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New security of payment regulation and how it will affect you

Caroline Hutchinson, ||

The new Building and Construction Industry Security of Payment Regulation 2020 (New Regulation) commenced on 1 September 2020 (except for Schedule 2 which will commence on 1 March 2021).

The New Regulation repeals the Building and Construction Industry Security of Payment Regulation 2008 and is designed to better facilitate and support the administrative functions of the Building and Construction Industry Security of Payment Act 1999 (the SOP Act).

Residential Building Work

Exempt residential construction contracts

Owner occupier construction contracts are contracts where the homeowners intend to the live in the premises. Previously, a residential builder could not use the mechanisms of the SOP Act to recover outstanding progress claims from homeowners.

From 1 March 2021, the New Regulation will remove owner occupier construction contracts as a prescribed class to which the SOP Act does not apply.

This means from 1 March 2021, residential builders will have a statutory right to payment and will be able to serve payment claims on homeowners under the SOP Act and apply for adjudication in relation to any outstanding progress claims.

Homeowners will still be entitled to bring a building claim in a Tribunal or Court for defective work, however this will not delay the builder’s entitlements under the SOP Act; meaning that homeowners will be required to pay any amount awarded pursuant to an Adjudication Determination prior to the determination of any Tribunal or Court proceedings.

What are the practical implications on the industry?

  • Any contract references to the Building and Construction Industry Security of Payment Regulation 2008 (NSW) will need to be updated to the Building and Construction Industry Security of Payment Regulation 2020 (NSW).
  • Whilst the reporting requirements in respect of retention monies have been reduced, head contractors should ensure that their practices are compliant with the New Regulation.
  • The introduction of minimum eligibility requirements for adjudicators may improve the quality of adjudication determinations made under the SOP Act.
  • The application of the SOP Act to owner occupier construction contracts will improve cash flow for residential builders as they will be able to claim outstanding progress claims from homeowners without having to get involved in expensive and lengthy Tribunal and Court proceedings in order to get paid.

Implications for residential builders in NSW

If you are a residential builder in NSW, we suggest you familiarise yourself with the operation of the SOP Act and your contracts in relation to:

  • the requirements of a valid payment claim under the SOP Act;
  • the date and method of service of payment claims;
  • review your standard contracts to ensure they comply with the minimum contracting requirements under the Home Building Act 1989;
  • review your practices and procedures to ensure you have adequate resources to utilise the adjudication process within the strict time frames of the SOP Act; and,
  • get legal advice to ensure you are equipped to deal with the recent changes and maximise your chances of getting paid efficiently.

Other Notable Changes

Reporting requirements

The New Regulation reduces regulatory requirements and improves administrative efficiency by removing the annual reporting requirement for trust accounts to NSW Fair Trading.

Trust account records

The New Regulation introduces a requirement for head contractors to keep a ledger for retention money held in respect of each subcontractor. It also introduces an obligation to provide trust account records to subcontractors if their money is held in trust.

There are also new penalties for breaches of these record-keeping obligations. There is a maximum of 1,000 penalty units for a corporation for breach of the requirement to hold retention money in trust.

The penalties have been introduced to increase compliance and improve accountability.

Adjudicator eligibility

The New Regulation introduces qualifications and eligibility requirements for adjudicators. The eligibility requirement includes:

  1. A degree or a diploma in architecture, building surveying, quantity surveying, building and construction, construction management, project management, engineering or law conferred by an Australian or foreign university or tertiary institution; and at least 5 years’ experience in the administration and management of construction contracts or in the resolution of disputes in connection with construction contracts; or,
  2. At least 10 years’ experience in the management of construction contracts or in the resolution of disputes in connection with construction contracts.

There will also be continuing professional development requirements for adjudicators commencing on 1 September 2021. Current adjudicators will be ineligible if they do not meet these requirements.

If you have any questions about the recent changes, please do not hesitate to contact a lawyer in Coleman Greig’s Building & Construction team, who would be more than happy to assist you.

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