SOP challenges for Developers

Opinion: Michael Chesterman

2018 saw the advancement of major SOP reforms contained in the Building Industry Fairness (Security of Payment) Act 2017 (BIFA). There is no doubt as to the impact on contractors and subcontractors but the effects are far wider. 14.8 Million Australians have a financial stake in property through their super funds and more than 1 in 4 people derive their wage from the property industry directly or indirectly (Property Council of Australia).

From the outset, it needs to be recognised that under BIFA a developer can never be awarded an adjudicated monetary payment in their favour. They can only defend payment claims served on them by head contractors. Furthermore developers will be expected to assume very broad administration and monitoring functions concerning the establishment of PBA’s by head contractors.

BIFA principally seeks to regulate contractors working in the building and construction industry through:

  • the imposition of new and tougher Licensing Minimum Financial Requirements (MFR’s) on contractors, coming into effect on a staged basis during 2019;
  • regulating contracts by mandating certain provisions and prohibiting others in relation to the carrying out building work. Again, it is not known at this point in time what these requirements will be. I addressed this issue in a previous article entitled “What will building contracts look like after Project Bank Accounts (PBAs) come into effect?”;
  • controlling and directing the flow of money between subcontractors and head contractors with the establishment of PBA’s. However, as I pointed out in my article “Project Bank Accounts are happening but will your job have one?”, of the approximate $44 billion of building and construction work done in Queensland, only a third of that money will be protected by PBAs;
  • redefining in favour of claimants the operations of the replaced Building and Construction Industry Payments Act 2004 (BCIPA) through a number of procedural changes that came into effect via BIFA on 17 December 2018. But be careful because any payment claim received by developers from head contractors before 17 December 2018 will be determined under BCIPA. Any payment claim received by developers from head contractors after 17 December 2018 will be determined under BIFA even if the contract was entered into before 17 December 2018;
  • repealing the Subcontractors Charges Act 1974 and in the process make some minor changes which also commenced on 17 December 2018. Heads up here to the changes in the Form necessary for lodging a charge; and
  • increased ability of the Queensland Building and Construction Commission (QBCC) to provide regulatory oversight to the building and construction industry through significantly enhanced compliance and enforcement powers.

The QBCC has produced a booklet entitled “Protecting your payment rights” which outlines these changes in a simple but detailed and informative manner.

The government is confident that BIFA will deliver improved SOP outcomes for the industry. However, as the procurer of construction work, there will be a number of challenges for developers in managing the SOP initiatives contained in BIFA.

My intention is that those focused in property are able to use this as a resource to assist them in:

  • responding to payment claims from head contractors under BIFA; and
  • contracting for the carrying out of building work that will require the establishment of PBA’s by head contractors for private projects from mid 2019.

CHALLENGE 1 — It’s raining payment claims!

Payment claims need not to be specifically endorsed as having been made under the BIFA in order for a head contractor as a claimant to be able to proceed to adjudication. It’s now raining payment claims on your project with no prior weather warning.

The removal of the requirement for contractors to have to endorse a payment claim to obtain the benefits provided by BIFA, will prove to be problematic for developers if the experience of NSW in this regard is any indication.

At a public hearing on 20 September 2017 an experienced adjudicator, Scott Pettersson said in relation to the NSW decision in 2014 to do away with the need for claimants to endorse payment claims under that states SOP legislation:

“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.”

Mr Pettersson focused on the contractual relationship between subcontractors and head contractors in citing issues. However, exactly the same issues will be evident in any contractual relationship between head contractors and developers. Using Mr Pettersson’s logic, if your project manager or superintendent is provided a scope and price for a variation you may find some smart lawyer arguing that the document provided by the head contractor was actually a payment claim with you liable to meet the full cost without argument.

As if sent from NSW to make the point how absurd this is, on 21 November 2018 the Building and Construction Industry Security of Payment Amendment Bill 2018 was passed by the NSW parliament, with one of the reforms being a reintroduction of the payment claim endorsement requirement. The explanatory statement indicates that:

“The decision to re-insert this requirement follows overwhelming stakeholder feedback received in support as part of the NSW review. Stakeholder feedback indicated that removing the requirement created significant problems and uncertainty for both respondents and claimants. Stakeholders agreed that a payment claim endorsed with a statement that it is made under the Act evidences a clear intention to engage the formal process under the Act. Stakeholders agreed that an endorsed payment claim alerts the recipient of the severe consequences if it fails to respond within the statutory timeframes by way of a payment schedule.”

Are you frustrated yet? Queensland has just adopted what NSW has just proven does not work and the challenge is that you need to do your absolute best to deal with the consequences.

CHALLENGE 2 — Less scope for settlement

BCIPA afforded a developer respondent the opportunity to provide a “2nd chance payment schedule” when responding to a payment claim before the claimant could proceed to adjudication or seek summary judgment from a court for the total amount claimed.

The BIFA amendments removes any 2nd chance payment schedule opportunity for a respondent — with the consequence of reducing a developers chance to settle a dispute with a head contractor early.

By eliminating the opportunity for respondents to provide a “2nd chance” payment schedule when they fail to provide an initial payment schedule in response to a payment claim from a head contractor, there is no legislative “last chance” for the parties to negotiate a settlement.

Developers may find themselves having to very quickly move into formal response mode. Under this pressure cooker situation, developers will only have a very limited time in which to contact the head contractor and try and negotiate a settlement of a potential dispute.

CHALLENGE 3 — Change up your processes — Again

In response to the BIFA, developers will have to alter their contract administration practices. In my opinion, they will now have to adopt a process that treats every invoice from a head contractor as a payment claim that may result in a potential adjudication application.

If you do not provide a schedule:

  • You will commit an offence under Section 76 of BIFA if you do not provide a payment schedule within the 15 business days period and pay in full the amount claimed on or before the due date to which the payment claim relates.
  • You are completely locked out of making any argument to the adjudicator, or in the alternative you risk an order from a judge that you pay the full amount of the claim.
  • Your project may come to a complete halt with the head contractor exercising a legislative right to suspend work.

To close off this risk it makes sense to adopt a process that is BIFA compliant, especially given the warning shot (by endorsing under claim) if now gone. This sounds like a painful exercise but you will only need to do it once (unless the law changes again) and you will be sure that you have the right payment processes to see your project through any difficult periods. If you need a hand, give me a shout.

CHALLENGE 4 — Supersized payment schedules

If your project comes upon troubled waters, delay, disputed variations, latent conditions, then defending payment claims may call for the serving up of ‘supersized’ payment schedules under section 76 of BIFA.

Developers may be forced to “supersize” due to:

  • the removal of the “second chance” payment schedule entitlement;
  • no new reasons being allowed in adjudication responses to complex claims (over $750,000 excl GST);
  • the limiting of the number of pages that can comprise an adjudication response in an adjudication application where the payment claim is not more than $25,000; and
  • the need for developers as respondents to respond to a payment claim from a head contractor by either fully paying the amount claimed by the due date for payment or provide a payment schedule disputing the amount claimed. As previously stated a failure by a developer in this regard is an offence under BIFA.

If a “supersized” payment schedule is necessary a head contractor will be faced with having to evaluate a detailed payment schedule in assessing prospects in proceeding to adjudication.

On the positive side, as a result of head contractors having 30 business days (under BCIPA 10 business days) to lodge an adjudication, it is open to the parties to negotiate a settlement of the dispute during this time.

CHALLENGE 5 — Developers may be involved in more litigation

My prediction is that there will be an increase in the number of adjudication applications lodged. It may well be that adjudication was never contemplated by either party at the time the claim was made but that circumstances have inspired the head contractor to go to adjudication. Parties are going to very quickly lock into “dispute mode”.

Unfortunately, if there are a significant number of issues in dispute then a developer cannot afford to devote too much time to trying to mediate a settlement with the head contractor within the 15 business day period for providing a payment schedule. I would always recommend that a developer explore settlement options with a head contractor after receiving a payment claim but this has now become more challenging.

Furthermore in an article entitled “QLD Security of Payment is a minefield… but it might surprise you who is in danger”. I also pointed out that even legislative wording changes could prove to be problematic:

“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.”

I expect to see an increase in the number of Supreme Court challenges of adjudication decisions for this reason as well as the fact that the significantly revamped adjudication process under BIFA will be tested by parties. If you are successful at defending a significant adjudication application and the head contractor is dissatisfied with the result you can expect that anything associated with BIFA changes that can be challenged — will be challenged.

CHALLENGE 6 — mandatory and prohibited conditions in building contracts

Contracts for the carrying out of building work will have to be significantly redrafted because of the prohibiting and mandating of certain clauses under the QBCC Act (sections 67GA and section 67GB) by way of regulation. At the time of writing this article neither regulation has been made.

I addressed these contract initiatives in an article entitled “What will building contracts look like after Project Bank Accounts (PBAs) come into effect?”. Follow this link and I will keep you up to date on this challenge.

CHALLENGE 7 - PBA’s will impose significant oversight responsibilities on developers

Many of you have put PBA’s in the too hard basket as they do not apply to you yet. Well, in 2019 it is time to take the challenge out and have a good hard look at it and start planning.

According to information contained on the Department of Housing and Public Works website:

“Project Bank Accounts (PBAs) are established for certain projects to safeguard progress payments, protect retention monies and allow for more timely payments to subcontractors.

From 1 March 2018, projects tendered by the Queensland Government will use PBAs on building and construction projects (excluding engineering projects) valued between $1 million and $10 million (including GST). Following successful implementation, this model is set to apply to private sector projects valued from $1 million. However, this will not occur before 1 March 2019.”

Furthermore it is stated on the above website that:

“A PBA is a set of 3 bank accounts that operate as a trust.
The Head Contractor is the PBA ‘trustee’ and a beneficiary; each Subcontractor who signs a subcontract becomes a beneficiary. A separate PBA is required for each building contract.
The PBA, which must be set up at a financial institution in Queensland has the following accounts:
- A general trust account — the Principal makes payments into this account.
- A retention trust account — it holds Subcontractor’s retention money.
- A disputed funds trust account — holds amounts subject to certain payment disputes until resolution.”

While it is the responsibility of the head contractor to establish PBA’s when required, it nevertheless needs to be recognised that BIFA imposes significant oversight monitoring and reporting functions on developers in such situations.

CHALLENGE 8 - PBA’s may force construction costs up for your project

I believe that the current trial of government projects operating subject to PBA’s may reveal that the cost to head contractors in operating them will be significantly greater than originally envisaged. In an article entitled “SOP questions you should be asking”, I stated:

“Furthermore, I believe that the government should release comprehensive details on its analysis of the government projects subject to PBA.
In particular I would be interested in knowing whether the government’s estimated administration duties by builders for each PBA project is still valid. The Department of Housing and Public Works advised the relevant parliamentary committee reviewing the BIF Bill that:
The Deloitte report has identified that 7 additional hours will be incurred each month per project for head contractors who manage a project bank account contract”.

Any significant additional administration costs incurred by head contractors in complying with the PBA’s requirements will be passed on to developers. Developers should start thinking now about solutions because what looks like the head contractors problem will soon become your problem when your build costs escalate.

Final thoughts

When I initially designed BCIPA I envisaged and hoped that head contractors would use the Act to even out, what back in 2001 had emerged as an imbalance of power between developers and head contractors, when it came to negotiation of disputes. Over the 13 years I was adjudication registrar I saw first hand that these parties preferred to settle disputes and I believe that BCIPA actually encouraged such outcomes.

For the 2018/19 financial year, as at 31 October 2018 only 16.77% of adjudication applications were lodged by head contractors against developers under BCIPA. I am of the view that under BIFA this percentage will increase because of the simple fact that head contractors will be the subject of many more adjudication applications lodged by subcontractors.

Given that head contractors will be under increased payment pressure from subcontractors, I believe that they in turn will adopt a more aggressive payment approach with developers. What is clear to me is that a “not my problem” approach to BIFA including SOP and PBA’s will not fly for developers in 2019 and beyond.