What can I do when a client doesn't pay?

Non-payment during construction is a very common issue in the South Australian building industry, BUT there are ways you can ensure you get paid on time!

How?

Avoid it!

The best way to deal with a payment dispute is to avoid it in the first place.  

Steps 1 – 4 below detail practical measures that you can take to set up good payment practices.  Step 5 and the listed alternative options can assist when a payment claim is overdue.

Step 1 - Ensure you have a contract

A written contract provides a record of the agreement between the parties.  It sets out important information with regard to your right to payment including:

• the contract sum
• finance and evidence of capacity to pay
• progress payment schedule
• timing for payments
• interest and other rights in relation to non-payment and
• process for disputes.

In SA, a written building contract is required for home building work valued over $12,000.  The contract must also:

• be legible
• set out all the terms of the contract
• include the builder’s details, e.g. the licence number and
• be signed by both the home owner and the builder.

If you don’t meet the legal requirements you may have trouble getting paid and may be subject to additional fines.

Regardless of the contract value, it is strongly recommended that you ensure you have a comprehensive written contract in place.  

Step 2 - Confirm the client’s capacity to pay

If all or part of the project is self-funded and you have concerns about the client’s capacity to pay progress claims when they are due, you may include special conditions that allow you to:

• request the client provide you with written evidence that they have sufficient funds
• request the client place money into a trust fund or other form of joint bank account or
• nominate a guarantor by using a deed of guarantee.

Obtaining written evidence from your client demonstrating that they have obtained the necessary finance for the project can ensure that you avoid any payment issues in the future. 

Step 3 - Proper contract administration

In order to avoid payment disputes it is important to ensure you are carrying out the proper contract administration.  This includes:

• ensuring variations to the contract have been properly documented and approved by the client where required and
• if required by the contract, any extension of time processes have been followed. 

Step 4 - Progress payments

If you have completed a progress stage, you are entitled to make a claim for the work carried out under that stage.  When you have made a genuine claim for a progress payment, the client must pay the progress payment within the timeframe set out in the contract.

A request for payment under a domestic building work contract must be a genuine reflection of the value of work performed.  Exceptions to this rule include:

• a deposit of up to $1,000 where the work is valued up to $20,000
• a deposit of not more than 5% of the contract value where the work is valued over $20,000
• payments to third parties for professional services, e.g. engineers, architects and surveyors and
• reimbursement of the cost of home indemnity insurance and other fees associated with the builder work that are required to be paid by law.

For all other building work, while permitted, it could be difficult to justify an entitlement to payment for work that has not yet been completed, except where the contract specifically provides for that type of arrangement.

Step 5 - Responding to non-payment

If the client fails pay a progress claim by the due date, there are a number of steps you can take under the contract.  If you are using the SA New Homes Contract, the options include:

• stop the work under the Contract by written notice until such time as payment is received in full
• charge interest on late payments at a rate of 15% per annum.  In some instances the threat of interest is a sufficient incentive to make payment
• create a charge (or lien) over the property to secure payments under the contract.  A charge will ensure that you are paid for the money you are owed upon sale of the property, following any higher priority payments, such as mortgages. 
  There are strict timeframes and legal processes in relation to charges and legal advice and further advice should be obtained to ensure the appropriate process is followed.
• as a final option, you can terminate the contract.

Termination of a contract is a serious step and should only be taken after obtaining legal advice.  If it is done without a genuine cause, it will give the owner the right to terminate the contract and to seek damages from you. 

Dispute resolution process

The SA New Homes Contract sets out a process under which disputes can be resolved.  This may be in relation to non-payment or any other dispute.  

The dispute resolution procedure provides two options:

• conciliation or
• dispute reference (which begins with conciliation).

HIA has further information on the conciliation and dispute referral processes.

Are there any other options?

Yes.  These options are separate from your options under the contract.  The advantages and disadvantages of each option should be considered in relation to your particular circumstances.

Rapid adjudication

Rapid adjudication is a mechanism of the Building and Construction Industry Security of Payment Act 2009.  It allows a party to a construction contract to make an application for an unpaid claim to be determined by an adjudicator.  An application may be made for a partially of fully disputed payment claim and for an overdue payment claim.

The Act does not apply to domestic building work contracts with home owners who live in, or intend to live in the premises where the work is being carried out.  This means you will not be able to make a claim against a resident home owner.  However, you may be able to make a claim against the owner of the property where the owner does not live in the home or intends to use it as a rental.

HIA has further information on rapid adjudication.

Letter of demand

A letter of demand should set out the amount of money that is outstanding and provide the client with a timeframe in which to make payment.  It also sets out the consequences of non-payment.  It is used as a last resort prior to taking more decisive action such as going to court.

Magistrates Court

The Magistrates Court deals with matters up to a value of $100,000.  Parties are not represented by lawyers when dealing with disputes up to a value of $12,000.  The fees for Magistrates Court are also reasonably low.

Despite this, preparing for court is a very time consuming and costly exercise.  Taking a matter to court may also come with a significant psychological burden.  Before proceeding to court, it is worthwhile considering whether there is any opportunity to resolve the dispute in another way.

In addition, where the parties have agreed to alternative dispute resolution (ADR) under a contract, the Court may require the parties to honour their contractual agreement and proceed through ADR instead.

Where can I obtain further information?

Before exercising any contractual or legal rights, it is important that you read the contract carefully and if you are unsure contact HIA or seek independent advice.

HIA’s building contracts, trade agreements and variation forms are available via Contracts Online.

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

Email us