I have been grappling with Security of Payment (SOP) issues since back in 2001 when I was the Compliance Manager for the then Building Services Authority. I commenced undertaking research around SOP initiatives by authoring a discussion paper in December 2001, which I initially hand wrote. This discussion paper was the initial basis for extensive consultation with industry participants over the following 4 year period, which ultimately culminated in the passing of the Building and Construction Industry Payments Act 2004 (BCIPA).
In the initial development of this discussion paper in 2001, the first thing I realised that needed to be done was to clearly define what is SOP, because any possible solution(s) needed to be based on a broad industry acceptance as to what this term means.
I defined SOP along the following lines:
“The term ‘security of payment’ is a term used mainly by subcontractors to describe the need for secure, long-term guaranteed arrangements for payments for work performed or material supplied. The term arises from the contractual nature of the industry which operates under a hierarchical chain of contracts. The financial failure of any one party in the contractual chain can cause a domino effect on other parties, with those at the bottom most at risk in the event of a client or contractor defaulting. The collapse of one element in the contractual chain or the failure to pass on moneys owed can create enormous financial strain on the other parties. Extremely tight margins in the industry, restricted cash flow and payment default can force contractors to carry bad debts or, if the burden of debt becomes too much, force such contractors into some form of insolvency.”
This SOP definition has been quoted, sometimes partially, many times since. Some of the most notable adoptions are:
- Final Report of the Royal Commission into the Building and Construction Industry, volume 8 SOP, para 38, page 236, (2003) (Cole Royal Commission).
- The Hon Nick Xenophon, South Australian Legislative Council, Building and Construction Industry Security of Payment Bill 12 September 2007.
Why is this SOP definition so significant?
Because it demonstrates the enactment of BCIPA was based on an understanding that the financial failure of any party in the contractual chain can cause a domino effect on other parties and, therefore any SOP solution(s) needed to recognise this fact.
The key parliamentary documents pertaining to the BCIPA, referred to below, confirm this understanding of SOP, with the objectives of BCIPA reflecting the fact that all persons who carry out construction work or supply goods or services deserve to be paid.
The Explanatory notes for 2004 BCIPA, include the following:
“The objective of the legislation is to entitle certain persons who carry out construction work (or who supply related goods or services) to a timely payment for the work they carry out and the goods and services they supply. This will be achieved through establishing a procedure for securing progress payments to which a person becomes entitled under this Bill.”
In the second reading speech, the Honourable RE Schwarten stated:
“For the past two years the Queensland Building Services Authority has been working hard to deliver yet another tool which will improve payment outcomes for workers in the building and construction industry. While I cannot and will not guarantee 100 per cent security of payments in 100 per cent of cases, this legislation develops, as I said, yet another tool for contractors and subcontractors which complements existing legislation introduced by the Beattie government. As I have said in this place many times, the reality is that there is no system in the world that will guarantee 100 percent of the payment 100 per cent of the time. We would be fooling ourselves if we believed that that is the case. I heard the member for Maryborough talk about trust. Trust funds, where they have tried them in the world, do not work. They simply hold up the contractual business. It ends up that money is put into the pockets of lawyers rather than the pockets of workers in the building industry.”
BCIPA 2014 amendments
Though significant amendments were made to BCIPA in 2014, the same broad 2004 objectives underpinned the revamped BCIPA. The explanatory notes include the following:
“The Building and Construction Industry Payments Act 2004 (the Act) provides a person with an entitlement to receive, and an ability to recover, progress payments if they undertake to carry out construction work, or supply related goods and services, under a construction contract. The Act establishes a procedure for making and responding to payment claims within statutory timeframes and for disputed or unpaid claims to be referred to adjudication for a decision.”
In the second reading speech, the Honourable TL Mander stated:
“The construction industry is one of the main pillars of the Queensland economy. It is therefore vital that we have a system of payment which is fair for all. The Building and Construction Industry Payments Act, or BCIPA, was created to provide an alternative to the court system and is intended to be a quick and easy way to resolve payment disputes. Anything that allows payment disputes to be resolved quickly is worth supporting and, for the most part, BCIPA has operated reasonably well.”
I am of the view that the SOP reforms in 2004 and 2014, through the prism of BCIPA, were focused on providing improved payment outcomes for all persons carrying out construction work. Subcontractors as the predominant category of persons carrying out construction work for the benefit of builders have benefited the most from BCIPA, but so have many builders caught up in payment disputes with clients, as well as sub subcontractors working for other subcontractors, consultants working for clients etc. In my opinion, looking at SOP as an all of industry issue is an important step in resolving a workable bill and ultimately new legislation.
Is the Building Industry Fairness (Security of Payment) 2017 Bill (BIF Bill) based on different objectives to that of the BCIPA?
To form an opinion in this regard, I have reviewed the key parliamentary documents (see below) relating to the BIF Bill.
The objectives of the Building Industry Fairness (Security of Payment) Bill 2017, outlined in the explanatory notes, include the following:
“improve security of payment for subcontractors in the building and construction industry by providing for effective, efficient, and fair processes for securing payment, including the establishment of a framework to establish Project Bank Accounts.”
In his speech introducing the BIF Bill, the Honourable MC de Brenni, stated:
“The central tenet of this bill is one that I and my colleagues on this side of the House feel very strongly about: if you do the work you should get paid. For far too long subcontractors have suffered an unreasonably high level of risk and burden of financial loss associated with the building and construction industry. The majority of the risk in a $44 billion industry has been placed on the shoulders of those who have the least power, and the result has been a disaster for small and medium sized subcontracting businesses.”
At a later point in his speech the Minister stated :
“When I consulted on this issue across the state I heard too many stories about the strain that late payment is placing on subcontractors and the devastation that financial loss associated with non-payment causes. This is a very real issue that is affecting far too many Queenslanders. In just the last week we have seen two more construction industry insolvencies on the Gold Coast that have left subcontractors out in the cold.”
Furthermore, Don Rivers, Assistant Director-General, Building Industry and Policy, Department of Housing and Public Works made the following statement to the Public Works and Utilities Parliamentary Committee in response to the evidence given by witnesses at a public hearing on 20 September 2017, namely:
“Firstly, I would like to clarify that project bank accounts are not just about improving security of payment in insolvency situations, but they are also intended to assist in addressing late and non-payment of subcontractors.”
I am of the view that the SOP reforms contained in the BIF Bill are focused on addressing payment issues that affect only subcontractors.
“So what”, I can hear many people say, “to ensure subcontractors get paid the objectives of any SOP legislation needs to be 100% subcontractor focused.”
I say however, what if as a result of an objectives shift in favour of subcontractors in the development of the BIF Bill, there are unintended consequences that may result in subcontractors actually experiencing deteriorating payment outcomes.
While I absolutely agree that subcontractors must be paid and that all that can be done, should be done, to assist — taking an approach that shifts SOP to exclusively be about subcontractors is likely to have unintended but detrimental consequences for all of industry, including subcontractors.
In commenting about unintended consequences of the BIF Bill, I have not turned my attention to evaluating how Project Bank Accounts (PBA) would operate. PBA will be the subject of another article.
1. Every claim gobbles up a reference date
Payment claims need not be specifically endorsed as having been made under the BIF Bill in order to be able to proceed to adjudication. At the public hearing of the BIF Bill on 20 September 2017, an experienced adjudicator, Scott Pettersson stated:
“It was ludicrous in New South Wales and it will be ludicrous here if you proceed with it. What it means is that a subcontractor, an electrician or a plumber, if they are instructed to do some variation work and they send in a note to the contractor, their superior contracting party, saying that it cost $400 to change some piping, potentially they have just now issued a payment claim, because they have described the work, they have said how much the money was. That falls within those broad parameters. ‘Not requiring an endorsement’ now means two possible things. Firstly, the person who receives it will now have to provide a payment schedule or they face the consequences of potentially 100 penalty units, which would seem grossly unfair. Secondly, for the claimant, they will have used an available reference date so they will not be able to claim again until the next entire payment cycle goes through, which is probably going to be another month even though they were only claiming for a few hundred dollars worth of work, but intended to claim for $30,000 at the end of the month”
In other words, subcontractors may unintentionally use a reference date which may mean that they are forced to proceed to adjudication on a claim for payment of a variation. Alternatively, they will have to delay pursuing monies owed to them until the following month, because they don’t have any more reference dates for that month. They may well have been prepared to keep on working for the month and bundle up any deductions from monthly invoices, into one payment claim at the end of the month which they would appropriately endorse and if necessary proceed to adjudication. The unintended consequence for subcontractors is that control is taken away from them, control as to when and in what circumstances to pull the payment claim trigger.
2. Less scope for Settlement
The 2004 BCIPA allowed a “2nd chance payment schedule” before proceeding to adjudication, the 2014 amendments extended this to allow a second chance before Court action. The BIF Bill completely annihilates any 2nd chance — with the unintended consequence of wiping out the subcontractor’s chance to make a deal.
In my view, by eliminating the opportunity for builders to provide a “2nd chance” payment schedule when they fail to provide an initial payment schedule in response to a mandated payment claim from a subcontractor, there is no legislative “last chance” opening for the parties to negotiate a settlement. Many subcontractors in these circumstances will proceed straight to adjudication because the builder cannot provide an adjudication response and failing a jurisdictional issue coming to light, the adjudicator will basically “rubber stamp” the subcontractor’s payment claim.
On the surface, this appears to be a good outcome for subcontractors. However, in my opinion, if you look deeper, commercial relationships between many builders and subcontractors may be destroyed in this process.
3. More disputes for Subcontractors
In response to the BIF changes, builders will have to alter their contract administration practices. Builders will have to treat every payment claim as leading to a potential adjudication application. I consider that this will result in a practice where builders will have detailed template payment schedules that records a broad range of possible reasons for withholding payment that the Subcontractor will be required to meet. This will put pressure on the relationship from a very early point and require the subcontractor to also step up its administrative process.
Also, as a builder will commit an offence if they do not provide a payment schedule, they will have to very quickly move into formal response mode. Under this pressure cooker situation, builders will only have a very limited time in which to contact the subcontractor and try and negotiate a settlement of a potential dispute.
4. Supersized Payment Schedules
The BIF Bill seeks to limit the size of adjudication responses. In my opinion, builders will respond to this change by providing much more comprehensive payment schedules as a means to ensuring their position is fully documented for an adjudicator to have regard to. In other words, the payment schedule will take on the significance of an unrestricted adjudication response. In these circumstances, subcontractors will be faced with having to evaluate a detailed payment schedule in deciding whether to proceed to adjudication if the builder signals an intention to pay less than the claimed amount. This will add to the contract administration responsibilities of subcontractors.
On the positive side, as a result of subcontractors having 30 days to lodge an adjudication, it is open to them during this period to contact the builder and attempt to negotiate a settlement of the dispute. Further, it may be on considering the points raised by the builder in their payment schedule the subcontractor accepts that their case is not as strong as they first thought and proceeding to adjudication may not be a good option.
5. Subcontractors will be involved in more litigation
I consider that the drafting changes in the current version of the BIF Bill will lead to increased litigation. Mr Pettersson articulated this issue well at the public hearing in which he stated:
“I have really serious concerns about minor changes to language which have appeared consistently through this document. I noted in the paper which was provided today that they are reconsidering the use of the word ‘undertaken’ which was in the existing legislation but is removed in the new draft. I also note that reference dates, which has been raised in a couple of submissions, talk about it being ‘for’ a reference date rather than ‘from’ a reference date. These sound like really small matters, but in the state of Queensland there have been in excess of 400 cases which have gone to the Supreme Court since the original legislation. In those 400-plus cases the court has decided what those words mean. They have decided whether it has a particular meaning or does not have a particular meaning. I am sure you do not want to invite to have all of those things re litigated.”
While wording changes may seem a trivial matter that will not affect subcontractors, this is simply not the case as uncertainty of interpretation will cause more issues not less for subcontractors. If there is some uncertainty as to the correct position, unsuccessful parties will be more likely to apply to the Supreme Court to overturn adjudication decisions. While all this is happening, normally the subcontractor will not be paid the adjudicated amount.
6. Contractual uncertainty
As I pointed out in my article “What will building contracts look like after Project Bank Accounts (PBAs) come into effect?”, the industry currently has no idea as to what contractual provisions the government intends to mandate and prohibit in building contracts. Construction lawyers will carefully evaluate whatever the government determines in this regard and revamp building contracts accordingly. It is possible that subcontractors will be faced with having to operate in a very fluid building contractual environment for a considerable period of time, and in these circumstances, they may fail to understand the significance of a new or changed provision that could have adverse payment consequences for them.
In conclusion, I have not met a person who does not believe that if a subcontractor carries out work in accordance with contractual requirements, they deserve to be paid in full and on time, every time. However, a reasonable question that needs to be asked in relation to the BIF Bill is, in the desire to see subcontractors get paid, has the government inadvertently made the situation worse for them in a number of instances?
If you have any questions relating to the BIF Bill or any SOP issues, please contact Michael Chesterman at email@example.com or Earl Tan at firstname.lastname@example.org.Not intended as legal advice. Read full disclaimer.