Exciting Changes Ahead for Payment Practices in Construction

Government Responds to SOPA Recommendations released in November 2023

The Victorian Government has announced strong support for a game-changing set of recommendations from the recent Parliamentary Inquiry, set to reshape payment practices in the construction industry. Aimed at tackling longstanding issues with subcontractor payments, reducing unfair practices, and aligning with national standards, these recommendations promise a fairer, simpler, and more efficient landscape for everyone involved. Below, we dive into some key recommendations, exploring the current challenges, the government’s response, and the transformative changes on the way to boost financial stability and fairness across the industry.

Let’s take a closer look at what’s coming!

Recommendations that the Government supports in full

Recommendation 2: Repealing Excluded Amounts Provisions

Government response – Support in full

Current Challenge

The current provisions in the Security of Payment (SOP) Act exclude certain “amounts” from adjudications, increasing complexity and reducing the money recoverable through disputes. This regime often drives up costs, discourages claim submissions, and prevents retention monies from being recovered. These provisions also make Victoria's SOP Act inconsistent with other Australian states.

Proposed Change

The government fully supports repealing sections 10, 10A, and 10B, which will allow contractors to claim a progress payment calculated either by contract terms or, in their absence, based on the value of completed work, and making consequential amendments to remove other references to ‘excluded amounts’ elsewhere in the legislation. By removing “excluded amounts,” the reform simplifies payment claims, improves cash flow, and aligns Victorian law with other states, making dispute processes fairer and less costly.

Recommendation 3: Eliminating ‘Reference Dates’ for Payment Claims

Government response – Support in full

Current Challenge

Reference dates, a key factor in determining when a payment claim can be made, are often a difficult thing to calculate, requires legal advice and can lead to disputes – stats show that providing the correct date is one of the most litigated issues in adjudications under the SOP Act. Additionally, some contractors exploit reference date rules to delay payments by terminating contracts strategically before reference dates, thereby blocking subcontractors from lodging claims.

Proposed Change

The government supports repealing reference dates and introducing a statutory right to monthly claims and provides for a payment claim to be made on or following the termination of a contract for goods and services provided up to the date of termination. It will also override any contracted dates for payment claims if they are longer than those provided for by the SOP Act. This change aligns with New South Wales’ approach and simplifies the claim process, making payments more predictable and reducing legal disputes, which promotes a fairer and more efficient payment system.

Recommendation 4: Redefining Business Days

Government response – Support in full

Current Challenge

The construction industry traditionally shuts down over Christmas, but Victoria currently counts these days as business days under the SOP Act. This practice creates confusion and unfairly shortens the timeframe available for filing claims during this period.

Proposed Change

The government supports redefining business days to exclude Saturdays, Sundays, public holidays, and the period between December 22 and January 10. This alignment with other states ensures fairer timelines and respects the construction industry's seasonal shutdown. This is important, as business days must be calculated correctly in accordance with the strict deadlines under the security of payments regime, otherwise the process for claiming payments and adjudication will be delayed or even terminated, restricting one’s right to just compensation.

Recommendation 5: Declaring Notice-Based Time Bar Clauses as Unfair

Government response – Support in full

Current Challenge

Time bar clauses, often used by contractors with greater bargaining power, can prevent subcontractors from making valid claims. When compliance with these clauses is unreasonable or difficult, subcontractors are unfairly penalized, impacting their right to payment.

Proposed Change

The government supports amending the SOP Act to allow courts to declare overly restrictive time bar clauses as “unfair,” if compliance is not reasonably possible or unreasonably onerous. This reform empowers adjudicators to assess time bars on a case-by-case basis, ensuring subcontractors are not unfairly restricted from claiming payments and promoting a fairer contracting environment.

Recommendation 7: Extending the Claim Period to Six Months

Government response – Support in full

Current Challenge

Victoria’s SOP Act currently has a short, three-month time frame for payment claims to be made to a contractor for work done, limiting subcontractors' ability to negotiate or resolve disputes. This short period, unique to Victoria, restricts flexibility and increases the risk of unresolved payment issues.

Proposed Change

The government supports for progress payments to be claimed up to six months after:  the relevant construction work was completed, 28 days after the end of the last defects liability period for the construction contract, or the date provided for in the construction contract, whichever is later, matching other states. This amendment provides contractors with more time to negotiate disputes, promoting procedural fairness and potentially reducing litigation by allowing parties more time to reach resolutions.

Recommendation 8: Capping Payment Terms to 25 Business Days

Government response – Support in full

Current Challenge

Lengthy payment terms often burden subcontractors, who lack the bargaining power to negotiate quicker payments. This issue disrupts cash flow and places financial strain on smaller contractors who depend on timely payments.

Proposed Change

The government supports imposing maximum time limits on payment terms of no more than 25 business days after the payment claim has been made, or if the contract makes no express provision with respect to the matter, on the date occurring 10 business days after a payment claim is made. This reform creates a standard, reducing the exploitation of subcontractors by ensuring quicker payments, which strengthens financial stability across the sector.

Recommendation 9: Entitling Contractors to Claim Retention Money

Government response – Support in full

Current Challenge

Retention money – monies withheld from a subcontractor’s progress payment as a security to ensure project completion - is frequently withheld or delayed, creating financial insecurity for subcontractors who depend on these funds. Currently, retention money is an ‘excluded amount,’ i.e. excluded from SOP Act adjudications, limiting subcontractors' ability to recover these funds.

Proposed Change

The government supports allowing retention claims to be included in adjudications, empowering adjudicators to mandate its return. This change ensures subcontractors can access withheld funds more promptly, enhancing financial security and compliance in the industry.

Recommendation 11: Promoting SOP Awareness through the VBA

Government response – Support in Full

Current Challenge

Many industry participants lack awareness of the SOP Act's rights and obligations, leading to misunderstandings, non-compliance, and an increase in disputes.

Proposed Change

The government supports tasking the Victorian Building Authority (VBA) with SOP Act promotion and education. This initiative aims to improve industry compliance and reduce disputes by fostering a well-informed construction workforce, ultimately leading to better compliance and fewer issues.

Recommendation 15: Precluding New Reasons in Adjudication

Government response – Support in full

Current Challenge

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. If they submit a payment schedule, 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, and unnecessarily consumes adjudicator time and attention (discerning ‘new’ claims and then notifying claimants and providing them two business days to respond) and increases an adjudication’s cost. It also has a further negative impact since incorrectly identifying the respondent’s new reasons can serve as grounds for a court setting aside an adjudicator’s determination.

Currently, principals can introduce new reasons for withholding payment during adjudication, overwhelming subcontractors with last-minute objections and increasing adjudication costs.

Proposed Change

The government supports restricting principals to only initial reasons for disputing claims. This reform simplifies the adjudication process, ensures transparency, and allows contractors a fair chance to address objections upfront.

Recommendation 16: Provide Respondents with Five Business Days to Provide a Payment Schedule in Response to an Adjudication Notice

Government response – Support in full

Current Challenge

Under the current system, respondents who miss the initial deadline to submit a payment schedule are left without an opportunity to provide one later. This lack of flexibility can result in unfair adjudications, where respondents are unable to present their side simply due to an oversight or delay.

Proposed Change

The government fully supports allowing respondents an additional five business days to submit a payment schedule upon receiving an adjudication notice, where they failed to provide such a schedule in response to the initial payment claim. This change aims to provide natural justice by giving respondents a second chance to respond, ensuring that payment disputes are resolved with greater fairness and transparency.

Recommendation 17: Mandate a 10-Business-Day Period for Adjudication Determinations, with Optional Extension

Government response – Support in full

Current Challenge

Currently, there is a 10 to 15-day period for adjudicators to hear both sides and make an adjudication.

Proposed Change

The government supports establishing a 10-business-day timeframe for adjudicators to issue a determination following either – the date of a valid adjudication response, the date the response became due, or in the event of no right to a response, the date the adjudicator accepted the adjudication application. This change ensures timely adjudications, with an optional 20-business-day extension if both parties agree. This balance aims to speed up the process while allowing flexibility for more complex cases.

Recommendation 19: Repeal the Adjudication Review Mechanism

Government response – Support in full

Current Challenge

Division 2A of the SOP Act currently restricts adjudication reviews to cases involving "excluded amounts," limiting the scope of reviewable issues. This selective review process has been criticised as creating inconsistency and potential unfairness for parties unable to seek review in cases that fall outside the excluded amounts category.

Proposed Change

The government supports fully repealing Division 2A, removing the adjudication review mechanism altogether. Instead, judicial review will be the primary recourse for disputing adjudications, aligning Victoria’s framework with most other states, which also lack an internal adjudicator review mechanism. This simplification is intended to streamline the adjudication process and minimise procedural complexity.

Recommendation 26: Strengthening Enforcement with Judgement Debt Status

Government response – Support in full

Current Challenge

Compliance with adjudications is often low, leaving subcontractors unpaid despite favourable determinations, and they lack the authority to enforce payments without additional legal action.

Proposed Change

The government supports allowing adjudication certificates to be filed as judgment debts. This measure simplifies and strengthens enforcement, providing subcontractors with a streamlined process to recover payments, thereby increasing compliance and supporting the subcontractors’ financial security.

Recommendations that the Government supports in principle

Recommendation 10: Applying SOP Act to Residential Disputes

Government response – Support in principle

Current Challenge

The SOP Act currently excludes disputes between residential builders and homeowners, which are covered under the Domestic Building Contracts Act (DBC Act). This dual framework causes inconsistencies and limits the protections available to residential builders’ subcontractors.

Proposed Change

The government supports, in principle, amendments that would eliminate the separate payment dispute resolution process under the DBC Act and bring disputes between homeowners and residential builders within the scope of the SOP Act’s framework for dealing with payment claims and disputes. However, it seeks further review and safeguards before implementing this change, particularly to protect homeowners. This reform could harmonize dispute resolutions while ensuring fairer payment processes across the board.

Recommendation 14: Mandating SOP Act Review Every Three Years

Government response – Support in principle

Current Challenge

The SOP Act has not undergone a substantial review in seventeen years, even as the construction industry has become more complex. This lack of oversight risks leaving outdated provisions in place that do not reflect current needs.

Proposed Change

The government supports reviewing the SOP Act every three years, ensuring it adapts to industry changes and remains effective. Regular reviews will enhance legislative responsiveness and address evolving industry challenges. More consideration about the frequency and nature of the review (e.g., who will undertake it, who will receive the reports) is needed, and whether this process needs to be legislated. 

Recommendation 27 & 28: Introducing a Trust Scheme

Government response – Support in principle

Current Challenge

The absence of trust obligations in the Victorian construction sector leaves subcontractors vulnerable to withheld or misapplied progress payments and retention monies. This ongoing issue has caused significant financial strain, especially for smaller contractors and subcontractors, who often face delayed or non-payment for completed work. The complexity of managing such payments through the contracting chain has prompted calls for a more secure method of handling these funds to ensure that they are used appropriately and not withheld unfairly.

Proposed Change

The Victorian Government supports, in principle, the introduction of a trust scheme. The government plans to review various trust models, including the cascading deemed statutory trust scheme outlined in Recommendation 27, before implementing any legislative changes. Under Recommendation 28, retention monies would be held in trust accounts, ensuring that funds are protected and only used for their intended purpose, and serve as an interim solution, providing immediate financial relief to subcontractors by guaranteeing that retention funds are securely managed. This will help familiarise the sector with the concept of trust accounts while broader discussions continue about the best long-term approach.