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Top tips on avoiding payment disputes with homeowners

Late or non-payment is a common issue in the building industry. If you are owed money under your building contract, you might be able to make a security of payment claim, initiate legal proceedings and obtain a judgment order, issue a statutory demand, wind up a company or bankrupt an individual.

It is important to ensure you understand the ‘red flags’ of when a home owner may be in financial distress and the steps you can take when you are owed money prior to commencing legal action. If you are a subcontractor and worried about the financial position of parties you are contracting with, read hereHIA also has information on statutory demands, company debts and windups and bankruptcy proceedings.

Before you sign a contract

The best way to avoid dealing with a payment dispute is to avoid it in the first place. By following these practical measures, businesses can set up good payment practices, be aware of what to look out for when it comes to financial issues with homeowners, and other options available when a debt remains unpaid.

Early prevention is key

Businesses should understand the ’red flags’ of financial distress to prevent a debt from escalating. Some signs that a homeowner may be in financial distress include:

  • Regular late payment.
  • Sale or repossession of assets.
  • Other contractors and businesses complaining of late or non-payment.
  • Requests to vary the works because they are no longer able to afford them.

If the homeowner is displaying any of these red flags, this may be a sign for you to reconsider undertaking significant works without obtaining evidence of their capacity to pay or without doing further due diligence checks (such as discussing the issues with them).

Pre-contract due diligence

Before signing a contract, carry out appropriate due diligence including:

  • Finance checkObtain written evidence (if permitted) of the homeowner's capacity to pay under the contract. 
  • Heard a rumour? Don't ignore information from other businesses. If you hear rumours of late payments or credit issues about a homeowner, this is a sign of trouble.

Ensure you have a written contract

A contract is a written record of the agreement between the builder and homeowner. The contact sets out important information about to your right to payment including:

  • The contract price.
  • Finance and evidence of capacity to pay.
  • Progress payments.
  • Timing of payments.
  • Interest and other rights in relation to non-payment.
  • Process for disputes.

If you don't have a contract, you may have trouble getting paid.

During your contract

Follow your contract processes

It is important to follow the contract processes strictly and ensure you are carrying out proper contract administration. This includes:

  • Variations - Ensure your variations have been properly documented and approved by the homeowner where required.
  • Extensions of Time - Any extension of time notices to be given in accordance with the required timeframes and approved where required.
  • Capacity to pay - If you have concerns about your client's capacity to pay, for the building works, HIA contracts provide builders with the option to request written evidence of their capacity to pay.
  • Progress payments - Ensure you are only issuing progress payment claims for works you have completed. Builders are generally prohibited from making a claim for incomplete works.

Responding to non-payment

If payment is late, you should follow the steps available under your contract. HIA contracts may provide options including:

  • Suspension - Suspend the works under the contract until such time as payment is received in full.
  • Interest - Charge interest on late payments.
  • Caveat - If agreed to by the homeowner, you may be able to lodge a caveat over the property to secure payment pursuant to the terms of the contract. A caveat will prevent the owner from selling the property without first discharging their debt to you. Before lodging a caveat, it is important to first obtain legal advice as a caveat has severe consequences.
  • Breach notice - You may issue a notice of breach of contract to the owner requiring that they rectify the default.
  • Termination - If the breach notice is not rectified, as a final option, you can terminate the contract.

It is important to check your individual contract terms to understand what options are available to you.

Security of payment options

In some jurisdictions, the rapid adjudication process under security of payment laws allow unpaid builders and contractors to recover overdue payments from a homeowner quickly and in a less expensive way compared to traditional legal proceedings in court. If considering this option, make sure you check your local requirements.

Letter of demand

A letter of demand is a time and cost effective debt recovery tool. Generally, the demand will provide the debtor with 7 days to pay the debt, failing which the creditor may commence legal proceedings to recover the full amount.

HIA contracts provide builders with the right to recover debt collection costs which can include costs incurred from solicitor letter of demands.

Commence legal proceedings

If all other steps have been unsuccessful, you may consider commencing legal proceedings in your local court. The court that you commence in will depend on the value of the debt. The debt may also be dealt with via a tribunal before it is heard by a court which can often be a more time and cost efficient process for parties.

Before taking any action

Commencing legal proceedings is a serious and complex step. Ensure that you understand your rights, responsibilities and risks in taking these steps by consulting with your solicitor before taking any of the legal steps outlined above.

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