Help for Home Builders under the Security of Payment Act

A guest post from Aaron Bolton. Managing Associate at Morrissey Law & Advisory

I was recently asked to speak to a group of builders who specialise in the residential construction space about developments in the law relating to their area of work. During the talk I touched on amendments to the Building and Construction Industry Security of Payment Act 1999 Act (NSW) (SOP Act) which will allow builders to have recourse to the “fast track” payment mechanisms created under the SOP Act for “owner occupier” dwellings. This news was welcomed by the builders at the talk, many of whom had at least one “war story” about having to walk away from monies owed to them because of the time and cost involved in trying to recover from owners.

Following on from that talk, I have prepared this brief introduction and guide to the SOP Act for residential builders who may not be familiar with what it is and how it can help them. It may also be a useful refresher for industry operators as well. The aim is to raise awareness of what should be seen as another tool in their belt that can be used to recover amounts owed quickly and cheaply and keep business on track.

What is the SOP Act?

Put simply, the SOP Act is a law that creates a “fast track” for builders to get paid for construction work they have done. It does this by:

  1. creating a statutory process that entitles builders to make regular claims for payments; and

  2. establishes a mechanism for the recovery of unpaid amounts.

Who is covered by the SOP Act?

An entity that undertakes to carry out “Construction Work” or supply “Related Goods and Services” under a Construction Contract is entitled to receive “Progress Payments” and is covered by the SOP Act. We will refer to Construction Work and Related Goods and Services as Work, and we will refer to the “entity” that carries out the Work as the Claimant.

Both “Construction Work” and “Related Goods and Services” are defined broadly. Put together they cover most of the work performed by the NSW building and construction industry. There are some exceptions, but chances are that if you are involved in building and construction in NSW on some level then you will be covered. This includes if your Construction Contract is not written and only verbal.

An exception to the above is that the SOP Act does not currently apply to Owner Occupier Construction Contracts where the person lives or proposes to live in the property. This is because the Building and Construction Industry Security of Payment Regulation 2020 (NSW) (SOP Regulation) identifies these as a class of Construction Contract to which the SOP Act does not apply. However, this exclusion exception is being removed from 1 March 20201, and is discussed further below. Another main exception is that the SOP Act does not apply to Work outside of NSW, however the other States and Territories have legislation similar to the SOP Act.

How do I seek payment under the SOP Act?

A Claimant will seek a Progress Payment by making a Payment Claim for the Work. Progress Payment Claims will usually be made on the last day of the month that the Work was carried out, unless the Construction Contract allows an earlier date. The amount that can be claimed as a Progress Payment is determined by the terms of the Construction Contract. If the Construction Contract doesn’t deal with how much the Claimant is to be paid, then the amount is determined by the “value” of the Work carried out or undertaken to be carried out. The SOP Act includes a mechanism for determining what this “value” will be if the Contract does not. Despite what the name might suggest, Progress Payments do not need to be “part” (i.e. milestone) payments and can be final payments, or single / one off payments.

Is there a requirement that I must be paid within a certain time?

Yes there is. The SOP Act sets a ceiling on the due date for payment of a Progress Payment. What the due date is will depends on the Claimant’s role in the Construction, i.e.:

  • if the Claimant is the Head Contractor then the Principal must make a Progress Payment under a Construction Contract within 15 business days of a Payment Claim being made (or earlier if the Construction Contract provides for an earlier date);

  • if the Claimant is a Subcontractor under a Construction Contract (except Exempt Residential Construction Contracts) the Progress Payment must be made within 20 business days of a Payment Claim being made (or earlier if the Construction Contract provides for an earlier date); and

  • if the Progress Payment is made by anyone under an “Exempt Residential Construction Contract” then it must be made on the date for payment in the contract, or the date 10 business days after a Payment Claim is made.

“Exempt Residential Construction Contract” means a Construction Contract connected with an Owner Occupier Construction Contract or other contract for residential building work, ie Work for a residential property under the Home Building Act 1989 (NSW) (unless the Work is for the Owner Occupier who intends to reside there). An examples of this might be an electrical subcontractor performing working for the Home Builder.

What is special about a Payment Claim?

The short answer is, not much, A Payment Claim is basically a claim for a Progress Payment by a Claimant that meets the following requirements set out in the SOP Act, ie it must:

  • identify the Work to which the Progress Payment relates;

  • indicate the amount of the Progress Payment the Claimant claims (referred to as the Claimed Amount);

  • state that it is made under the SOP Act.

There are a couple of other rules about Payment Claims set out in the SOP Act, ie:

  • payment Claims may be served within the period set out in the Construction Contract, or 12 months after the Work was carried out (whichever is later);

  • only one Payment Claim may be served per month Work is carried out (unless the Construction Contract states otherwise), but each Payment Claim can include multiple Progress Payments, amounts included in earlier Payment Claims, and Work carried out in previous months; and

  • head Contractors must include a Supporting Statement with its Payment Claims, ie an approved form that that includes a declaration that all subcontractors have been paid all amounts due and payable in relation to the Work.

What is a Payment Schedule?

A Payment Schedule is essentially a reply to a Payment Claim by a person who is served with a Payment Claim. We will refer to this person as the Respondent. Similar to the Payment Claim there is nothing too special about them except the SOP Act requires that a Payment Schedule must include certain things, ie it must:

  • Identify the Payment Claim it relates to;

  • Indicate the amount of the payment the Respondent proposes to make (referred to as the Schedule Amount); and

  • If the Schedule Amount if less than the Claimed Amount, indicate why it is less, including any reason for withholding payment.

Payment Schedules must be provided within the time required by the Construction Contract or within 10 business days of the Payment Claim being served (whichever is earlier). If a Respondent does not serve a Payment Schedule within time, the Respondent becomes liable to pay the Claimed Amount on the due date for payment. Flowing from that, if a Respondent does not pay the whole of the Claimed Amount on the due date for payment, then the Claimant may:

  • recover the unpaid Claimed Amount from the Respondent as a debt in any Court, and the Respondent cannot bring any cross claim, or raise any defence relating to matters under the Construction Contract; or

  • make an adjudication application in relation to the Payment Claim; and

  • take steps to suspend Work under the Construction Contract.

How do I recover unpaid amounts?

As mentioned above, the SOP Act creates a statutory regime for the adjudication of disputes relating to payment or non payment under the SOP Act. We have prepared a flow chart that shows how the statutory process works at a glance:

Who can make an Adjudication Application?

Only a Claimant may make an Adjudication Application. The right to make an Adjudication Application will arise if:

  • the Scheduled Amount is less than the Claimed Amount;

  • the Respondent fails to pay the Scheduled Amount on time;

  • the Respondent fails to provide a Payment Schedule, and fails to pay the Claimed Amount.

If the Respondent fails to provide a Payment Schedule and fails to pay the Claimed Amount, before the Claimant can make an Adjudication Application it has to give the Respondent written notice that it intends to apply for adjudication of the Payment Claim within 20 business days of the due date for payment. The Claimant will then have a “second chance” to provide a Payment Schedule within 5 business days of receiving the Claimant’s notice.

The time for making an Adjudication Application may vary, ie an Adjudication Application must be made within:

  • 10 business days after the Claimant received the Payment Schedule if the Scheduled Amount is less than the Claimed Amount;

  • 20 business days after the due date for Payment if the Respondent fails to pay the Scheduled Amount on time; or

  • 10 business days after the end of the Respondent’s “second chance” to provide a Payment Schedule.

Similar to the requirements for Payment Claims and Payment Schedules, the SOP Act requires that Adjudication Applications be:

  • made in writing;

  • made to an “authorised nominating authority”, essentially a statutory body that is responsible for referring Adjudication Applications to individual adjudicators;

  • made in time (see above);

  • identify the relevant Payment Claim and Payment Schedule (if any);

  • accompanied by any application fee; and

  • accompanied by any submissions the Claimant wishes to include.

A Claimant can withdraw an Adjudication Application by serving a written notice. It can do this without the Respondent’s consent if the notice is served before an Adjudicator is appointed, but consent is required if it is after.

What is a Payment Withholding Request?

A Claimant that has made an Adjudication Application can also require a Principal Contractor to retain sufficient money that is (or becomes) payable to the Respondent, to cover the amount claimed in the Adjudication Application.

To do this, the Claimant must serve a Payment Withholding Request (PWR) on the Principal. The SOP Act requires a PWR to be in an approved form, and include a statutory declaration that the amount claimed in the Adjudication Application is owed.

A Principal who is served with a PWR must retain the amount claimed in the Adjudication Application from money owed to the Respondent relating to the Work, until the earlier of the following occurs:

  • the Adjudication Application is withdrawn (and no new Adjudication Application is made);

  • the Adjudicator fails to make an Adjudication Determination (and no new Adjudication Application is made);

  • the Respondent pays the amount claimed in the Adjudication Application;

  • the Claimant serves a notice of claim on the Principal under the Contractors Debt Act 1997;

  • 20 business days have elapsed after the Adjudication Determination is served on the Principal.

If a Principal contravenes a PWR and pays money to the Respondent, the Principal becomes jointly and severally liable for the debt owed to the Claimant.

What is an Adjudication Responses?

If a Respondent has served a Payment Schedule, the Respondent also has the opportunity to respond to an Adjudication Application by issuing an Adjudication Response. The Adjudication Response must be in writing, identify the Adjudication Application, contain submissions that the Respondent wishes to include, and be served on the Claimant. The Respondent’s submissions can only include reasons for withholding payment that were already included in the Payment Schedule previously.

An Adjudication Response must be made within 5 business days after the Respondent receives a copy of the Adjudication Application, or within 2 business days after the Respondent receives notice of the Adjudicator’s acceptance of the Adjudication Application, whichever is later. An Adjudicator cannot consider an Adjudication Response that lodged late.

How long does it take to get an Adjudication Determination?

An Adjudicator cannot determine an Adjudication Application until after the time for the Respondent to lodge an Adjudication Response has passed. An Adjudicator must determine an Adjudication Application “as expeditiously as possible” and in any case within 10 business days of the following (unless the Claimant and Respondent agree to an extension of time):

  • the date the Respondent lodges an Adjudication Response (or the end of the period for within which the Respondent was entitled to lodge an Adjudication Response); or

  • the date notice of the Adjudicator’s acceptance of the Adjudication Application is served.

The Adjudication Determination includes the amount to be paid to the Claimant (the Adjudication Amount), the date that the Adjudication Amount is payable, and the interest rate payable. There are limited grounds to dispute an Adjudication Determination, including jurisdictional errors or denial of natural justice. An error by the Adjudicator is generally insufficient. Adjudications have often been referred to as “rough justice” by the Courts.

How long does it take to get paid after an Adjudication Determination?

If the Adjudicator determines that the Respondent must pay the Adjudication Amount, it must be paid on or before the date 5 business days after the Adjudication Determination is served by the Adjudicator on the Respondent (or some later date determined by the Adjudicator) (Relevant Amount).

If the Respondent fails to pay the Adjudication Amount by the Relevant Date the Claimant can suspend the Works and request the Authorised Nominating Authority to issue an Adjudication Certificate. The Adjudication Certificate can then be filed as a Judgment Debt with the Courts. The Respondent can take various steps to recover a Judgment Debt, including issuing garnishee notices or writs of possession, and commencing bankruptcy proceedings.

Why am I hearing about this now?

As noted above, the SOP Act does not currently apply to any Owner Occupier Construction Contract. An Owner Occupier Construction Contract is a Construction Contract for residential building work where the party resides or proposes to reside.

However, from 1 March 2021 the Owner Occupier exclusion in the SOP Act will be removed and Owner Occupier Construction Contracts because they will fall within the definition of “exempt residential construction contract” and be covered under the SOP Act. There is uncertainty debate about whether the SOP Act will apply to Owner Occupier Construction Contracts entered into before 1 March 2021, eg whether a Claimant seek Progress Payments or commence an Adjudication Application. That being said there is little doubt that it will apply to Owner Occupier Construction Contracts entered into after 1 March 2021.

What should I do?

Claimants working in the owner occupier space should begin familiarising themselves with the SOP Act and how it works. This information should be considered as an outline, and not the complete picture. Other parts of the SOP Act inform how it operates and its utility in different circumstances. There is also a considerable body of case law dealing with the SOP Act which can trip up even seasoned operators.

Claimants should review their Owner Occupier Construction Contracts to check if they are consistent with the requirements of the SOP Act. Parties cannot “contract out” of the SOP Act so inconsistent terms will be void and unenforceable, including payment and invoicing terms.

Claimants should also review their “pro forma” invoices to make sure that they also meet the requirements of the SOP Act. Something as simple as forgetting to state that an invoice is a Payment Claim under the SOP Act may jeopardise a later Adjudication Application.

Morrissey Law + Advisory has prepared a series of presentations dealing with the SOP Act, and recently held “Soptoberfest” which was a four part series dealing with the SOP Act in greater detail including case examples and analysis. We also offer “in-house” training and seminars to help your business navigate the SOP Act and its practical applications. If you would like copies of the presentations, or interested in any training and seminars, or have any further questions on the SOP Act, please let us know and we would be glad to assist.

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