Everything you need to know about the Building and Construction Industry Security of Payment Act

What is the Security of Payment Act?

The Building and Construction Industry Security of Payment Act 1999 *- or, as most people call it, the 'Security of Payment Act', is NSW-specific legislation that is intended to reduce the incidence of insolvency in the construction industry.

It does this by:

• providing specific rights and protections for contractors; and
• prescribing a statutory mechanism for recovering progress payments.

All States and Territories in Australia now have security of payment legislation. However there are differences from State-to-State. This page only relates to the NSW Security of Payment Act. You can read about security of payment in other jurisdictions here.

* In late 2018 the NSW Government approved amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW). The changes commenced on 21 October 2019. To learn more about the changes, click here.

Who is covered?

Section 7 explains who is covered. Broadly, most commercial construction contracts will be caught by the legislation. Residential building work is excluded where the principal resides in, or proposes to reside in, the premises where the work is performed.

What are the general protections given to contractors?

The main protections given to contractors under the NSW Security of Payment Act are:

• minimum interest rates on late progress payments;
• a prohibition of ‘paid when paid’ provisions;
• a statutory right to make regular payment claims, and maximum periods of time for principals to respond to those claims (failing which the claim will be payable in full);
• maximum payment terms (15 business days for head contracts, 20 business days for subcontracts); and
• a statutory right to suspend work following non-payment.

The legislation also contains a mechanism, involving a 'payment withholding request', that allows a subcontractor to obtain payment direct from a head contractor's client where an adjudication application is made.

What is the procedure for recovering progress payments?

The process for recovering payment under the NSW Security of Payment Act starts with the contractor making a payment claim. Click here if you'd like to learn more about how to make a payment claim in NSW.

A payment claim must identify itself as being made under the Act, for example, by stating "This is a payment claim for the purposes of the Building and Construction Industry Security of Payment Act 1999". Where the claim is made by a head contractor, it must be accompanied by a 'supporting statement'. (You can find the template here.)

A payment claim cannot be made under the NSW Security of Payment Act unless there is an available date – being a date fixed by the contract or the legislation as a date for making payment claims. Unless the contract otherwise provides, only one claim can be made in any particular named month.

Once a payment claim has been made, the principal (or head contractor) only has 10 business days to respond, unless the contract prescribes a shorter period. This response must be in writing and is called a ‘payment schedule’. If you'd like to learn more about how to respond to a payment claim, click here.

If the principal or head contractor fails to provide a payment schedule within the required timeframe, it will be  liable for the entire amount of the claim. The contractor can then recover this amount as a debt in court.

If the principal issues a payment schedule but the contractor disagrees with the assessment, the contractor can make an ‘adjudication application’. We explain this further below. 

If you're facing a potential payment issue or payment dispute on a construction project, our workshops may be of interest. Read more here.    

What is adjudication?

Adjudication is a streamlined process that allows a contractor to recover a disputed or unpaid progress payment. The dispute is determined by an independent adjudicator. 

The adjudicator is not a judge (and is often not a lawyer), and is appointed by an independent ‘nominating authority’. You can find a list of nominating authorities in NSW here. 

The adjudication application is a written document that must be sent to the nominating authority within a fixed period – usually 10 business days from the date the payment schedule is served on the principal or head contractor. The exact timeframe will depend on the circumstances. (You can find the relevant part of the legislation here.)

Any response to an adjudication application must be made within 5 business days of receiving the application, or 2 business days after receiving notice of the adjudicator having accepted their appointment, whichever is longer. This is often an exceptionally short timeframe.

A claimant has an express right to withdraw an adjudication application. The respondent may object to the withdrawal if an adjudicator has been appointed.

Click here if you'd like to learn more about how to respond to an adjudication application.

Critically, the respondent is not entitled to include in its adjudication response any reasons for withholding payment that were not included in its payment schedule.

Once the time for a response has lapsed, the adjudicator is required to determine the application. Typically, this is done by reference to the application and the response, with neither party having any right to appear before the adjudicator. It is not uncommon for the adjudicator to seek further submissions from the parties.

Adjudication determinations under the Security of Payment Act are usually issued within 10 business days of the date the adjudication response was required (although extensions are often sought by the adjudicator and approved by the parties).

If you need help assessing your position under the security of payment legislation, we can help. Read more here.   

What effect does an adjudication determination have?

Once an adjudication determination has been made, the respondent must pay the ‘adjudicated amount'. If it does not:

• the respondent will be liable for interest;
• the contractor can give notice of its intention to suspend work and, after 2 business days, suspend work if the amount remains unpaid; and
• the contractor can apply for an ‘adjudication certificate’ and then seek to register that certificate in court, as a judgment. Usually this can be done within a matter of days.

If the judgment debt is not paid, the contractor can then commence debt recovery proceedings. 

The entry and enforcement of an adjudication certificate can have negative implications for the respondent’s credit rating and, if it is a head contractor, its ability to secure future work. This is because some principals and government bodies will take this type of behaviour into account when awarding tenders.

What if the respondent is insolvent?

If the respondent is insolvent, an adjudication determination may not be worth much unless it can be enforced against another party.
In NSW, the Act allows subcontractors to issue a ‘payment withholding’ request to upstream principals. In broad terms, the mechanism works as follows:

• Upon making an adjudication application, the subcontractor can request the adjudicator to direct the head contractor to disclose details of its client (the ultimate principal).
• The subcontractor can send a ‘payment withholding request’ to the head contractor’s client, and require that person to withhold an amount from the head contractor equal to the amount sought through the adjudication.
• The head contractor’s client becomes bound to withhold the amount from any payments that might otherwise be due to the head contractor.
• If the adjudication application is successful, the subcontractor can then seek to recover the adjudicated amount from the amount withheld by the head contractor’s client.

What if I am insolvent?

A corporation that is in liquidation is prohibited from serving a payment claim or taking any action to enforce a payment claim (including by making an application for adjudication of the claim) or an adjudication determination. 

Where a corporation in liquidation has made an adjudication application that has not been finally determined before the day on which the corporation was put into liquidation, the application is taken to have been withdrawn.

Who pays the costs of an adjudication?

The parties to an adjudication must each bear their own costs. That is, you will not be able to recover any costs you incur in preparing or responding to an adjudication application from the other side.

If you are the claimant, you will need to pay the adjudicator’s costs before he or she releases a determination. If you are successful, the adjudicator will normally allow you to recover most or all of those costs from the other side. Those costs form part of the adjudication certificate if they are not immediately paid by the respondent.

Can an adjudication determination be appealed?

Yes, however the circumstances in which they can be appealed are extremely limited.

The mere fact that an adjudicator makes a mistake is not a sufficient reason for a determination to be set aside. In NSW and South Australia (and potentially other jurisdictions as well), this is the case even where the adjudicator has incorrectly interpreted and applied the terms of the contract.

To be able to set aside a determination, the respondent will generally prove some form of ‘jurisdictional error’. A jurisdictional error is an error that involves the adjudicator having acted outside the scope of his or her authority. For example, by:

• making a determination where the claimant did not make an adjudication application, or had no right to make an adjudication application;
• failing to consider the terms of the contract; or
• failing to afford the parties procedural fairness.

The NSW Security of Payment Act gives the court an express right to set aside an adjudication determination for jurisdictional error. (You can read more about jurisdictional errors, here.) If only part of a determination is affected by jurisdictional error, the court may set aside that part only, while confirming the balance of the determination.