What Did the Government Propose?
In November 2023, the Victorian Government released a report titled ‘Employers and Contractors who refuse to pay their subcontractors for completed works,’ aiming to reform Victoria’s construction sector. This report proposes changes to the Building and Construction Industry Security of Payment Act 2002 (Vic) (the Act) to streamline processes and enhance payment efficiency. The reforms seek to update the Act, which has remained largely unchanged since 2006, and align Victoria’s laws with those of Western Australia and New South Wales for national consistency.
Although nearly a year has passed since these recommendations were introduced and we are still awaiting a response from the Victorian Government, it is crucial to revisit these updates. They remain vital for enhancing the framework of our building industry and driving necessary improvements forward.
National Harmonisation
National harmonisation of payment security laws is crucial for facilitating interstate trade. Aligning Victoria’s security of payment laws with those of other states will streamline operations for construction businesses and professionals working across different jurisdictions. Inconsistent payment protection laws are currently disadvantaging Victoria’s construction sector, which, along with New South Wales, is one of the largest in Australia. Both New South Wales and Western Australia offer valuable models for reform, with Western Australia’s laws representing the most modern example of security of payment legislation.
Purpose of the SOPA Regime
The Act ensures fair compensation for construction work and related services, providing a streamlined and cost-effective way to recover payments owed under a contract, minimising the need for legal action. Additionally, the principle of “pay now, argue later” ensures that contractors receive payments promptly, even if disputes over the quality of work or other issues arise later.
To understand the impact of the proposed reforms, it is important to first grasp how the current system operates. Under the current framework, a contractor submits a payment claim to the principal for work completed. The principal then has 10 business days to either pay the claimed amount or issue a payment schedule detailing the disputed claim and the amount they are willing to pay. If a dispute arises, the contractor can seek adjudication. The Act imposes strict deadlines, and failure to comply with these deadlines can lead to significant financial repercussions.
With this foundation in mind, let’s explore the proposed changes designed to address the current system’s shortcomings and enhance fairness in the construction industry.
Key Proposed Changes
- Abolition of Excluded Amounts
Currently, the Act excludes certain amounts from payment claims, including costs associated with delays and breaches of contract, labelled ‘Excluded amounts.’ This exclusion creates complexity and can hinder the ability to recover all owed funds. The proposed reform seeks to simplify the process by allowing contractors to include these excluded amounts in their payment claims. By removing the restrictive regime of excluded amounts, the reform aims to streamline the claims process and ensure more comprehensive recovery of funds.
Legislative recommendation: that ss 10, 10A & 10B of the Act be repealed, with a new provision inserted that will bring the SOPA act more closely aligned with NSW (s 9 of the Building and Construction Industry Security of Payment Act 1999 NSW) (NSW SOP Act) and WA (s 18 of the Building and Construction Industry (Security of Payment) Act 2021 WA) (WA SOP Act).
- Removal of Reference Dates
The existing Act specifies reference dates for issuing payment claims, limiting claims to one per reference date. If no date is specified in the contract, it defaults to 20 business days after the start of construction or the previous reference date. The proposed reform introduces a standard reference date of the last day of each month, unless otherwise agreed in the contract. This change is intended to provide a more predictable and consistent schedule for payment claims, enhancing overall efficiency and reducing confusion.
Legislative recommendation: That the concept of ‘reference dates’ from the Act be removed, and insert a statutory entitlement to claim payment modelled on ss 13(1A), (1B) and (1C) of the NSW SOP Act.
- Amendment of Business Days
There are timeframes stipulated in the Act that regulate payment claims, payment schedules and adjudication dates. The proposed reform suggests excluding weekends, Victorian public holidays, and the period from 22 December to 10 January from these timeframes. This aims to mitigate the impact of staff shortages and reduced operational hours during these periods, facilitating better management of claims and reducing the risk of missing critical deadlines.
Legislative recommendation: That the definition of business days contained in s 4 of the Act be amended, with Division 2, s 4 of the WA SOP Act providing a suitable model for this reform.
- Extension of Payment Claim Deadline
Under the current Act, payment claims must be submitted within three months of completing the relevant construction work, so as to discourage claimants from delaying progress payment claims long after completed work. However, many have criticised this requirement as restrictive and disqualifies legitimate claims, especially for small construction businesses who may lack the resources to pursue unpaid invoices. Submissions to the report have cited that subcontractors often take about eight months to start debt recovery because they are busy trying to cover the cash shortfall caused by unpaid work, and that the current three-month limit prevents subcontractors from claiming millions of dollars for completed work. The proposed reform extends the deadline to six months, giving subcontractors more flexibility and a better opportunity to recover payments for completed work.
Legislative recommendation: A longer time frame would align the Act with NSW, Tasmania and ACT legislation. To do this, the Government should amend the Act by aligning it with s 23 of the WA SOP Act.
- Right to Claim Retention Money
The current avenue for a subcontractor claiming retention money is unclear and difficult. Retention monies are specific funds withheld from each payment claim until the project is completed, serving as an incentive for construction parties to ensure the job is finished properly. Claiming these funds is challenging, especially if the head contractor becomes insolvent. This situation has been further complicated by the Punton’s Shoes v Citi-Con[1] case, which has blurred the legal path for subcontractors to claim retention or security. The proposed reform aims to clarify this right by explicitly allowing subcontractors to claim and adjudicate retention monies within each payment claim. Additionally, it suggests introducing a trust scheme for retention funds to protect subcontractors in cases of head contractor insolvency.
Legislative recommendation: That s 14 of the Act (which outlines what may be included in a payment claim) should be amended, modelling the existing ss 13(3)(b) of the NSW SOP Act.
- Precluding New Reasons in Adjudication
Under the current system, when a payment claim is submitted, the principal has the option to either pay the claim or issue a payment schedule that disputes the claimed amount, including reasons for the dispute. The subcontractor can then seek adjudication, addressing the dispute reasons. The principal must then issue an adjudication response, to which the subcontractor has two days to reply. At present, new reasons for disputing the claim may be introduced in this adjudication response that were not mentioned in the initial payment schedule. This situation can overwhelm the subcontractor with new objections, given their two-day limit to respond.
The proposed reform aims to prevent the introduction of new reasons during adjudication that were not part of the original payment schedule. This change ensures all reasons for withholding payment are disclosed upfront, allowing the contractor a fair opportunity to address them initially.
Legislative recommendation: That the Victorian Government should amend s 21 of the Act to introduce the reforms, and amend s 18 too, to provide respondents with five business days to provide a payment schedule in response to an adjudication notice.
We eagerly anticipate the Victorian Government’s response to these proposed reforms. The steps outlined in the report represent a significant move towards enhancing fairness and efficiency in the construction industry, and we are optimistic about the positive changes these reforms will bring.
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[1] Punton’s Shoes v Citi‑Con [2020] VSC 514
