If you work in the building and construction industry, or you are engaging an industry participant (for example, a builder or other tradesperson), you will need to be across changes to the security of payment laws in New South Wales (NSW).
Fair Trading NSW has published new Regulations, the Building and Construction Industry Security of Payment Regulation 2020 (NSW) which replace the 2008 Regulations. These Regulations accompany the Building and Construction Industry Security of Payment Act 1999 (NSW) ( Act ), which was recently amended.
The new security of payment Regulations cover four key areas:
- trust account management;
- supporting statements provided by head contractors;
- adjudicator requirements; and
- owner occupier contracts.
This article will explain the latest changes and their impacts.
Recap – What is The Security of Payment Legislation?
The security of payment legislation allows building and construction industry participants to claim interim progress payments. It is designed to improve cash flow, which is key to the industry. The legislation also includes an adjudication process, where parties to a contract can settle payment disputes, in what is intended to be a quick and relatively cheap forum.
What Are The Key Changes?
In NSW the new Regulations, for the most part, came into effect on 1 September 2020. The remaining change comes into effect on 1 March 2021.
The 1 September 2020 Changes
- Trust accounts – there are now requirements regarding the management of trust accounts for contracts valued at at least $20 million. Head contractors need to deposit retention money into an approved retention money trust account as soon as reasonably possible. This must occur within five days of the head contractor receiving the money from a subcontractor. There are restrictions on when retention money can be withdrawn from the trust account, and reporting obligations on the head contractor (including to notify and provide certain details to, the Commissioner of Fair Trading NSW within 10 business days of establishing a trust account). Directors of companies can face personal liability for breaches of some of these trust account requirements.
- Supporting statements – head contractors have an obligation to provide a supporting statement along with a payment claim, but only to those subcontractors or suppliers that they have engaged directly. In other words, the obligation does not extend to sub-subcontractors (i.e. third parties engaged by the head contractor's subcontractors). The supporting statement is used to declare that all subcontractors have been paid all amounts that are due and payable to the subcontractors, in relation to construction work they have carried out. The new Regulations also no longer require the statement to separately identify amounts that the head contractor is in dispute over with a subcontractor.
- Adjudicator requirements – there are new eligibility requirements for adjudicators. To be an adjudicator, a person needs to have either:
- a degree or diploma in architecture, building surveying, quantity surveying, building and construction, construction management, project management, engineering or law from an Australian or foreign university or tertiary institution, and at least five years of relevant experience, or
- at least 10 years of relevant experience.
Adjudicators must also complete the required continuing professional development to remain eligible. An adjudicator will be considered ineligible if a reasonable person would conclude the person has an actual or perceived conflict or would not adjudicate impartially.
The 1 March 2021 Changes
The Regulations also include a change that will come into effect on 1 March 2021, and which relate to residential construction projects.
Under this change, owner occupier contracts will no longer be exempt from the Act.
An owner occupier contract means a residential building contract under the Home Building Act 1989 (NSW), or in other words, a contract between a builder or tradesperson and a homeowner. This is significant, as previously, the security of payment legislation had only applied to commercial building projects.
Under the legislation, the payment process is relatively simple, however, the important thing is to ensure the timeframes in the legislation are complied with. These will differ between commercial and residential projects and can depend on what is written in a particular contract. The payment process involves:
- A builder issuing a Payment Claim to the homeowner for a progress payment.
- The principal (or homeowner) issuing a Payment Schedule in response to the Payment Claim, specifying how much it intends to pay (if any), and stating any reasons for not paying the full amount claimed in the Payment Claim.
- If the principal (or homeowner) fails to respond to a payment claim or does not intend to pay the full amount claimed, the builder can then bring an adjudication application under the legislation. In certain circumstances, it could also recover the unpaid amount in court.
The key benefit of the changes for builders is that they will have additional paths to recover payment from homeowners. If a homeowner fails to make payment in accordance with the legislation, the builder will have the option of commencing an adjudication application, and in some circumstances, to commence court proceedings to recover the unpaid amount as a judgment debt.
Homeowners will need to be aware of the payment process under the legislation, and the ability for the builder or tradesperson to commence an adjudication application. Homeowners will need to pay close attention to Payment Claims they receive, and to ensure they respond to them within the timeframes in their contract and/or the legislation.
We anticipate that this will result in homeowners needing to engage lawyers during building projects to assist with responding to Payment Claims, and to assist with adjudications.
The new Regulations in New South Wales have implications for residential construction projects, commercial construction projects worth over $20 million, and for adjudicators. In terms of the commercial projects over $20 million, there are new trust account requirements, including reporting obligations to Fair Trading, and restrictions on when retention money can be withdrawn from trust accounts.
For residential projects, from 1 March 2021, residential projects will no longer be excluded from the operation of the security of payment laws in New South Wales. This means that homeowners may need assistance from lawyers in relation to adjudications under the security of payment legislation. Homeowners will need to become aware of their obligations to issue payment schedules and to make progress payments to builders within the timeframes in the legislation, and the repercussions of failing to do so.
Builders will need to consider whether their residential building contracts need to be adjusted to align with the payment regime under the Act. They will also need to understand their rights to be able to pursue homeowners who fail to make payment in accordance with the legislation. This is particularly relevant for builders who solely operate in the residential space and may not have had prior exposure to the security of payment legislative regime.
There are new preconditions that adjudicators need to satisfy to become an adjudicator, including to obtain a relevant diploma or degree, or 10 years' experience otherwise.