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

To manage this issue, consistent and compliant contract administration is key to protecting your right to payment. The steps below set out practical measures to support good payment practices and help manage non‑payment issues if they occur.

Step 1 - Ensure you have a contract

In SA, a compliant building contract is required for home building work valued over $20,000. Importantly, the contract must comply with the requirements of the Building Work Contractors Act 1995 (BWC Act). HIA building contracts have been specifically drafted to comply with the Act and to protect builders’ rights, including their entitlement to payment.

A written contract is critical as it provides a clear record of the agreement between the parties and can be relied upon to enforce payment. 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.

Without a compliant contract in place, your ability to recover unpaid monies may be significantly compromised and you may also incur additional fines for non-compliance with the legislation. 

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 at any time throughout the building work or when they are due, Clause 3 of the contract allows the builder to request evidence of the owner’s capacity to pay the remaining contract price. This clause can be relied upon whenever issues arise, such as delayed or missed payments to ensure the owner can continue to meet their financial obligations under the contract.

Alternatively, you may include special conditions that allow you to:

• 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 at the time of signing the contract.

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. Written evidence can be in the form of finance approval from the lender.

Step 3 - Proper contract administration

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

Failure to comply with the correct contractual processes may jeopardise your entitlement to make a claim, for example, entitlement to a variation or to a claim for an extension of time.

Variations must be properly documented in writing whenever they arise. In most cases, the variation should be signed by the client to confirm their agreement. Where a variation is required without the owner’s consent, for example, due to local or statutory authority, it may not be necessary for the owner to sign the variation. However, it remains essential that you notify the owner in writing and clearly communicate the nature and reason for the variation.

When claiming payment for a variation, ensure that the claim is made in accordance with the agreed schedule, timing, and construction stages. For example, if a variation relates to the type of tiles used during the bathroom stage, the cost of that variation should be claimed once the bathroom stage is completed. The amount claimed for that stage will be adjusted to reflect any prime cost or provisional sum adjustments.

It is important to claim variations progressively at the relevant stages rather than leaving them until the end of the building work at final claim. Delayed claims increase the risk that the owner may have forgotten the variation, which can lead to disputes and unnecessary complications. 

Step 4 - Progress payments

If you have completed a progress stage, you are entitled to make a claim for the work carried out in accordance with the agreed schedule. 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 – you should closely monitor these timeframes.

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

• a deposit of up to $1,000 where the work is valued at less than $20,000;
• a deposit of not more than 5% of the contract value where the work is valued at $20,000 and over;
• 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:

• Follow-up with the client to remind them that payment is overdue and seek confirmation that the payment will be made immediately.
• Charge interest on late payments at a rate of 15% per annum. This is often a sensible first step under the contract  and sufficient incentive for the homeowner to make payment.
• Suspension of works may be considered if the client does not respond to earlier steps. Suspending works must be done so in accordance with the contract and must be in writing with sufficient details of the clients breach (i.e. non-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 for contracts and compliance advice or seek independent legal advice.

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

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.