GETTING PAID WHAT YOU’RE OWED: CHANGING THE RETENTION CULTURE

I know we said we were going to give you a series of articles on the adjudication process, however, we think this warrants diversion. 

We recently attended the Queensland Building and Construction Commission’s (“QBCC”) information session on ‘Invoice and Payment Practices’. Listening to the questions from the audience, we realised one of the biggest concerns in the industry at present is in relation to the release of retention amounts at the end of a contract’s defects liability period.

Most of the focus over the last year has been spent highlighting the changes to industry practice brought about by the introduction of the Building Industry Fairness (Security of Payment) Act 2017 (“BIF Act”) and the repeal of the Building and Construction Industry Payments Act 2004 (Qld) and Subcontractors’ Charges Act 1974 (Qld), not to mention the controversy over project bank accounts. Slipping through the cracks, although just as important, the introduction of the BIF Act also saw additions to Part 4A of the Queensland Building and Construction Commission Act 1991 (“QBCC Act”) relating to building contracts (as defined in Part 4A of the QBCC Act). Have no fear, we are here to help.

The words that appear in italics in this article have special meaning, defined in the QBCC Act.

So, what’s new?

On 10 November 2017, the BIF Act introduced sections 67NA–67NC into Part 4A of the QBCC Act. These sections, which commenced operation on 17 December 2018, provide:

  • if a contract does not specify a defects liability period and a retention amount or security is held under the contract, a statutory defects liability period of 12 months starting on the day of practical completion of a building contract now applies. It is parliament’s intention that this provision will create certainty for when a retention amount or security is to be released, ensuring contracted parties are paid what they are owed, when they are owed;

  • if a retention amount is retained under a building contract, the contracting party must, unless they have a reasonable excuse, release the retention amount to the contracted party in accordance with the contract. This provision carries with it a maximum penalty of 200 penalty units ($26,100) or one (1) year imprisonment for failing to comply. A retention amount paid into court to satisfy a notice of claim under the BIF Act, or an amount subject to dispute between the parties to the building contract is exempt; and

  • where a retention amount or security is held under a building contract, a contracting party must give the contracted party a notice within 10 business days (in the approved form found on the QBCC website) prior to the end of the defects liability period stating the following:

    • the date the defects liability period ends;

    • for a retention amount:

      • the retention amount to be paid to the contracted party at the end of the defects liability period, if no amount is required to correct defects in the building work under the contract; and

      • the date the retention amount is to be paid to the contracted party.

In circumstances where the defects liability period in a subcontract is linked to another building contract, the contracting party must give the contracted party notice within 5 business days.

Failing to provide a notice under this Part is an offence and attracts a maximum penalty of 100 penalty units ($13,055).

Do these changes apply to you?

Part 4A of the QBCC Act applies to building contracts for building work carried out in Queensland. This does not include a domestic building contract for work on private residences, or a contract exclusively for construction work that is not building work as that latter term is defined in the QBCC Act. Therefore, if you carry out work on homes or carry out construction work other than building work, for example, work related to public bridges, roadways and tunnels or water reticulation systems and stormwater drains, this Part may not apply to you.

Even though the amendments to the QBCC Act may not apply to you, most construction contracts include retention. Therefore, it is important you are aware of your rights and obligations.

So how do you ensure you’re not out of pocket?

Most contracts allow for a principal or a head contractor (the contracting party) to require a contractor or subcontractor to provide a form of security to guarantee the performance of works under a contract and to safeguard against defects in the event the contracted party fails to satisfactorily rectify them. The simplest form of security is where the principal or head contractor withhold a specified sum of money from a contractor’s or subcontractor’s progress payments. In practice, up to 10% retention is commonly withheld from each progress claim until up to 5% of the contract sum is retained. Once the retention limit is reached (as determined by your contract), no further retention amounts can be deducted from any progress claim.

Usually, the retention is released over two (2) stages of a contract:

  1. 50% at the time of practical completion; and

  2. the remaining 50% upon the expiry of the defects liability period.

The usual practice is for the works to be inspected at the end of the defects liability period, unless there is an urgent need for immediate rectification. The contracted party then attends to any necessary defects and, once satisfactory, retention is released. Release of retention is sometimes contentious. Further, many contracts have a limitation period in which the retention can be claimed and it is quite surprising the number of contractors and subcontractors who are not following up on amounts rightfully owed to them, within the time limits required.

Another issue we see often that further complicates recovering retention is the principal or head contractor may not issue a notice of practical completion. As most defect liability periods run from the date of practical completion, a contractor or subcontractor can have difficulty knowing when the defect liability period is set to expire, often resulting in the limitation period expiring before they can claim the balance of their retention. The amendments to Part 4A discussed above will help solve that problem for building contracts but not those contracts excluded from that definition.

Pay when paid provisions

Something else about retentions you may not know is that payment of withheld retention monies cannot be conditional or dependent upon events or obligations under another contract. For example, a subcontract that provides for the defects liability period to end when the defects liability period ends under the head contract.

Section 74 of the BIF Act provides that a ‘pay when paid’ provision in a construction contract is void. In its simplest form, a ‘pay when paid’ provision is a term that makes payment to the contractor or subcontractor or an entitlement to claim payment, contingent upon the principal or head contractor being paid, or on the occurrence of some event or circumstances under another contract. 

In the recent decision of Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5 the High Court took a broad approach in defining a ‘pay when paid’ provision and determined that certain terms in a subcontract tying the release of retention monies to an event under the head contract will constitute a ‘pay when paid’ provision and consequently be void. What this means is clauses in construction contracts that tie the release of retention monies to an event under the head contract and not to the completion of the subcontractors works (and any other obligations under the contract) will likely constitute a ‘pay when paid’ provision and consequently, be void.

Therefore, you may be entitled to claim the final retention amount under the contract prior to the end of the defects liability period if release of the retention is contingent on performance of the head contract. In order to make a final payment claim under the BIF Act you must claim before the end of the longest of the following:

  1. the period under the contract, if any;

  2. 28 days after the end of the last defects liability period; or

  3. Six (6) months after the completion of all construction work to be carried out or the completed supply of all related goods and services.

If you do not claim within this time, you may not be entitled to apply for an adjudication. However, you may still have rights to the retained sum through the courts. Which of those limitation periods apply may depend upon the terms of the contract and whether the provisions about the defect liability period are void or not.

Take-away:

  • Understand your rights and obligations under the contracts you enter and ensure you administer those contracts properly. Having quality specialist legal advice readily available in the event of any doubt can greatly assist in ensuring you are paid what you are owed. Remember, retention is money owing to you under the contract.

  • If you are a subcontractor, always have in writing the date of practical completion for the portion of the works you are contracted for. This should be done as soon as possible after the works reach practical completion to ensure you are not liable to the contractor for longer than necessary or that your rights to claim the balance of retention held is not lost.

  • if you are a head contractor or subcontractor, insist upon the principal/superintendent or head contractor issuing a certificate of practical completion or at least an acknowledgement so that you have an undisputed date from which to calculate the defects liability period.

  • If you are a head contractor, consider negotiating longer defect liability periods with subcontractors to overcome potentially void ‘pay when paid’ clauses. Extended defect liability periods in subcontracts may cover the likely period of the head contract.

  • If required, set up automated systems to ensure you give the appropriate written notifications at the expiration of the defects liability period to avoid penalty by the QBCC. The approved form can be found on the QBCC website.

  • You may be entitled to interest for any amount paid late, including retention.

  • We cannot stress enough how important it is to keep good records of all projects you are engaged in.

If you need any assistance in determining whether your contract is a building contract or how to comply with the new provisions of the QBCC Act, call us today.

Active Law’s construction team are very experienced in all aspects of construction law including statutory compliance and defence against prosecution, as well as all other aspects of law affecting the construction industry. The construction team at Active Law can swiftly identify your rights and obligations and can ensure you make the best submission possible in your circumstances. Active Law’s Paul Hick is an experienced construction lawyer with 35 years of construction experience. He is also a senior adjudicator under security of payment legislation in numerous states around Australia. Formerly employed with the QBCC, Active Law’s Emma Ward, has invaluable insight into QBCC process and legislation.