Contractors often experience significant delays in receiving payment during the course of a construction project or do not receive payment at all. This lack of cash flow can severely affect the ability of Contractors to continue working on a project. Security of Payment legislation was introduced to alleviate this problem and to do away with the “pay when paid” mentality which has prevailed in Victoria.
The Building and Construction Industry Security of Payment Act 2002 (SOP Act) specifies a process whereby contractors, subcontractors, consultants and suppliers (Contractors) can recover money owed to them including single payments, milestone payments, progress payments and final payments. The SOP Act applies to contracts that are written, oral or a combination of the two and provides a timely and cost effective mechanism whereby Contractors can receive payment for amounts owed, without having to go to Court.
When does the SOP Act apply?
The lists below identify the works, goods and services that are captured by the SoP Act and those that are not.
Works, goods and services captured by the SoP Act
- Residential and non-residential buildings
- Civil engineering works
- Demolition works
- Electrical works
- Hire of plant and equipment
- Landscaping works
- Maintenance work
- Mechanical/air-conditioning works
- Plumbing works
- Professional services (e.g. design, architectural services, surveying)
- Supply of building materials
Works, goods and services outside the SoP Act
- Domestic building contracts between a builder and the home owner
- Contracts for mining, oil and gas exploration
- Employment contracts
- Contracts that are not based on the value of the work
- Contracts that are part of a loan agreement
What is claimable under the SoP Act?
Monies owed under a progress claim or pursuant to a milestone payment are captured by the SoP Act. Variations, whether agreed or disputed, are also captured by the SoP Act. However costs relating to latent defects, changes in regulations, damages for a breach of contract and delay costs caused by an owner are excluded from the SoP Act.
What is the process specified by the SoP Act?
A “payment claim” must be served on the person liable to make the payment (Respondent). In the payment claim, the Contractor must:
- Identify the work performed or goods or services supplied pursuant to the contract;
- Identify the amount due either in its entirety or in part;
- State that it is made pursuant to the SoP Act and must include the following statement: “This is a payment claim made under the Building and Construction Industry Security of Payment Act 2002”.
The payment claim must be made within the dates specified in the contract. If the contract is silent, then the SoP Act, specifies a timeframe within which the payment claim must be made.
The Respondent must provide a payment schedule within 10 business days of receiving the payment claim. The payment schedule must identify the relevant payment claim and the amount or amounts that will be paid by the Respondent. If the full amount is not paid then the Respondent must give reasons for the non-payment or for the partial payment. If the Respondent fails to provide a payment schedule within 10 business days then the full amount of the payment claim is payable by the Respondent.
If the Contractor is dissatisfied with the reasons given for the non-payment or the partial payment of the payment claim then the matter can be referred to an adjudication.
What is the adjudication process of the SoP Act?
An adjudication is an inquisitorial process whereby an appointed adjudicator takes into account the relevant material and makes a determination as to the appropriate amount to award to the Contractor. In making his or her determination, the adjudicator will have regard to SoP Act, the Contract, and any payment claims and payment schedules exchanged between the parties.
The adjudicator will make a determination about the dispute within 10 to 15 business days hence this is a significantly faster process than the slow and costly process of going to court. The determination will set out the amounts, if any, that the Respondent must pay to the Contractor. There is no oral hearing and there are almost no appeal rights from the determination made by the adjudicator.
If the Respondent party does not comply with the determination of the adjudicator, the Contractor can:
a. Take enforcement action (including obtaining a court order);
b. Exercise a lien over the unfixed goods or materials onsite;
c. Suspend work (in accordance with the SoP Act) until the due amount is paid.
The costs of the adjudication are shared by both parties however the adjudicator has the discretion to apportion the fees of the adjudication.
If you would like further information about the operation of the SoP Act and how to utilise it for your business, please contact Urban Lawyers.