Building cash flow - how to encourage on-time payment from construction clients
This article was originally published by Hire and Rental News, Feb 2020, Page 18.
Prompt payment to contractors and suppliers is vital to the stability of the construction industry – an industry that contributes significantly to the strength of the Australian economy.
Suppliers of plant and equipment, whether by sale or hire, are important in the delivery of construction projects.
While levels of construction activity remain high, the Australian Financial Review on 4 November 2019 reported on a survey by McGrathNicol Advisory, which revealed that engineering and construction companies are taking an average of 3 months to pay suppliers.
What’s more, while Australian companies overall are paying creditors 2.9 days faster in 2018-19 than they did a year earlier (for an average of 63.5 days), engineering and construction companies are taking 12.4 days longer to pay (up to 87.6 days).
Why? McGrathNicol suggests two possible reasons: debts in this sector are becoming increasingly scrutinised and they maintain highly complex billing processes.
“Days sales outstanding”, which measures the average time it takes to collect payment after a sale, rose from 71.7 to 77.7 days for engineering and construction companies over the past financial year.
That may explain why it is taking them 87.6 days to pay their contractors and suppliers.
So what can contractors and suppliers do about that?
The answer lies in a powerful piece of well-known but little used legislation.
Security of Payment legislation
The Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) is designed to ensure prompt payment to any person, including a supplier of hire equipment to construction contractors, who is entitled to receive progress payments in relation to construction work.
In the event of a dispute, the Act provides a quick and efficient resolution mechanism.
When does the SOP Act apply?
The Act applies, with limited exceptions, to contracts or agreements, in writing or not, under which a party agrees to:
(a) carry out “construction work”; or
(b) supply “related goods or services”
The Act defines ‘related goods’ to include plant or materials (whether supplied by sale, hire or otherwise) for use in connection with the carrying out of construction work.
The supply of plant or equipment under a hire or rental agreement to a contractor for use in construction work clearly falls within the scope of the SOP Act.
When does the SOP Act not apply?
One exception to the Act is a contract with a home owner for carrying out ‘residential building work’ (as defined by the Home Building Act 1989 (NSW)) on a home in which the owner resides or proposes to reside.
This exception is aimed at true consumers and does not extend to developers of apartment buildings or town houses.
How can the SOP Act help?
By serving a valid payment claim under the Act, suppliers of plant and equipment to the construction industry can get paid quicker.
Valid Payment Claims
Recent amendments to the SOP Act, which apply to contracts entered into after 21 October 2019, reduce the time for payment of a payment claim from 30 to 20 business days after the claim is served.
But for the Act to apply, the payment claim must be valid; that is, it must strictly comply with the requirements of the SOP Act.
Neither an adjudicator nor a court has any discretion in this regard.
What is a valid payment claim under the SOP Act?
A valid payment claim:
a) identifies the construction work or related goods and services to which it relates
b) indicates the amount claimed to be due (Claimed Amount)
c) specifically states that it is made under the Building and Construction Industry Security of Payment Act 1999 (unless the construction contract was entered into between 21 April 2014 and 21 October 2019 when such a notation was not required under the Act).
If your usual invoice contains all this information, it may well be a valid payment claim.
When can a payment claim be issued
If your hire contract makes provision for a date earlier than the last day of each month for serving a payment claim, the claim can be served from that date instead of from the last day of that month.
For contracts or agreements entered into after 21 October 2019, payment claims can be made on the last day of each month.
One important restriction on issuing payment claims is that, unless your contract or agreement provides otherwise, you cannot serve more than one payment claim in any named month.
How does the SOP Act ensure prompt progress payment
Within 10 business days of being served with a valid payment claim (or earlier if stipulated in the construction contract), the construction contractor (respondent) may reply by providing a payment schedule.
A payment schedule indicates:
a) the amount of the payment (if any) that the respondent proposes to make (Scheduled Amount); and
b) if the Scheduled Amount is less than the Claimed Amount, why.
The Act requires a progress payment to be made within 20 business days after the claim is made, unless the contract provides for a shorter period.
This is so even if the contract’s trading terms are greater than 20 business days.
What if there’s no payment by the due date?
No payment schedule issued and no payment by due date
If the respondent fails to provide a payment schedule within the required time, and the due date for payment passes without the Claimed Amount being paid, the claimant may recover the Claimed Amount as a debt due to it in the appropriate court.
In those court proceedings, the respondent is not entitled to:
a. bring any cross claim against the claimant hire company; or
b. raise any defence based on the construction contract, even if there is a genuine dispute over the Claimed Amount.
Payment schedule issued but Scheduled Amount not paid by due date
If the respondent provides a payment schedule within the time allowed indicating the Scheduled Amount it proposes (which will invariably be less than claimed), and the due date passes without payment being made, the claimant can recover the Scheduled Amount as a debt due to it in the appropriate court.
In those proceedings, the respondent is not entitled to:
a. bring any cross claim against the claimant hire company; or
b. raise any defence based on the construction contract.
Prohibiting the respondent from raising a defence or counter claim allows the claimant to fairly easily secure judgment from the court against the respondent.
Your likelihood of being paid is then significantly improved.
Our experience is that just advising the respondent that in either of the two scenarios above, court proceedings will commence and the respondent is prohibited from raising any substantive defence, will often result in payment.
The SOP Act can improve the likelihood and timeliness of payment to a hire company supplying plant or equipment in connection with construction work.
All you need to do is to serve a valid payment claim on or after the date your contract or agreement allows you to make a progress claim or, if no date is provided in your contract, then on or after the last day of the month.
Authors: David Creais and Mark Glynn