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What do the Security of Payment updates in New South Wales mean for your construction contract?

30 April 2019
DWF |
The Building and Construction Industry Security of Payment Amendment Act 2018 (NSW) (“the Act”) will bring about various changes to the existing security of payment regime in New South Wales. With the changes expected to commence in 2019, it is timely to consider the practical implications for construction industry participants.

When do the updates apply?

The proposed changes are not yet in force. The commencement date the Act will be set by proclamation, which is expected to occur in 2019. The amendments to the security of payment regime will not apply retrospectively.

 

Key changes and their implications

Key changes industry participants need to be aware of include:

  • broadening the right to progress payments;
  • shortening payment timeframes of progress payments to subcontractors;
  • requiring payment claims to state that the claim is made under the Act (in order to have the force of the Act);
  • increasing penalties for a head contractor failing to properly provide a supporting statement by 500%; and
  • enhancing investigative powers of the ‘authorised officer’ that include the ability to enter premises.

Some of the updates to the Act may have a significant impact on construction contracts which we discuss below.

 

  1. Right to progress payments

    Entitlement to progress payments are no longer tied to the occurrence of a ‘reference date’. The right to a progress payment now arises simply by a person, under a construction contract, undertaking to carry out construction work or to supply related goods or services. 

    Implication on construction contracts – Under the new updates, industry participants will no longer be able to fix the reference date for the purposes of the Act. Currently a number of construction contracts seek to fix the reference date (i.e. the contractor may submit a payment claim on the later of a series of events occurring). The updates to the Act will mean a payment claim may be submitted by virtue of performing construction work in a given month.

  2. Payment timeframes

    Under the new updates, progress payments to a subcontractor under a construction contract become due and payable 20 business days (previously 30 business days) after the payment claim is made under the Act.

    Implication on construction contracts – Head contractors should take note of this tightened timeframe and ensure their construction contracts are updated to manage this and their internal accounting procedures are updated to accommodate the shorter payment timeframe. This is often a challenge for larger contracts.

  3. Claim under this Act

    Progress claims are again required to state that they are ‘made under the Act’ (in order to have the force of the Act). This amendment aligns with the findings of the Murray Report which recommends a clear distinction is made between a claim under the Act and a claim that is made under contract. However, it also places the discretion back into the hands of the claimant and provides claimants an additional negotiation tool to bargain with – ultimately enhancing the claimant’s bargaining power.

    Implication on construction contracts – Contractors and subcontractors must carefully consider whether they want to submit their payment claims under the Act (in addition to the construction contract). Principals and head contractors will need to be vigilant with assessment of payment claims they receive (in particular identifying whether the relevant payment claim is a payment claim for the purposes of the Act).

  4. Increased penalties

The penalty for a head contractor failing to provide a supporting statement when serving a payment claim on a principal has increased from 200 penalty units to 1000 penalty units. In monetary terms, the penalty has increased from $22,000 to $110,000 per occurrence. In line with this rationale, the penalty for a head contractor providing a supporting statement that is known to be false or misleading when serving a payment claim on a principal has also increased from 200 penalty units to 1000 penalty units.

Implication on construction contracts – It is best practice to ensure that a valid and compliant supporting statement is included in your construction contract (as an annexure).

 

Action item

Construction industry participants in New South Wales should watch this space to ensure they (and their contracts) are prepared for when the Act is in force.

 

For further information please contact a member of our Construction & Infrastructure team.

Further Reading