Key developments in Victorian Security of Payment legislation – 10 reforms to watch

The Victorian Government recently issued a response confirming its support for all 28 of the recommended reforms to the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) following a parliamentary inquiry in 2023.

Security of Payment legislation regulates payment processes and payment disputes within the construction industry. It aims to ensure that subcontractors and other constriction industry participants are paid in a timely, efficient and cost-effective manner.

One of the key findings of the parliamentary inquiry was that ‘Victorian construction businesses are currently operating in a difficult economic climate characterised by persistent supply chain issues, increased building material costs and skills shortages. However, poor payment practices predate these challenges. They are a long‑standing issue in the industry that must be addressed.’

The proposed reforms will be the most significant construction law reform in Victoria for decades, simplifying payment processes and streamlining the adjudication of payment disputes for a broad range of construction industry participants.

 Key changes

1. Abolishing the ‘excluded amounts’ regime

Victoria is unique amongst other states and territories in that the SOP Act includes a concept of ‘excluded amounts’ that cannot be claimed under the Act. These amounts include specified ‘non claimable’ variations and amounts relating to latent conditions, time-related costs (including liquidated damages), changes in regulatory requirements and damages for breach of contract. Abolishing the excluded amounts regime is expected to simplify the process of preparing payment claims under the SOP Act, better aligning Victorian security of payment law with that in other Australian jurisdictions and ensuring that subcontractors are able to make claims that more accurately reflect the amount they are owed.

2. Abolishing the concept of a ‘reference date’

A key concept in the SOP Act is that of the ‘reference date’ which determines when a person is entitled to a progress payment and when a payment claim can be served. A payment claim that does not have a reference date is invalid. Identifying a reference date for a payment claim can be complex and is known to cause confusion and unfairly prevent legitimate payment claims from being submitted. The concept is also open to manipulation as a number of submissions to the inquiry noted the practice of some head contractors strategically invoking termination clauses prior to a reference date to avoid paying subcontractors for work performed. In place of a reference date, it is proposed that Victoria follow the New South Wales approach of allowing contractors to submit one payment claim every calendar month (or more frequently if a contract provides) and following the date of termination of a contract.

3. Introducing a Christmas shut down period

The definition of ‘business day’ will be amended to introduce a shutdown period between 22 December and 10 January. During this time, payment claims, payment schedules and SOP adjudications will be treated as on hold for the purposes of the strict timeframes within the Act. This change will enable construction industry participants to take time off over the Christmas period and avoid the many practical challenges involved with responding to a payment claim or adjudication application during this time.

4. Empowering adjudicators to declare a time bar ‘unfair’

It is proposed to curtail notice-based time bars within construction contracts by allowing adjudicators to declare them ‘unfair’ and set them aside, if compliance with the time bar is not reasonably possible or is unreasonably onerous. This change is aimed at protecting parties with inferior bargaining power who may find themselves time barred from receiving payment under an otherwise legitimate payment claim.

5. Extending the time limit on submitting payment claims to six months

Currently in Victoria a person has only three months after completion of the relevant construction work in which to submit a payment claim under the SOP Act. This is the shortest timeframe in Australia. The proposal is to extend this period to six months or later if provided for in the contract. This change is said to be fairer for many small construction businesses that may lack the expertise or resources to chase up unpaid invoices immediately. It will also allow parties more time to achieve a negotiated outcome where there is a dispute about a claimed amount or the work performed.

6. Introducing uniform payment terms

It is proposed to limit payment terms to a maximum period of 25 business days after a payment claim has been submitted (or earlier if specified in the contract). If the contract is silent on when payment is due, it will be due within 10 business days after a payment claim has been submitted. This reform is aimed at prohibiting lengthy payment terms being imposed on subcontractors because of unequal bargaining power with upstream construction industry participants. The introduction of a maximum timeframe for payment is also consistent with other states and territories across Australia.

7. Entitlement to claim retention money

The inquiry noted that issues with claiming back retention money at the conclusion of a construction project have become commonplace. This is especially problematic as retention often represents a subcontractor’s entire profit on a construction project. The proposed reforms will provide an entitlement to claim retention money under the SOP Act, either as part of a broader payment claim or as a standalone claim, and empower an adjudicator to decide whether, when and how much retention money is to be returned.

8. Prohibition on raising new reasons for non-payment

Victoria is the only jurisdiction that allows respondents to add new reasons for non-payment of a payment claim, that were not previously included in a payment schedule, into its responses to an adjudication application. This practice is known to consume adjudicator time and attention in discerning which responses are ‘new’ as well as adding time and cost to the adjudication process overall with claimants given two business days to respond to the new reasons. Incorrectly identifying the respondent’s reasons can also serve as grounds for a court to set aside an adjudicator’s determination. A prohibition on adding new reasons for non-payment beyond those included in a payment schedule is therefore expected to streamline the adjudication process and increase certainty in an adjudicators’ determination.

9. Shortening the deadline for adjudication determinations

There is currently a statutory time limit of 10 business days after accepting a case for an adjudicator to provide its determination of an adjudication application, with an extension available of up to 5 business days if agreed by the claimant. The inquiry noted that this comparatively short timeframe can impact the quality of adjudication outcomes and increase the chance of determinations being overturned by a court. Various timeframes were considered by the inquiry but ultimately the Victorian Government supports the introduction of a 10 business day timeframe from:

• a respondent providing a valid adjudication response;
• the date an adjudication response became due; or
• if the respondent is not entitled to provide an adjudication response, the date the adjudicator accepted the adjudication.

There will also be a possible extension by agreement of up to 20 additional business days. This approach is consistent with Western Australia.

10. Consideration of statutory trust regimes

The inquiry recommended that the Victorian Government work with the construction sector to consider the application of a cascading deemed statutory trust regime or retention trust scheme to improve subcontractors’ prospects of being paid for the work they perform.

The Parliamentary Enquiry into the SOP Act has revealed substantial shortcomings with the current legislation and emphasises the imperative need for reform. Victoria is well known to be behind other states regarding SOP legislation and the proposed reforms will go a long way in addressing this situation. A timeframe for the implementation of the reforms has not yet been identified but they will likely be introduced in the short to medium-term.

Gadens will be following the status of the proposed reforms closely and will be supporting clients to transition to new payment and adjudication processes as the reforms continue to progress.

In the meantime, if you have any questions about the reforms, please contact our team.

Authored by:

Daniel Middleton, Partner
Sarah Zampaglione, Senior Associate