In tough economic times, maintaining cash flow to your business can become more difficult. In this article, Richard Anderson principal, Ben Broadhead special counsel, and Felicity Price associate of Harwood Andrews explore ways in which cash flow can be maintained, with a particular focus on the building industry.

What is the Act and does it cover your business activities?

The purpose of the Building and Construction Industry Security of Payment Act 2002 (Act) is to enable suppliers, contractors and subcontractors in the building industry to get paid more quickly and avoid expensive construction disputes.

The Act is intended to be broad. The Act applies to all contracts, both written and oral, for building and construction work or for the supply of related goods or services within Victoria.

There are, however, several exceptions to the Act. The Act does not apply to, amongst other things, domestic building contracts (as defined in the Domestic Building Contracts Act 1995), except when work is carried out for a person who is in the business of building domestic residences, and the contract is entered into in the course of or in connection with that business. Also the Act does not cover certain financial contracts with financial institutions or construction contracts where the consideration payable is not calculated by reference to the value of the work or services.

The Act covers a wide range of claims commonly made in the building industry. These include progress claims, final payments, milestone (key event) payments and most variation claims. The Act does not apply to claims for damages, delay costs, latent condition claims and certain variation claims. There are other ways however that payment can be obtained for the latter types of claims.

Making sure the Act applies to you

The Act does not apply automatically and in order to make a claim under the Act a certain procedure must be followed. The procedure is not intended to be difficult, and it is intended to bring about a result of payment sooner, rather than later.

The procedure under the Act is initiated by the making of a “payment claim” by the person claiming payment (claimant). For a payment claim to comply with the Act it must state on the claim that the claim is made under the Act, that is, “ this is a payment claim under the Building and Construction Industry Security of Payment Act 2002”.

A payment claim must also clearly describe the construction work carried out or the goods or services supplied up to the date of the claim. The amount of the claim must be stated, and it must be shown on the claim how the claim is calculated. These seem to be obvious points, but are often missed, or not stated clearly, on a claim.

If you are thinking of making a payment claim it is important that you act sooner rather than later in making the claim as time limitations apply. The payment claim must be served within the time specified in the construction contract or three months after that “reference date” (as defined in the Act), whichever is the later. Also, only one payment claim can be made in respect of each progress claim.

After the payment claim has been submitted there is then a tight timeframe in which certain things must be done. The tight timeframe is one of the benefits of using the Act in that an outcome can be achieved in a relatively short space of time.

What happens if you receive a payment claim?

After a payment claim is submitted to the recipient of the claim (recipient), the recipient has 10 business days, or a shorter return period if specified in the contract, in which to dispute the claim by serving a “payment schedule” upon the claimant. If a payment schedule is received within 10 business days the claim can subsequently be adjudicated by an independent adjudicator.

The recipient can, in the payment schedule, propose a lesser amount for payment. If this occurs, the claimant must apply within 10 business days to have the amount adjudicated, otherwise the right to dispute the lesser amount by the claimant will be lost.

If no payment schedule is received within 10 business days, the claimant can subsequently make an application to the court for summary judgment. With the party making the claim now having the benefit of a court judgment in its favour against the respondent, payment can then be enforced in a number of ways.

Benefits and warnings relating to the Act

The benefits of the Act include avoiding expensive construction disputes. The Act gives subcontractors certain rights to access amounts held by the principal/head contractor. In some circumstances, the Act also gives the claimant a right to exercise a statutory lien or right over unfixed goods to the value of the unpaid amount. Clauses which sometimes appear in building contracts which seek to limit or delay payment to contractors or subcontractors such as “pay when paid”, are prohibited. Interest is also payable on unpaid progress claims.

It is important to adhere to the forms specified for certain notices and certificates in order for the notices or certificates to be valid under the Act. These forms have been recently introduced (commencing on 3 June 2013) through regulations under the Act.

When used correctly, the Act can reduce the cost of expensive claims by enabling contractors to secure payment, with a corresponding improvement in cash flow. However, serious consequences can occur for the recipient if time limits are missed or ignored.

For further information please contact:

Richard Anderson
Principal and Accredited Specialist in Commercial Litigation Law
Harwood Andrews
03 5226 8524

Ben Broadhead
Special Counsel
Harwood Andrews
03 5226 8549

Felicity Price
Harwood Andrews
03 5226 8590