On 21 April 2014, the Building and Construction Industry Security of Payment Act 2013 (NSW) (Amendment Act) commenced.
Late last year NSW parliament assented to the Amendment Act as a result of an inquiry into insolvency in the construction industry. The reforms were designed to enhance the existing Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA). We have highlighted some practical concerns for affected parties (such as principals, head contractors and subcontractors) and how they can best ensure compliance with the new regime.
The key features of the reform are:
- Contractors are no longer required to endorse the SOPA on a payment claim;
- Head contractors are 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 have been introduced; 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.
MANDATORY PAYMENT DEADLINES
Mandatory payment deadlines have been introduced for making progress payments. Where a head contractor makes a payment claim to a principal, a progress payment must be made within 15 business days. Where a payment claim is made by a subcontractor to a head contractor, a progress payment must be made within 30 days.
These deadlines apply so long as a contract has not made provision for earlier payment or the progress claim is not in dispute. Principals need to consider the impact the new timing may have on their accounts departments and financing arrangements. As a result of these new timeframes, head contractors have the option to achieve, in effect, a “pay when paid” arrangement in order to streamline payment cycles.
REMOVING THE SOPA ENDORSEMENT
The Amendment Act removes the requirement to make a statement on a payment claim that the claim is made under the SOPA.
Last year’s inquiry found that the requirement to endorse the SOPA on payment claims was breeding a widespread practice of commercial pressure to dissuade those down the subcontracting chain from issuing payment claims endorsed by the SOPA.
Any payment claim from a head contractor to a principal is now required 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.
Any head contractor who fails to provide a complying supporting statement of this nature, or who provides a supporting statement that they know to be false or misleading may face serious penalties (maximum $22,000 or 3 months imprisonment).
This reform may significantly impact a head contractor’s cash flow. A practical concern is that the inflexible operation of this reform may place unnecessary financial burden on head contractors. At this stage, the level of concern will depend on how the words ‘due and payable in relation to the construction work concerned’ are interpreted.
TRUST ACCOUNT REQUIREMENTS
The Amendment Act does not address trust accounting requirements, however the regulations may make provision for the requirement that all retention money be held in trust accounts for subcontractors. This is a response to reports demonstrating that retention money is often dealt with improperly by head contractors.