Cash flow is the lifeblood of the construction industry, so much so that the interruption of cash flow in construction projects commonly forces construction companies into insolvency, leaving many stakeholders in the lurch. To provide a more effective and fair process for parties operating in the construction industry to secure payment on projects and keep the cash flow pipeline flowing, the WA government has introduced the Building and Construction (Security of Payment) Act 2021 (WA) (BCISP Act).
Does the BCISP Act apply to me?
If you enter into a construction contract on or after 1 August 2022 for the provision of construction work or the supply of goods and services for use in construction work in WA, then it is likely that the BCISP Act will apply to you. There are some exceptions, for example, where the construction contract is between a builder and individual homeowner for residential building work that is less than $500,000. If you are unsure whether the BCISP applies in relation to a particular project, we recommend that you seek legal advice before commencing work or engaging in a payment regime.
This Act provides general protection for stakeholders such as requiring contracts with a value exceeding $20,000 to be in writing, providing a broader prohibition on 'pay when paid' provisions and allowing notice-based time bars to be declared unfair in certain circumstances.
For contracts entered into before 1 August 2022, payment regimes are addressed in the Construction Contracts Act 2004 (WA) (CCA). Under the CCA, payment regimes in construction contracts are largely governed by the terms of each individual contract, unless a particular matter is not provided for in the contract, in which case the CCA implies certain terms into the contract.
The BCISP Act provides for a more structured and transparent payment regime that applies to all construction contracts. Importantly, the right to progress payments is a separate right and additional to the entitlement to payment under a construction contract.
Essentially the payment regime set out in the BCISP Act is as follows:
- The Claimant makes a payment claim for a progress payment. A payment claim must be in writing, contain the prescribed information and can only be made once a month (unless the construction contract provides otherwise).
- Upon receiving a payment claim, the Respondent issues a payment schedule to the Claimant within 15 business days after payment claim is made or an earlier time provided for in the contract. The payment schedule should state the amount the respondent proposes to pay the Claimant and if not the full amount or no amount is payable, the reasons for that proposal, and any other prescribed information.
- A progress payment must be made within 20 business days (if by a principal to head contractor) or 25 business days (if by a head contractor to a subcontractor) after the payment claim is made unless the construction contract provides for an earlier date for payment.
It is critical that a Respondent issues a payment schedule on time that sets out all reasons for denying payment of the full amount or any amount claimed by the Claimant. Failure to do so can limit the Respondent's ability to defend any claim brought by the Claimant for the full claimed amount.
If a Respondent fails to pay the claimed amount or the amount it proposes to pay in a payment schedule, the Claimant can, depending on the circumstances:
- Recover the claimed amount or scheduled amount as a debt in Court;
- Lodge an adjudication application; or
- Suspend work or supply.
We recommend that anyone wanting more information as to their rights and options regarding non-payment of an amount set out in a payment schedule seek legal advice.
Adjudication is a 'pay now, argue later' process where a claimant can request an adjudicator to determine the amount the respondent must pay the claimant under a payment claim. Therefore, the determination of an adjudicator is binding and can be enforced as a judgment of a Court but is not final. In some circumstances, such as when the Respondent provides a payment schedule but does not propose to pay the Claimant any amount, the Claimant's only option to recover the claimed amount quickly is to lodge an adjudication application.
Under the BCISP Act, the adjudication process has changed, in particular, changes to the pre-conditions for lodging an adjudication application, introducing limits on a respondent's right to respond to an adjudication application and the introduction of a review adjudication process that is available in certain circumstances. How the changes to the adjudication process affect how those adjudications are run will be an interesting flow on effect of the BCISP Act that we will watch with interest.
Other upcoming reforms
There are other reforms under the BCISP Act which have not commenced. The most notable reform that has yet to commence is the implementation of retention trust schemes. For further information about upcoming reforms and how they will impact payment arrangements in construction contracts, we recommend that you seek legal advice.
What you should do
Given the cash flow issues associated with the rising costs of labour and materials across the construction industry, contract administration has become more crucial than ever. You should ensure that you understand your rights and obligations under the new Act and the timing for enforcing those rights and complying with those obligations.
It is also important to remember that the CCA still applies to construction contract entered into before 1 August 2022. Therefore, your contract administration process must be able to accommodate the processes under both the CCA and the BCISP Act if you have current contracts entered into both prior to and after 1 August 2022.
We also recommend that at all times, if you are unsure as to your legal rights or obligations, it is important to seek legal advice immediately.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.