Security of Payment - Construction Contracts

Find out if your construction contract is covered by the SOP Act.

Contracts must be in writing

For contracts over $20,000, the contract and all variations must be in writing.

Despite this, contracts that are not in writing will still be covered by the SOP Act and the parties will have the same rights and obligations under the SOP Act as they would have if they had a written contract.

If the contract is worth less than $20,000 and is varied during the work, resulting in the value exceeding $20,000, the contract and all variations will be required to comply with the requirements of the SOP Act. The parties may avoid a penalty in the event the subject work was urgent, or it was not reasonably practicable to comply with this requirement.

Does this affect contracts with homeowners?

No. Contracts for home building work worth between $7,500 and $500,000 are not covered by the SOP Act. However, the Home Building Contracts Act includes a requirement for these contracts and any variations to be in writing.

Always put it in writing!

Even if there is no statutory requirement for a written contract to be used, HIA always recommends the use of a written contract. This assists in clarifying the rights and obligations of each party and makes dealing with disputes easier.

Mandatory information must be included

Where the contract is over $20,000, it must include mandatory information, including:

• the names of the parties
• the building service contractor’s registration number (see below for further details)
• a general description of the work to be carried out, or goods or services to be supplied
• the cost of the work, goods or services where fixed
• the way in which the cost is to be calculated if the price is not fixed.

Registration numbers

If the work to be carried out under the contract requires you to be registered as a builder, painter or building surveyor, you will be required to include your registration number in the contract.

However, if you are a registered builder, building surveyor or painter and you are not required to be registered for the purpose of carrying out the work, you do not need to include your registration number.

An example of this may include works under a Preliminary Agreement. Services carried out under this type of agreement include design and drafting services, procuring land surveys and soil information and arranging the planning approval.  A builder does not need to be registered in order to provide these services.

By contrast, under a contract for home building work worth over $500,000, the builder would need to include their registration number as they must be registered to carry out this type of work.

Prohibited terms

Pay-when-paid provisions

A ‘pay when paid’ provision allows a party to withhold payment from another party until such time as they themselves are paid under a separate contract. An example of this is where the builder has a subcontract with an electrician that includes a term that allows the builder to withhold payment from the electrician until the builder is paid under the head contract with the property developer.

You cannot include pay when paid provisions in construction contracts. If these provisions are included they will not be enforceable.

Further, you are not permitted to withhold payment on the basis that you have not been paid yourself. Instead, you are required to meet your payment obligations under a construction contract when a payment entitlement arises.

Notice-based time bars

Some contract clauses require notices to be given by one party to another within a particular timeframe in order for a contractual entitlement to arise. If the notice is given outside of the timeframe, the party may lose their right to that entitlement. Common examples of these types of clauses include the requirement to give notice of an extension of time claim or payment claim within a prescribed timeframe.

Under the SOP Act there types of clauses are allowed in construction contracts as long as they are not unfair. For example, if a payment or extension of time clause includes a notice-based time bar for which compliance is not reasonably possible or is unreasonably onerous, it may be considered unfair.

A party claiming that a clause is unfair must make an application for adjudication or file the matter in court or arbitration. They will also need to provide proof that the provision is unfair. Following that, the adjudicator, review-adjudicator, court or arbitrator may make a determination as to whether the clause has any effect, based on a number of prescribed factors.

HIA has a full suite of contracts for various different job types and contractual relationships. HIA Contracts are available via Contracts Online or as hardcopies in the HIA Stationery Shop.

To find out more, contact HIA's Contracts and Compliance team

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