A win for home builders: but homeowners beware

From 1 March 2021, the NSW Government has extended the Building and Construction Industry Security of Payment Act 1999 (SOP Act) to apply to contracts between residential builders and homeowners. This will significantly change how residential builders are paid, and how payment disputes are resolved.

What is the SOP Act all about?

The SOP Act aims to ensure that any person who carries out construction work (or supplies related goods or services) can recover progress payments for carrying out that work. It achieves this goal by creating a right to claim payment, and a regime for the prompt resolution of disputes about payment by way of “adjudication”; a rapid, written dispute process where payment entitlements are determined by an independent adjudicator.

Why the change?

The SOP Act previously did not apply to contracts with homeowners (that is, “owner-occupiers” who reside in or intend to reside in the premises that are the subject of the construction contract). This meant that residential builders could not make claims under the SOP Act, even though subcontractors who carried out work on the same project could make such claims against the builder. This put builders in a difficult financial position if the homeowner had not paid the builder, but the builder was obliged to pay subcontractors.

Key changes

From 1 March 2021, contracts with homeowners for residential building work are now subject to the SOP Act. This means that:

• Residential builders can submit progress claims to homeowners monthly, even if the contract only allows claims to be submitted on completion of certain milestones
• If the contract doesn’t specify a due date for payment of progress claims, payment is due 10 business days after the claim. Penalties apply for homeowners’ failure to pay on time, including suspension of work
• Unpaid progress claims attract interest, even if the contract doesn’t allow interest
• Homeowners need to provide a payment schedule within 10 business days of receiving a claim (or an earlier time specified in the contract)
• If homeowners do not provide a valid payment schedule in time, they will become liable to pay the whole amount of the claim
• Disputes about progress payments can be referred by the builder to adjudication

What homeowners need to know

Homeowners who engage a builder after 1 March 2021 should familiarise themselves with the SOP Act, and how it works. This includes for renovations, new home builds, and repairs.

For contracts entered after 26 June 2021, and with a value over $20,000, builders must provide homeowners with a copy of the “Security of Payment Guide” published by NSW Fair Trading. Homeowners should carefully read this document, and keep it in a safe place for ease of reference.

In particular, homeowners should be aware that the SOP Act imposes obligations that may not appear in their contract with the builder, or may be different to the terms of their contract. If there are any concerns or disputes about progress claims submitted by builders, homeowners should carefully prepare a payment schedule, within time, which includes detailed reasons for disputing the claim. Failure to do so, can make homeowners liable for the full amount of the claim, and if that claim goes to adjudication, homeowners cannot raise any reasons for non-payment not already included in their payment schedule.

Adjudication decisions in a builder’s favour can be entered as a judgment debt in Court against the homeowner.

Disputes about the quality of work or any overpayments can still be referred to NSW Fair Trading or to the NSW Civil & Administrative Tribunal, but such claims will not delay a builder’s entitlement to be paid under the SOP Act.

What builders need to know

Residential builders should update their contracts and standard payment claim forms to ensure that they align with both the SOP Act and the Home Building Act 1989 where necessary.

For contracts entered into after 26 June 2021 and worth more than $20,000, builders need to ensure that a copy of the “Security of Payment Guide” is provided to homeowners or risk fines of up to $8,800 for a corporation or $4,400 for individuals.