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Security of payments and performance security
In this article
SOPA allows a contractor to:
- a statutory entitlement to receive progress payments for construction work
- Utilise procedures established for interim adjudication of progress payment disputes
- Recover unpaid progress payments as a debt; and
- Recover security determined by adjudication to be payable.
Who can make a payment claim under SOPA?
SOPA allows a person who has undertaken construction work or has supplied related goods and services under a construction contract to make a progress payment claim. Such persons include:
- A contractor against the principal
- A subcontractor against the head contractor or principal
- A supplier against the principal; or
- A building consultant against the principal.
Can a builder make a payment claim under SOPA against the homeowner?
At present, a residential builder cannot make a SOPA claim against their residential owner-client. Disputes with the residential owner-client in relation to such matters will need to either be referred to the Building and Plumbing Commission (BPC) for dispute resolution, or the builder can seek legal advice from a construction lawyer about their contract enforcement options.
Payment claim procedure for recovering progress payments
The initiating party (the ‘claimant’) is entitled to make one payment claim per month on and from the last day of the month which the work was first carried out. This means, the claimant can submit a claim on 30 April 2026 if the works were first carried out on 1 April 2026.
Whilst the claimant can only submit one claim in one month, they are permitted to roll any outstanding claims from previous months into the next month. For example, if the above example 30 April 2026 claim remains unpaid, the claimant can roll the 30 April 2026 and 29 May 2026 claims together.
The latest a payment claim cannot be served is the later of:
- the date determined under the contract; or
- six (6) months after completion (or practical completion (PC) under commercial arrangements) of all construction work under the contract; or
- six (6) months after all goods and services are to be supplied under the contact.
The claimant must ensure that the payment claims contain the following information:
- Identification of the construction work and/or goods and services to which the progress payment relates to
- A stated claim amount that is due for the work and or goods and services provided (state the dollar value); and
- A very clearly drafted statement of “This is a payment claim made under the Building and Construction Industry Security of Payment Act 2002 (Vic)”.
The claimant must serve the payment claim on the respondent (the other party who owes the outstanding amounts) in one of the following methods:
- In person: The claim is deemed served when it is handed to the respondent.
- Mail: The claim is deemed as served two business days after the day it was posted to the respondent’s ordinary place of business – this may mean the claimant will need to look up the address on ASIC’s database.
- Email: The claim is deemed as served at the time of transmission, unless the claimant is notified of an error. It is recommended for the claimant to ensure that the delivery and read receipts are turned on before serving the claim under this option.
Responding to a payment claim
Upon being served the payment claim, the respondent will need to either:
- Pay the whole amount stated in the payment claim by the due date; or
- Dispute the amount stated in the payment claim with a payment schedule.
The respondent has 10 business days to serve the claimant with a payment schedule in response to their claimed amount.
A failure to serve the payment schedule within the deadline will result in the claimant being entitled to a payment of the full amount, and this may be recovered in court through a judgment debt process.
The payment schedule will need to include the following information:
- A statement identifying the payment claim that it relates
- The amount of payment the respondent proposes instead (the scheduled amount); and
- A statement of reasons as to the difference between the scheduled and claimed amounts.
The claimant is entitled to pursue the following options if the payment schedule proposes to make a payment lesser than what is claimed or the respondent disputes the claim and does not make any payment at all:
- Conduct further negotiations with the respondent to arrive on an agreed amount
- Exercise a lien over unfixed materials
- Apply to adjudication; or
- Apply to court for a judgment debt.
Adjudication
The claimant may choose to lodge an adjudication application with their chosen Authorised Nominating Authorities (ANAs) if:
- The respondent fails to serve a payment schedule in time; or
- The respondent fails to make payment (full or agreed amount) in time; or
- The claimant disagrees and disputes the proposed payment schedule.
In addition, the adjudication process further permits the hearing of matters associated with latent defects, time-related costs and any changes affecting regulatory requirements.
However, the respondent will need to ensure that, if a payment schedule is served, it will need to state all the reasons and identify its supporting evidence within the schedule, as the respondent is prohibited from raising any new reasons for withholding payment at adjudication.
The timeframe that a claimant has will depend on the circumstances.
| Respondent fails to serve payment schedule in time | Respondent fails to make payment (full or agreed amount) in time | Claimant disagrees and disputes the proposed payment schedule |
| The claimant has 5 business days to lodge an adjudication application and will have 3 business days to serve on the respondent. |
The claimant has 10 business days to lodge an adjudication application and will have 3 business days to serve on the respondent. | Claimant has 10 business days to lodge an adjudication application and will have 3 business days to serve on the respondent. |
The adjudicator will have 10 business days from the date of appointment, or the date which the respondent lodged an adjudication response – whichever is later – to deliver their determination.
The turnaround timeframe of the determination can be extended to a maximum of 20 business days if it is agreed amongst all parties.
However, the respondent will have 5 business days (or more if agreed to by the adjudicator) to pay the adjudicated amount. Should the respondent fail to make this payment, the claimant can either:
- Suspend the building works after providing 3 business days’ notice, obtain an adjudication certificate and file with the court to recover the owing debt; or
- Apply directly for a judgment debt with the court.
Meaning of business days
Business day means a day other than:
- Saturday or Sunday
- A public holiday
- A day during the period commencing on 22 December in any year and ending on 10 January in the following year.
The definition of business day has been amended to ensure the traditional industry shut-down period over the Christmas and New Years’ break is not calculated to ensure that parties do not inadvertently breach any deadlines.
Notice-based time bars
A notice-based time bar is a construction contract clause requiring a party (usually the contractor) to submit a formal notice within a strict time period. Whilst contracts can include notice-based time bar clauses, SOPA empowers an adjudicator, a court, an arbitrator or an expert determiner the ability to ‘declare’ those time-bar clauses to be ‘unfair’ if compliance would be unreasonably onerous or not reasonably possible.
The decision maker will consider the following in reaching their decision:
- Whether the party to provide the notice would have been reasonably aware of the last day which the notice could be given; and
- When and how the notice was given; and
- The bargaining power of each party to the contract; and
- Whether adherence to the clause would be unreasonably onerous or not reasonably possible to comply with.
The onus of the above factors lies on the party seeking to avoid the time bar (not reading or understanding the terms is not sufficient).
Whether a time bar clause is unfair will be determined on a case-by-case basis. However, if the time bar clause has been declared as invalid, the clause may continue to operate in other circumstances, but it does not invalidate the remainder of the contract.
Performance securities
A construction contract may require a contractor provide a financial security (called a performance security) to the principal to be held until performance under the contract has been met. This financial security can be in the form of:
- A bank guarantee; or
- A bond; or
- A percentage of money retained (retention money) in a bank trust account that is owed under the contract.
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The above is intended to provide general information in summary form. The content does not constitute specific advice and should not be relied upon as such. Formal advice should be sought by members and customers with respect to particular matters before taking action.
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