A Major Shake Up Of The Victorian Security Of Payment Regime

Significant changes to the Victorian security of payment regime are set to take place, with the Building Legislation Amendment (Fairer Payments on Jobsites and Other Matters) Bill 2025 (Bill) introduced to Parliament last week.

The Bill arises from a November 2023 report by the Victorian Government's Environment and Planning Standing Committee, following its inquiry into employers and contractors who refuse to pay their subcontractors for completed works (Inquiry), and closely reflects the Government's response in October 2024.

If passed, the Bill will bring Victoria into line with the security of payment laws in other Australian jurisdictions.

Evolution of security of payment legislation in Australia

Security of payment regimes exist in each Australian State and Territory. They are intended to give parties to construction contracts such as builders, subcontractors and consultants, a fast and efficient way to resolve payment disputes.

These regimes were introduced into Australia from the late 1990s, following UK legislation aimed at reducing cashflow problems caused by poor payment practices and behaviours in the construction industry, which were leading to distressed projects and frequent insolvencies. The themes of 'pay now, argue later' and 'cash is king' are underpinning principles of the security of payment framework.

Since its inception in 2002, the Victorian Building and Construction Industry Security of Payment Act 2002 (SOP Act) has been an outlier, with unique features that saw it less used than in other jurisdictions. Following a spate of construction business insolvencies in the aftermath of the COVID-19 pandemic, the Inquiry was launched and significant changes to the regime was recommended.

The remainder of this article highlights the key changes proposed under the Bill and their likely impact on the Victorian construction sector. We also have a webinar on 9 October 2025 to discuss these changes, register here if you would like to attend.

Excluded amounts abolished

The most unique aspect of Victoria's SOP Act is its 'excluded amounts' regime. Under the current legislation, claimants cannot obtain a determination of claims for:

• most types of variations
• 'time-related costs', for example extensions of time, delay damages, acceleration costs and relevantly for those responding to adjudication claims, liquidated damages
• latent conditions and changes in regulatory requirements
• claims for damages for breach of contract
• claims for amounts other than those arising under the relevant construction contract.

As many payment disputes involve these types of claims, particularly the first three, the Victorian regime was often of limited use, undermining its intended purpose.

The Bill repeals the concept of excluded amounts, meaning that all of these claims can now be made. It is expected that this will lead to a significant uptake of the amended SOP Act.

Reference dates abolished

Currently, a payment claim under the SOP Act must have a 'reference date', typically a date towards the end of each month from which a builder can lodge a claim for payment.

Years of case law have made the concept of a reference date highly technical and a regular obstacle to a successful claim. Lengthy judicial review appeals were often lodged after a successful adjudication, forcing a claimant to wait a further six to 12 months to be paid and undermining the intent of the regime.

The Bill repeals the concept of a 'reference date', and instead gives a claimant a right to claim payment:

• on or from the last day of the month
• on or from 22 December for work undertaken from 1 December to 21 December in the same year
• on or from 31 January for work undertaken from 22 December to 31 December in the previous year
• on or from the date of termination if the contract is terminated.

The Bill also provides that a payment claim served before the relevant date will still be valid. This addresses the position which had developed under case law which deemed invalid any payment claim served before the reference date.

Express right to claim release of retention and return of performance security

Under the current regime, a claimant has no ability to seek the return of performance bonds, such as bank guarantees.

The Bill:

• confirms that 'performance security', including bank guarantees, may be claimed in an adjudication, creating a standalone ability to claim the release of such security at the end of the defects liability period
• gives adjudicators the ability to determine that performance security must be released, when and in what amount
• establishes the mechanisms of a 'performance security claim' and 'performance security schedule' in the same form as the existing 'payment claim' and 'payment schedule' mechanisms. If a claimant fails to lodge a performance security schedule in time, they face the same well-known negative consequences as a respondent who fails to issue a payment schedule under the current SOP Act
• expressly prohibits parties from contracting out of these aspects of the SOP Act. For example, principals won't be able to draft their contracts to override the ability of a claimant to seek the return of a bank guarantee via the SOP Act.

This is a significant shift in the balance of power between construction counterparties, particularly with respect to the ability to seek the release of a bank guarantee.

It is notable, however, that the performance security claim does not give an express statutory right to claim for release of performance security at practical completion. Many construction contracts provide for a release of half of the security at practical completion and the other half at the end of the defects liability period. However, unless the right to seek release of security at practical completion is set out in the relevant contract, the Bill does not otherwise provide a statutory right to claim it.

No recourse to security without notice

The Bill places new limitations on a party seeking to have recourse to performance security, unless it has served a written notice of its intention to have recourse to the security, and at least five business days have passed since that notice was given. The Bill confirms that these new requirements "are taken to form part of every construction contract and are to have effect despite any other provision of the contract that purports to override these requirements". That is, these new requirements will affect any construction contract in Victoria, not just construction contracts that are the subject of adjudication under the SOP Act.

Unfair notice-based time bars to be of no effect

Following on from recent changes in Western Australia's SOP laws, the Bill gives decision makers the ability to declare a notice-based time bar to be unfair and of no effect, if compliance is 'not reasonably possible' or would be 'unreasonably onerous'. This is a significant addition to the proposed legislation.

Not only can this be done by an adjudicator in adjudication, but the reach extends beyond the SOP context, and can be used by:

• a court in a standard civil legal proceeding for the recovery of money, return of performance security or enforcement of other rights under the contract
• an arbitrator in an arbitration proceeding under the contract, or under any separate agreement between the parties to that contract
• an expert appointed by the parties to the contract, for the purposes of a proceeding to determine a matter under a contract.

The Bill sets out a series of factors to assist in determining whether a term is unfair, for example, the relative bargaining power of the parties. It also inserts a provision that permits the SOP regulations to be amended to prohibit other unfair construction contract terms in future.

'No new reasons' for non-payment

Another Victorian eccentricity under the current SOP Act is the ability to add new reasons for non-payment in an adjudication response, even if those reasons hadn't been included in the payment schedule. No other jurisdiction had this right, and instead a failure to include a reason in a payment schedule prohibits that argument being raised in the fast-paced context of an adjudication application.

The Bill confirms that reasons for non-payment cannot be raised in an adjudication response if they have not been set out in the payment schedule (or performance security schedule).

20 business day limit on payment terms

In recent years, payment terms for construction contracts have increasingly extended to 60 or even 90 days, causing real cash flow problems for contractors. Under the current SOP Act, if a contract sets a payment period, that period is binding in an adjudication.

The Bill makes any clause in a construction contract ineffective to the extent it provides for payment later than 20 business days after a payment claim is served.

A Christmas shutdown

Victoria is the only state that does not 'pause' the strict and brutally short SOP timelines during the Christmas and New Year period.

Construction industry players (and their lawyers) can now rest easy between 22 December and 10 January each year, which will no longer count as 'business days' for the purposes of calculating various deadlines.

Extended time to make a claim

Under the current SOP Act, a claimant's reference date expires after three months.

The Bill now extends this period to six months after practical completion, where the claim is for construction work or related goods and services.

In the case of a performance security claim, it may be served up to the last day of the month, in the month after the defects liability period finishes.

Adjudication determination to have the force of a 'judgment for debt'

Enforcing a successful adjudication determination is not as simple as it could be under the current SOP Act.

The Bill provides that an adjudication certificate issued by an adjudicator following a determination can be filed in court of competent jurisdiction as a 'judgment for a debt due', significantly simplifying the process of enforcement.

Other miscellaneous changes

There are a series of other changes brought in by the Bill, including:

• the time to issue a payment schedule in response to a 'last chance notice' (which a claimant can issue to a respondent following that respondent's failure to issue a payment schedule within the prescribed time) has been extended from two to five business days
• restrictions on 'pay when paid' clauses are extended to expressly prohibit clauses which link payment of the claimant to obligations, rights or dates under another contract (typically, a contract higher up the chain)
• there is now an express obligation on claimants and respondents to serve their adjudication application or adjudication response on the other party within three business days of lodging it with the authorised nominating authority or adjudicator
• the Building and Plumbing Commission has been given an express obligation to provide information and materials to educate those who carry out construction work or related goods and services, regarding the SOP Act, as well as promote the security of payment laws to the sector generally
• an adjudication determination is to be handed down up to 10 business days after either the adjudicator is appointed or the latest day a respondent could have issued an adjudicator response. If both parties agree, the time can be extended by a further 20 business days (i.e. 30 business day maximum)
• confirmation that the adjudicator's fees and interest may be included in an adjudication certificate, and therefore form part of a judgment for debt
• removing the little-used 'adjudication review' mechanism, which was limited to the review of whether an adjudication determination had wrongly included an 'excluded amount'
• modernising the requirements of service of notices. In news that should surprise no one, faxes are no longer a valid method of service. Notably, email is not listed as a method of service, but if the relevant construction contract allows, this will count as valid service. A 'note' in the Bill implies that service by email is, at least in principle, acceptable under the proposed legislation.

What hasn't changed?

While the changes above reflect a genuine shake up of the Victorian SOP status quo, the broad mechanics of the SOP Act remain the same, and a number of current issues which have been the subject of change and consideration in other jurisdictions, remain the same.

Recommendations from the Inquiry that were only 'supported in principle' in the government's response have not been implemented. Some examples include:

• no extension to the time to lodge an adjudication response. Despite the significant widening of claims brought in by the Bill, a respondent still only has five business days to respond once they are served with an adjudication application
• no clarification on the right of a claimant to seek adjudication against a party under administration or in liquidation
• the SOP Act will still not apply to domestic building contracts unless the owner is "in the business of the building residences". Whether the legislation should be extended to all residential building work, as in New South Wales, is to be the subject of further consultation
• the Inquiry's recommendations to implement a cascading statutory trust scheme or a retention trust scheme are to be the subject of further consultation
• various changes relating to continuing professional development of adjudicators, the role and immunity of authorised nominating authorities, and the role of the Building and Plumbing Commission, are to be the subject of further consideration.

When will the Bill take effect?

The Bill remains before Parliament. Once passed, the provisions in the Bill will take effect no later than 1 September 2026 and will apply to all construction contracts entered before, on or after the commencement date.

With many existing construction contracts drafted to account for and manage the current SOP Act, there will be a period of uncertainty while construction counterparties in the midst of project delivery juggle the removal of reference dates and excluded amounts, the changes to performance security, and the ability of decision makers to declare unfair time bars to be of no effect.

The changes will not apply to various niche cases, for example where a payment claim has already been served, an adjudication has already been commenced, or an adjudication certificate has already been issued.

What next for the construction industry

All construction industry participants will need to:

• assess their projects which will still be ongoing at 1 September 2026 (and quite possibly earlier) to consider how the Bill will impact that particular contract and plan for that change
• consider reviewing contracts under negotiation to account for the Bill, assuming it will come into effect sometime in the next 12 months
• review their existing templates and precedent contracts, notices and adjudication templates, and update them to address the changes proposed in the Bill.

Holding Redlich's team of experienced construction lawyers is well-placed to assist industry participants as needed. If you have questions about the Bill or need assistance with reviewing current contracts, please contact us below or join our webinar on 9 October 2025.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.