On April 21, changes to the NSW Security of Payment Act arising out of the Collins Inquiry into Construction Industry Insolvency will became effective for all building contracts entered into in that state after that date.
Collins made more than 40 recommendations and the New South Wales government published a reply setting out which ones they supported. This article is about only one, which stands out as a major problem because it will in fact worsen the exact problem it is trying to solve.
As a result of this change, Head Contractors involved in commercial construction contracts will have a shorter due date for payment, and ironically, subcontractors will in many cases have a much longer due date for payment.
This, despite the fact the changes were supposed to help subcontractors.
One of the proposed solutions was to shorten payment terms down the contractual chain. Collins recommended maximum payment periods that rendered void any contractual term that was longer.
A mystery here surrounds the insertion of the word ‘business’ in front of the relevant time periods. Collins’ recommendations were only ever expressed as simply ‘days.’ The government supported this approach in its reply, but when the actual legislation was released, the word ‘business’ was inserted. This makes a world of difference: 30 days is a month. 30 business days is at least six weeks - more if public holidays come up during the payment period.
Who came up with this idea? Collins didn’t. Why was this change implemented and who pushed for it? How does it help subcontractors? I was involved in some of the discussions during the consultation period and was told that the insertion of ‘business’ in front of the word ‘days’ was a ‘drafting error.’
Collins recommended the payment term under a contract between a Principal and a Head Contractor be a maximum of 15 days, and the government supported that, but the amended Act now provides for 15 business days, or three weeks. Anyone in construction will know this in fact makes the Head Contractors better off!
Under the vast bulk of head contracts, the due date for payment is one of 30 days, or 30 days from the end of the month, or sometimes 35 days. But this change brings them all down to 15 business days, which is 21 ‘actual’ days. The Head Contractor is better off by a minimum of nine days and in many cases up to 14 days!
This is not in itself objectionable as the thinking may be that the faster head contactors get paid the faster subcontractors will get paid. Under the amendment, however, many subcontractors will suffer a longer due date for payment.
Collins recommended the maximum payment term between a head contractor and subcontractor be 28 days. The government supported it but at a term of 30 days. But the actual legislation provides a period of 30 ‘business’ days, or six weeks! This is not what Collins recommended nor what the government claimed to support in its reply.
Now the drafters of this legislation will say this is only a ‘maximum’ term. The parties can always contractually agree on a shorter period. Sadly, this is a great example of the gap between the legislator’s reality and the reality faced by subcontractors. That is because one of the realities of construction is that a majority of the time there is no agreed due date for payment in the construction contract. Under those circumstances under the amended Act, the due date will default to 30 business days.
And here is the problem: the current Act provides that if a contract has no agreed due date for payment it defaults to only 10 business days. That is now gone and replaced with 30. That adds a full month to the due date! So for the hundreds of thousands of construction contracts worked out in NSW each year without an agreed due date for payment, the default term has now become 200 per cent longer.
As we know, the most common payment terms used are either ‘30 days’ or ’30 days EOM’ (End of Month). These terms are shorter than the default period of 30 business days. But if history is anything to go by, these terms will start to disappear and will be replaced by the much longer 30 business days. Many contracts have adopted the timings of the Security of Payment Act, especially in terms of timings for payment certificates [Payment Schedules].
More often, a due date for payment is either not contracted or else the subcontractor is forced to adopt the term offered by the head contractor. Either way the subcontractor is 20 business days worse off.
As a final irony, this ‘prompt payment’ provision will in countless situations also add a month to the adjudication process. Under the current Act, where a payment term is not agreed, and the Respondent does not issue a Payment Schedule within 10 business days, the Claimant can proceed to adjudication by issuing a s.17(2) Notice to the Respondent.
This starts the clock ticking for another five business days after which the matter goes straight to adjudication. This is because that s.17(2) notice can only be served AFTER the due date for payment has expired. And under the current Act, 10 business days is also the default due date for payment.
But under the amended Act, in the same situation the subcontractor would need to wait an extra 20 business days before being able to serve the notice. This adds a month to the adjudication process and the time the Claimant may be able to get paid under the Act.
This is the exact opposite of what the government was trying to achieve.
This is the solution making the problem worse.
This is not ‘Prompt Payment’.