Recent media reports suggest that the Australian Building and Construction Commission (ABCC) is facing increasing pressure to investigate builders subject to the national building code who do not pay subcontractors on time. Adverse findings by the ABCC could result in builders being prevented from tendering for Commonwealth government work.
By way of overview, under 2018 amendments to the Code for the Tendering and Performance of Building Work 2016 (Code), companies are required to report to the ABCC any disputed or delayed payments. In this update, we look at the practical application of the reporting obligations for disputed and delayed progress payments to those in the construction industry.
Recent media reporting
The number of complaints made to the Australian Building and Construction Commission (ABCC) on payment matters under the Code for the Tendering and Performance of Building Work 2016 (Code) significantly increased in 2018 and 2019. The Australian Financial Review reports that the ABCC received a four-fold increase on complaints in the 2018-2019 financial year.
As a result, media reports are to the effect that the ABCC has been under substantial pressure to be:
- more assertive in its investigation of companies that have delayed making payments; and
- more stringent in its enforcement of the reporting obligations the Code imposes on companies that have delayed making payments.
It may be recalled that these amendments to the Code stem from the Review of Security of Payment Laws conducted by John Murray AM during the period of December 2016 to December 2017.
What has been the response?
In response to the changes to the Code, we have seen principals and government parties amend their major works contracts to expressly include the reporting obligations imposed by the Code in relation to disputed or delayed payments and the relevant "security of payment reporting form". Examples of such clauses typically impose that the contractor must notify the ABCC when:
- a dispute arises regarding a payment claim submitted by a subcontractor; or
- there is a delay in payment of a payment claim submitted by a subcontractor, after the date on which payment of that payment claim falls due.
This poses a question for contractors subject to the code: what are the reporting obligations under the Code, when do they apply and do these contractual provisions go beyond the existing reporting regime?
Application of the Code
The Code prescribes the Commonwealth Government's expected standard of conduct for entities who tender for, or express interest in, Commonwealth funded building work after 2 December 2016 (referred to as Code Covered Entities).
Once an entity becomes a Code Covered Entity, it must comply with the Code on all building work awarded to it, including private projects. If a Code Covered Entity fails to comply with the Code, it can result in the entity being excluded from tendering for or being awarded Commonwealth funded building work for up to one year.
The Code imposes significant requirements on Code Covered Entities in relation to "security of payment", being a contractor's right to receive payments due under the contract. In particular, the Code imposes certain reporting obligations on Code Covered Entitles in relation to disputed or delayed payments.
The ABCC is responsible for enforcement of the Code.
Reporting disputed or delayed progress payments
Since 1 September 2018, Code Covered Entities have been required to report any "disputed or delayed progress payments" to the ABCC.
Section 11D(1)(f) of the Code states:
A code covered entity must report any disputed or delayed progress payment to the ABC Commissioner and the relevant funding entity as soon as practicable after the date on which the payment falls due.
The ABCC website provides some useful practical scenarios in which it says an obligation to report a disputed or delayed payment will arise. These include where:
- an amount is certified by a Principal (or Superintendent) under a contract and not paid within the contractual timeframe;
- an amount is specified in a payment schedule/notice of dispute issued under the security of payment laws and not paid by the date prescribed by those laws;
- other than in Western Australia and the Northern Territory, no payment schedule/notice of dispute is issued in response to a valid payment claim and the full amount of the payment claim is not paid by the date prescribed by the security of payment laws;
- and adjudicator makes a determination under the relevant state and territory security of payment legislation and the adjudicated amount is not paid by the date prescribed by the security of payment laws;
- a third party such as a court, arbitrator, or expert issues a binding determination and the amount determined is not paid in accordance with the determination.
At this point, it is worth observing that each example provided by the ABCC deals with a situation where payment of the relevant progress payment has been delayed, but do not address that component of a payment claim that might be disputed. The distinction between "progress payments" and "progress claims" is an important one. What then is the meaning of a disputed progress payment?
There is a "Frequently Asked Questions" section on the ABCC website which states:
7. Is there an obligation to report a 'dispute' where there is no delayed payment?
No. An obligation to report a disputed or delayed payment arises as soon as practicable after the date on which the payment falls due (s11D(1)(f)).
Accordingly, reporting is only required after a payment falls due.
The answer to this question supports the view that the focus of the reporting obligation is on the payment obligation, and whether that progress payment has been delayed, rather than on a disputed portion of a progress claim.
It seems therefore that for the purposes of section 11D(1)(f) of the Code, the approach the ABCC is adopting is that Code Covered Entities need only report delayed progress payments where the payment obligation in relation to that progress payments has fallen due.
In this regard, the concept of a disputed progress payment, in the context of section 11D(1)(f), is not a separate and distinct concept to a delayed progress payment. That is, a reporting obligation will not arise where all or part of a payment or progress claim is disputed, but no payment obligation has arisen in relation to that payment or progress claim.
We have prepared the below diagrams outline as examples of when an obligation to report a delayed or disputed payment will arise. These diagrams attempt to practically demonstrate the distinction that is to be drawn between "delayed payments" (which are to be reported) and "disputed claims" (which are not required to be reported).
Figure 1 – Delayed or Disputed Payments under Contract
Figure 2 – Delayed or Disputed Payments under Security of Payment Legislation
Australian Financial Review (2019) Subbies push watchdog on late payments [Press release], 11 November 2019. Available at: https://www.afr.com/companies/infrastructure/subbies-push-watchdog-on-late-payments-20191108-p538pf.
Australian Government Department of Jobs and Small Business (2017, December), Review of Security of Payment Laws,. Retrieved from https://www.ag.gov.au/industrial-relations/industrial-relations-publications/Documents/review_of_security_of_payment_laws_-_final_report_published.pdf. Ministers' Media Centre (2016) John Murray AM appointed to review security of payment laws [Media release], 21 December 2016. Available at: https://ministers.employment.gov.au/cash/john-murray-am-appointed-review-security-payments-laws.
Australian Building and Construction Commission, Security of payment, Australian Building and Construction Commission, viewed 26 November 2019 < https://www.abcc.gov.au/building-code/contractors/construction-phase/security-payment>.
Australian Building and Construction Commission, Security of payment questions and answers, Australian Building and Construction Commission, viewed 26 November 2019 <https://www.abcc.gov.au/sites/default/files/sopqanda.docx>.