What is Security of Payment Act and How It Affects Construction Contracts

Understanding and adhering to the Security of Payment Act (SOPA) is crucial for anyone involved in capital projects and construction contract administration. Financial disputes around contract works and progress claims are common, and it's in everyone's interest to keep the projects moving forward.

What is it, and why does it exist?

The Security of Payment Act (SOPA) was legislated and enacted in all states and territories in Australia to safeguard the interests of parties involved in a building contract or capital project.

Here is the list of SOPA per state:

• New South Wales - Building and Construction Industry Security of Payment Act
• Victoria - Building and Construction Industry Security of Payment Act
• Queensland - Building and Construction Industry Payments Act
• Western Australia - Construction Contracts Act
• Tasmania - Building and Construction Industry Security of Payment Act
• Australian Capital Territory - Building and Construction Industry (Security of Payment) Act
• Northern Territory - Construction Contracts (Security of Payments) Act 2004

The Act addressed significant issues in the construction industry related to delayed payment of progress claims and the resultant cash flow problems for contractors and subcontractors undertaking contract works. Sometimes, it can take an average of 83 days for subcontractors to get paid after putting work in place, even to this day.

Before this Act, there were frequent disputes over progress claims and payments, leading to lengthy and costly legal battles, which in turn caused financial strain and capital project delays. Contractors and subcontractors went bust, and families were hurt.  

The Act was designed to ensure that those who carry out contract work in construction or supply-related goods and services are paid promptly and fairly, thereby improving cash flow and reducing the risk of insolvency in the industry. Its introduction aimed to establish a more efficient, streamlined process for resolving payment and progress claim disputes, contributing to the overall health and stability of the construction sector.

Let's demystify the Security of Payment Act, and explore its impact on construction contracts.

Understanding the Security of Payment Act

At its core, the Security of Payment Act is a legislative framework designed to ensure prompt payment for work done in the construction industry. It's a tool to resolve payment and progress claim disputes, formats and compliance, leading to more streamlined cash flow. This should ensure that contractors and subcontractors receive timely payment for their services.

This Act varies slightly in terminology and specifics across different states and territories, but the underlying principles remain consistent: fairness, promptness, and dispute resolution efficiency.

Stakeholders to the Act

The Security of Payment Act (SOPA) is a cornerstone in the construction industry, ensuring that payments are made promptly and disputes are resolved efficiently. It touches upon a broad spectrum of stakeholders, each playing a vital role in the lifecycle of a construction project.

• Building Owners and Developers - responsible for making payments under the contracts.
• Client-Side Project Managers – often appointed as contract administrators or superintendents to manage contracts and adhere to SOPA.
• Contractors and Subcontractors - rely on timely payments for their work.
• Suppliers of Construction Materials and Equipment – receiving payment from above
• Legal and Financial Advisors - play a role in advising parties on their rights and obligations under SOPA.
• Government Bodies and Regulators - oversee the enforcement and compliance with the Act.

How does the Act relate to construction contracts?

If you are a client-side project manager, it is important to understand the SOPA for your state in managing progress claims or undertaking construction contract administration of these contracts.  

• AS4300-1995 (Australian Standards)
• AS4000-1997 (Australian Standards)
• AS2124-1992 (Australian Standards)
• AS4902-2000 (Australian Standards)
• FIDIC Forms (International Federation of Consulting Engineers)
• GC21 Form (NSW Government)
• ABIC MW Form (Master Builders Australia and Australian Institute of Architects
• Defence Head Contract (HC-1)
• Defence Design Services Contract (DSC-1)
• Defence Managing Contractor Contract (MCC-1)

Although it may not be mentioned in a contract you are administering, your project will still have considerations for the SOPA in your state or territory. More on the various types of construction contracts in Australia here: 'Exploring Standard Forms of Construction Contracts in Australia'.

Key Features of SOPA

1. Fast-Track Adjudication: SOPA introduces a rapid dispute resolution process where issues relating to payment or progress claims are settled quickly through adjudication, minimizing disruptions to ongoing projects.

2. Right to Progress Claims/Payments: It establishes a statutory entitlement to regular, interim payments, providing a lifeline for contractors and subcontractors who depend on steady cash flow.

3. Payment Claims and Schedules: The Act stipulates a formal process for submitting payment claims and schedules, ensuring clarity and consistency in payment dealings. More on this below.

4. Protection from Retention and Security Withholding: It safeguards against unjust withholding of payments or retention amounts, promoting fair dealings.

How to make a progress claim under the SOPA

Progress claims under the Security of Payment Act (SOPA) are formal requests for payment made by a person who has carried out construction work or supplied related goods and services.

For example, a contractor engaged under a building contract, such as AS2124, will aim to submit a SOPA-compliant progress claim to a Client-Side Project Manager for certification.  The contractor's progress claim must comply with specific requirements outlined in the Act to be compliant with and protected by the Act.  At a high level, considerations such as:

• Submission: The progress claim must be submitted following the time specified in the contract or the Act.
• Details: The progress claim should detail the amount due and describe the construction work
• Notice: A written notice must be provided, often stating that it is made under the SOPA
• Evidence. A Progress claim may also include attachments, such as evidence supporting the progress claim

The claim recipient (usually the contractor or employer) must respond within a set period, or the claimed amount becomes due. These procedures aim to expedite payment processes and minimize disputes, ensuring smoother financial operations in the construction sector.

For more detail, check out our blog on How to Submit a progress claim under the SOPA.

Impact on capital works projects and building contracts.

Legal and regulatory shifts can significantly impact capital works projects, and this is particularly true for the Security of Payment Act (SOPA). SOPA presents both beneficial and challenging effects on building contracts, influencing various aspects of project execution and management.

• Aims to enhance Cash Flow. One aim of SOPA is the improvement of cash flow in construction projects. However, it is disputed that it may slow down cash flow due to the heavy administration overhead.  
• Administration burden. Due to the strict compliance requirements of the Act, submitting and responding to progress claims is a heavy administration overhead.  
• Dispute Resolution. SOPA streamlines the dispute resolution process under contract works, providing a faster, less cumbersome alternative to traditional litigation. This expediency is crucial in the construction sector, where time is often of the essence.
• Contractual Relationships. The Act fosters more transparent and trust-based relationships between contractors, subcontractors, and clients. Clear rules and processes for construction contract administration minimize misunderstandings and potential conflicts.
• Compliance and Documentation.  SOPA necessitates meticulous record-keeping and compliance with its provisions. Contracts must be carefully drafted to align with the Act's requirements, emphasizing the importance of due diligence and legal expertise in contract formulation.

Conclusion

The Security of Payment Act is more than just a rule; it's a key part of fair work in the building industry, especially for big projects. It makes sure that people get paid on time and fairly, which is important not just for the workers and smaller companies, but also for the health of the building industry as a whole. By following this act, we help make construction projects fairer, smoother, and more successful.

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Disclaimer: While Mastt is dedicated to offering valuable industry insights, it's important to note that we are not legal experts. Therefore, our content should not be interpreted as legal advice. We encourage readers to exercise discretion and seek personalized guidance from qualified legal professionals.