It’s been a long wait, but proposed changes to the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOPA) will finally align Victoria with other legislation around the country. Anticipated for early 2025, the changes will create a more predictable and fair payment system for the state’s construction sector, and potentially set the stage for improving housing supply. We take a look at the recommendations and industry impact.
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Over multiple decades, research has emerged that highlights the poor payment practices that plague the Australian building industry. These practices see financial risk passed down from owners and principals to contractors and subcontractors, increasing the levels of financial insecurity that contractors and subcontractors face, and causing the rates of insolvency to skyrocket.
In Victoria, the SOPA legislation has remained unchanged since 2006. This contrasts with many other legislations around Australia and especially the equivalent legislation in Western Australia and New South Wales. Both state’s legislation has undergone progressive reviews and reforms to ensure the legislation remains fit for purpose and achieves its goal as an interim payment mechanism allowing for necessary cashflow. In contrast, Victoria’s SOPA is carved out for ‘Excluded Amounts’ and non-claimable variations are difficult to utilise in the same way.
In a bid to mitigate poor payment issues, the Victorian Legislative Assembly launched an Inquiry into SOPA. The Inquiry aimed to not only align Victoria with other states’ Security of Payment Legislation, but to also remove the unfairness and convolution preventing contractors and subcontractors from recovering payments.
Background information
In early 2023, the Victorian Legislative Assembly initiated an Inquiry into the payment sector of the Victorian construction industry to be undertaken by the Environment and Planning Committee. The Committee examined the processes in place and investigated potential improvements that could be made to ensure that contractors and subcontractors were paid correctly and timely for the work they had performed under the contract. The findings were published in November 2023 in the ‘Employers and contractors who refuse to pay their subcontractors for completed works’ report (the Report).
The Report outlined nine factual findings and 28 recommendations for reform that would positively contribute to the needs of the Victorian construction industry and better align Victoria with other Security of Payment regimes.
Findings
The Committee found that poor payment practices were extremely prevalent in the construction industry. Poor payment in Victoria’s industry was found to be partially due to the hierarchical nature of construction. It found that many payment delays occurred when a head contractor used funds that would have otherwise been used to pay subcontractors as capital to finance their other business projects.
The Report’s recommendations outlined the need for certain provisions to be repealed, amended, and for the Government to examine other prevalent issues. The recommendations aimed to strengthen the statutory right for parties to claim payment, improve the adjudication process, and combat insolvency within the industry.
The key recommendations in the Report are:
- Recommendation 2 – Excluded Amounts and non-claimable variations
This recommendation removes the concept of ‘Excluded Amounts’ and ‘non-claimable variations’, allowing contractors to claim progress payments based on the value of the construction work performed. This would mark a very significant change to the existing legislation and would align Victoria with other Australian jurisdictions.
- Recommendation 3 – Reference dates
The removal of the concept of reference days and the enabling of one payment claim per calendar month and a payment claim to be made on/following contract termination. It would also ensure contracted days that are longer than what is stipulated in SOPA be overridden.
- Recommendation 4 – Business days
The definition of business days is to be amended so that Saturdays, Sundays, Victorian public holidays, and days between 22 December to 10 January would now be excluded from the meaning of business days. This would reflect what is practiced in other Australian jurisdictions.
- Recommendation 5 – Time bars
Allowing notice-based time bars to be declared as unfair by an adjudicator, court, or arbitrator. If declared unfair, the time bar would be deemed to have no effect on the payment claim. It should be noted that this would not apply to other situations arising under the contract.
- Recommendation 6 – Unfair terms
This would prohibit unfair construction contractual clauses from arising in contracts and would nullify their effect. This would ensure that Victoria’s SOPA is aligned with other jurisdictions.
- Recommendation 9 – Retention monies claimable
This recommendation provides an entitlement to claim retention money. It provides the adjudicator with powers to determine whether the retention money shall be returned and the date at which it should be returned.
- Recommendation 15 – New reasons
If implemented, this would prohibit respondents from including reasons in their response to an adjudicator that they had not previously provided for in their payment schedule. Currently, no other jurisdictions in Australia allow a respondent to include new reason for not paying a subcontractor that had not been raised in the payment schedule.
This would also remove the requirement for adjudicators to identify these reasons as this can run the risk of reasons being incorrectly identified, providing an opportunity for a court to set aside the determination.
- Recommendation 17 – Extending time for determination
This amendment would state that an adjudication must be made within 10 business days of either the respondent providing a valid adjudication response, or the date of the response becomes due. This also aims to reduce complexity when interpreting legislation.
- Recommendation 26 – Simplifying enforcement process
This would allow for an adjudication certificate to be filed as a judgment for debt in court and enforced accordingly. Historically, compliance with adjudication outcomes is low, which can mean that certain subcontractors do not receive payment even if a decision has been handed down in their favour.
While the Government’s Report does not state when certain amendments will be made to SOPA, the Government has committed itself to making them, and the changes are likely to be implemented early in 2025.
Impact on the construction industry
Once these changes are enacted, the current construction payment practices in Victoria will be revolutionised. Given the changes will mean that the Victorian SOPA will be aligned with other legislation around the country, it is almost certain that many more contractors and subcontractors will elect to utilise the statutory adjudication pathway. Critically, the proposed amendments will also reduce the chance of adjudication applications being rejected on a purely technical legal basis.
The Victorian Government’s support and pledge to build a more stable and fair construction industry comes at a critical time. In particular, better payment practices are essential in ensuring the construction industry is well placed to improve housing supply and assist in working effectively towards Victoria’s Housing Statement.
If you require construction or infrastructure legal advice, Hamilton Locke can help. We draw on decades of experience to help bring market leading projects to fruition. Find out more, or contact us directly.
