date of its Royal Assent.  Therefore it will still be possible for principals, head contractors and subcontractors to agree on contract terms which are not different to the rules under the new changes up until the commencement date that is to be proclaimed.

Highlights

The amendments:

  • introduce maximum payment cycle terms system for principals to head contractors (15 business days) and payments to subcontractors (30 business days)
  • remove the need to endorse payment claims under SOPA with words identifying that it is made under that Act
  • require head contractors to include supporting statements with their payment claims confirming that all subcontractors have been fully paid amounts due and payable with $22,000 maximum penalties
  • introduce Authorised Officers of the Department of Finance and Services as the new ‘cash-flow cops ’ with powers to investigate compliance and to inspect and seize documents
  • lay the foundations for regulations to be drafted which will require a head contractor who holds cash retention to pay the money into a Retention Money Trust Account held on trust (by the Small Business Commissioner acting as trustee) for the benefit of subcontractors.

Impact of the changes

Many of the important details are left to the regulations and interested parties will need to wait to see how the issues raised in our analysis and in the Consultation Paper are to be dealt with in the complete legislative package once it is released.    

At this stage, the amendments do appear likely to strengthen the Security of Payment legislation as a useful system of ensuring prompt payment and enhancing cash flow in the supply chain with some significant improvements for subcontractors.   Also, whilst adjustment will be necessary in terms of internal accounting, contracting and finance processes the NSW Government appears, sensibly, to be looking to balance the demonstrated need for further regulation in this area with its desire to decrease red tape for business. 

The difficulty that remains for subcontractors is that they will remain financially exposed to insolvencies up the contractual chain.   In the second reading speeches for the present reforms, the NSW Government blamed the Federal regulators, namely ASIC, for not doing enough to prevent illegal ‘phoenixing’ of companies which is estimated to cost the economy up to $3.19 billion each year and is acknowledged as being particularly prevalent in the construction sector.

The present reforms don’t address (and are not intended to address) the devastating effect of insolvency in the construction sector where subcontractors have no priority status in the order of creditors and are regularly left unpaid for construction work.   The statutory construction trust proposed in the Collins Report (modelled on similar systems in the UK in parts of the USA and Canada) is the only measure that tackles this issue at its heart by ringfencing progress payments for the benefit of subcontractors.   Rightly or wrongly, this proposal was opposed by many in the industry and it proved a bridge too far for the NSW Government.  For more details on the construction trust concept please click here.

The success or failure of the trialling of trust arrangements via project bank accounts on selected government contracts in 2014 will be closely watched by industry stakeholders.   The comprehensive review of the Security of Payment legislation in 2015 will also be an opportunity to revisit some of the issues with construction sector payments, disputes and insolvency issues.