A look into the recent developments in the word of building and construction with regard to security of payments. Dealing with head contractors, subcontractors and the Building and Construction Industry Security of Payment Act 1999 (SOPA).

Introduction

In simplistic terms building and construction projects follow the model where:

A principle would hire a head contractor to oversee a project;
The head contractor would engage subcontractors for specific areas of the project (plumbing for example);
The subcontractors would do the work requested of them;
The principle would pay the head contractor for said work, and
The head contractor would pass the payment on to the subcontractors.

In theory a system that works both efficiently and effectively.

Arising Problems

Step 5, the final step, has been a cause of concern because for a number of projects it doesn't occur. Without a doubt there would be many instances where such shortcomings have a perfectly justified explanation. Regardless, aside from the personal impact the inability to receive payments has on subcontractor it also has a far reaching negative effect on society in general. Consequently, in an attempt to confront the problem the NSW State Government commissioned a report to look into this issues and provide recommendations to address it.

In November 2012 the Independent Inquiry into Construction Industry Insolvency in NSW Report (Report) lead by Bruce Collins QC was published (CLICK HERE for the full report). The Report was based on two position statements:

There needs to be support and protection of subcontractors, and
Payments intended for the project leaking outside to other areas to the extent that they jeopardise the head contractor’s ability of to fully pay subcontractor for their work, is unacceptable.

The Report provided 44 recommendations aimed at addressing the two tier objectives; these recommendations are summarised below.

Recommendations

The Commission

First, the Report stressed the need to bring all business under one roof (akin to NCAT). As such it encouraged the creation of the NSW Building and Construction Commission.This commission would then be responsible for the licensing, financial health check, discipline, complaints and standards for the building and construction sector.

Trust Accounting

One of the major recommendations was to implement procedures to allow trusts to be created for projects over $1 million. The intention behind such trusts would be ensure subcontractors were paid before head contractors were. The trust would have the following terms:

The head contractors would be the trustees
Bank authorisation would be required prior to payment out of the trust, but
Once funds are placed in trust by the principle, the head contractor can put said funds into a desired authorised investment vehicle;
Any interest derived from invested trust monies would be retained by the head contractor, once all subcontractors had be fully paid. This mean interest can be used to pay subcontractor if need be;
If the trustee/head contractor becomes insolvent the affected subcontractors can elect a new trustee;
Whilst the trustee/ head contractor must maintain the trust account, all affected subcontractors have a right to information regarding the trust accounting and have access to inspect the trust books.

Breaches and Reporting

The Report briefly mentions breaches, stating that no breach occurs if the action is made in accordance with a SOPA adjudication. However if a breach transpires, 3rd parties with knowledge of a breach will be liable.

Further recommendations urged transparency by having head contractors provide statutory declarations to the principle setting out that all subcontractors have been paid properly, prior to being paid themselves. To ensure the statutory declarations had some weight behind them it was recommended that the NSW Department of Finance and Service should be given prosecution power under the Oaths Act and that offences pertaining to attempting to circumvent the Oaths Act with respect to these declarations should be established.

Implications for Principals

Firstly progress payments should be statutorily implemented. Such progress payments should be made enforceable with contractual terms stipulating that if terms increase the period before payment falls due they are to be deemed void. Further, penalties apply to late payment (unless there is a dispute surrounding the amount paid). Also, any dispute arising from an issues relating to how much has been paid is to be settled by application to SOPA.

Implications for Head contractors and Subcontractors

The Report recommends that the aforementioned statutory requirements should also be put in place between head contractors and subcontractors. Such statutory requirements would entitle subcontractors to suspend work if payment is not made by its due date. Also, section 13(2)(c) of SOPA which requires a specific inclusion of words with respect to subcontractors’ progress payment claims should be abolished.

The Government Role

The Report made the following remarks concerning the Government: Government contracts above $10 million should have a dispute resolution procedures included. SOPA jurisdiction should be extended, to entail the further training of SOPA adjudicators. IN order to ensure the free flow of cash, the Government should legislate to ensure that dispute claims about money owing to sub-contractors or even sub-subcontractors should be made in first instance to SOPA. The Government needs to reassess its tender procedure, it must not contribute to driving business contractors down to unacceptable low margins. Education initiatives need to be undertaken (the NSW Building and Construction Commission may be an effective vehicle for this to be achieved). Finally, any reforms should be appropriately transitioned into the current law.

So what has been implemented?

The Governments approach to implementing the Report’s recommendations is through a 4 phase reform. It began in 21 April 2014 with the Building and Construction Industry Security of Payment Amendment Act 2013 (NSW). Which among other things introduced:

Ss11(1A) (1B), which set out the statutory support for progress payments between principle and head contractor and head contractor and subcontractor respectively.
S12A opens it up for regulations to be implemented for the purpose of creating a trust account. Which as of May 2015, Division 2 and 3 of the regulations reflect the report’s recommendations with respect to trust accounting.
S13(7) and (9) address the report’s requirement for head contractors to submit statements attesting that all subcontractors had been paid in full, before they themselves receive payment, and
The s13(2)(c) requirements have been relaxed.

Has this been effective in achieving the Reports objective?

It is difficult to make a fully informed determination because there simply hasn't been sufficient time to acquire robust data, especially from the more recent changes to the legislation. However, annual reports from the building and construction industry for the years 2013 and 2014 do suggest payments are making their way to subcontractors, the goals of the report are being achieved, whether this will continue or improve with current and future phases of the Report will have to be seen to be believed. But it does appear to be making step in progressing the rights and protections of subcontractors.

No part of this post is to be considered or constitutes legal advice in any way, any opinions or information provided is for either entertainment or educational purposes only, contact Alex via phone, email or through the CONTACT page if you require legal assistance.