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By Nick Marston, Director, Project Management | 3 December, 2019

The building industry, already grappling with a slowing housing market, now faces additional cashflow pressures as updates to the Security of Payments Act in NSW (SOPA) commence.

There are clear casualties from the recent construction and property industry slowdown, with 1,515 construction and property companies in Australia entering external administration in the 2018-19 financial year alone.

According to the Australian Investment and Securities Commission, 556 NSW companies fell into administration, receivership or faced a court-ordered shutdown last financial year – the highest figure nationally.

Whilst the changes to SOPA will bring quicker payments for subcontractors, there are tighter regimes to adhere to which will put the squeeze on some parts of the industry.

Key things head contractors need to consider:

1. Reference dates have been removed

This means payment claims are able to be made on and from the last day of a month – irrespective of provisions in the contract.

Ask yourself: Do my payment claim practices and cycles need to change to manage cashflow up and downstream?

2. Subcontractors get paid sooner

The due date for subcontractor payments has been reduced to 20 business days (instead of the the previous 30 business days). Under the amended legislation, if head contractors pay subcontractors late, the subcontractors can suspend works and accrue interest on late payments.

Ask yourself: How will I manage subcontractors which will possibly be on two cycles of payment periods – one for subcontractors on old contracts and one for subcontractors on contracts after 21 October 2019? How does the cashflow sit with the head contractor payments from our clients?

3. Tougher enforcement powers and penalties apply

Officers from the NSW Department of Finance, Services and Innovation have new powers to investigate, monitor and enforce compliance with the Act. Maximum penalties for head contractors that fail to serve a supporting statement with a payment claim have increased from $22,000 to $110,000.

Head contractors who work on government projects must report any late payments to subcontractors. This may prevent them from being included on government tender lists for a year.

Ask yourself: How will I ensure payment claims and supporting statements comply with the Act? Do we need to implement formal training of directors and managers?

What does this mean for developers?

The changes listed above will bring challenges to head contractors and potentially increase the risk of cashflow stress and insolvencies. The Australian Tax Office is on the watch for ‘phoenixing’ – the practice in which a new company emerges from the ashes of another that has been deliberately liquidated to avoid paying its debts.

How do you know if your head contractor is under stress? Here are some signs to watch out for:

  1. Progress on site is slow, slows down, falls behind program or milestones are consistently missed.
  2. Subcontractor numbers on site are lower than expected, subcontractors change part-way through the contract, or there appears to be a high turnover of staff on the project.
  3. The project is not well presented, scheduled correctly or is not pre-loaded with materials ready for installation.
  4. Materials and temporary equipment are removed from site ahead of schedule.
  5. The quality of finished product presented for inspections decreases over time.
  6. The contractor appears more focused on variations and extensions of time in contracts, rather than the completion of the project.
  7. The enthusiasm of the project team on site appears to wane, suggesting that they are worried about job security.
  8. You hear, either directly or on the grapevine, that subcontractors haven’t been paid, are being paid late or receiving reduced payments.
  9. The contractor exceeds monthly claims without justification, makes requests for payments which are not due, requests shorter payment cycles or seeks irregular prepayment of materials.

Things to remember;

  • Changes to the NSW Security of Payment Act took effect on 21 October 2019.
  • Various tweaks and adjustments to the payment claim and adjudication processes were made.
  • SOPA payment claims must again state that they are “made under the Act”.
  • The due date for payment to subcontractors has been reduced to 20 business days, down from 30.
  • There will be an increased focus on administration and compliance with the Act.

It’s a challenging time for the construction industry in NSW as tightening credit, a slowing credit, heightened scrutiny of building quality and tightening regulation all place industry players – both builders and developers – under the pump.

If you have any concerns and need some expert advice, don’t wait until it’s too late.

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