Security of payment (SOP)

General principles

SOP legislation helps to ensure the party or parties to a construction contract receive timely payment of all claims made which relate to the work carried out in respect of the building project. While the legislation aims to protect the payment rights and cashflow of contractors, subcontractors, consultants and suppliers, it has ramifications for architects and owners. Importantly, the legislation also applies generally to claims for payment made by consultants who carry out construction-related services for their clients. To come within the scope of the SOP legislation, contractors, subcontractors, consultants (including architects) or subconsultants need to be a party to a contract to carry out ‘construction work’ or for ‘related goods and services’ as defined in the relevant state/territory legislation. 

The legislation provides a mechanism to deal with disputed claims in a manner which is intended to ensure a speedy resolution of the dispute, known as adjudication. As the legislation and the case law has developed, it is becoming clearer that payments made under the legislation are ' on account on account Payments made 'on account' are payments that are provisional as a partial advance payment to the final price. In the construction context, a payment made 'on account' does not signify that the person paying the amount accepts the work or services the invoice relates to. This leaves it open for the principal, or the head consultant, paying the invoice to later claim defects in the work or a shortfall in the standard of the services. View full glossary ' in relation to the contract price. Adjudication decisions about disputed claims should be seen as disputes about the timing of payment under the contract. Nevertheless, the timing of payment can be significant for both contractors and owners.

Architects should be aware that progress claims made by a contractor in accordance with the provisions of the standard forms of contract are not (or should not be) claims under SOP legislation. The contractor's claim only becomes a claim under the legislation when the claim is submitted to the owner as a claim stated to be made under the relevant SOP legislation.

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Why is it important to be familiar with this legislation?

A claim made under the legislation must be identified as such and must include particular information setting out the detail of the claim. Architects should be aware that in NSW and Queensland, a supporting statement is required to be provided when a payment claim is served by a head contractor on a principal.

There are important reasons why the architect and owner should be prepared in advance for the possibility of claims under this legislation. Depending on the contracting arrangements and scope of an architect’s services, the architect may be:

A. The ‘head consultant’ who receives a SOP payment claim from a subconsultant it engaged directly and needs to assess and respond to that payment claim.

B. The owner’s consultant who makes an SOP payment claim on the owner.

C. Specifically authorised by the owner/principal to receive SOP claims and to respond to SOP payment claims on behalf of the owner.

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If you are handling SOP claims on behalf of the client?

If the architect is acting in the capacity as a superintendent, project manager or principal’s representative under a contract and has been authorised to manage and respond to SOP payment claims on behalf of the owner, the architect will have to assess the payment claims made by a contractor to determine how much should be paid and to then follow the applicable SOP process and timelines. SOP responsibilities can include an increased risk exposure from a Professional Indemnity (PI) insurance perspective. Architects should disclose any superintendent, project management and/or principal representative services to their PI insurer to ensure the appropriate coverage is provided. The architect will typically still assess and value a payment claim in accordance with the contract, to determine either of the following:

• That the full amount claimed should be paid.
• That only a partial amount claimed should be paid.
• That none of the amount claimed should be paid.

Wherever an assessment is made that does not involve paying the full amount claimed, the legislation requires that the party claimed against (the Respondent) provide reasons for not accepting the full amount, or not accepting the specific components of the full amount claimed. In a typical SOP claim under a construction contract, the Respondent is the owner and not the architect on behalf of the owner. The reasons must be provided between 10 – 20 days (depending on the state or territory SOP Acts) after receiving a payment claim. If payment is not made in full and if a disputed assessment and reasons are not given, the legislation states that the amount claimed in the payment claim must be paid in full. It is therefore imperative that the architect keeps on top of their records in a timely manner to either assess as payable the full amount claimed, dispute the amount claimed and only pay the portion which is not in dispute, or reject the claim entirely.

For the owner, the reasons are various and may involve considerable additional expenditure outside project budgets, legal or otherwise, if adjudication or court proceedings result. The architect should always recommend that the client get legal advice as soon as possible to ensure that timelines are met and minimise consequent costs.

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What does the legislation do?

The stated intent of the legislation for those who carry out construction work or related goods and services is to:

• provide a legal right for progress payments if the construction contract does not do so
• remove the right to withhold payment until paid by another person ('pay when paid')
• set up an adjudication scheme for disputed payments.

In certain circumstances, the SOP legislation protects against inability to pay (eg due to insolvency).

While there is some recognition of the usual terms of construction contracts, the general approach of the legislation is to impose a one-size-fits-all process over and above any existing contractual provisions protecting the parties. In some jurisdictions, the SOP processes might impose over the contractual right of the contractor to be paid regularly and, significantly, any certification process by the architect. Most importantly, almost all SOP legislation prohibits any attempt under the contract to limit, impede or exclude (ie no ‘contracting out’) the application of the rights and processes in the SOP legislation and the legislation makes those contractual provisions void. In effect, the SOP legislation imposes mandatory minimum standards and timings for assessing and paying claims, yet permits the contract to provide for standards and timings that are more ‘generous’ to the contractor than the mandatory minimum.

This approach has the potential to unnecessarily negate or duplicate contractual procedures, making otherwise workable provisions more complex, or even useless. Some states impose minimum protections into construction contracts as a complement to the contract, or permit the timeframes in the contract to decide the time for submitting and responding to payment claims.

However, apart from the minimum protections imposed, the legislation will only apply if, and only if, the contractor invokes it for a particular progress payment claim.

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How is the SOP legislation invoked?

The SOP legislation is invoked by the contractor making a 'payment claim' on the owner and expressly stating in the claim (typically supported with an invoice) that the claim is made pursuant to the applicable SOP Act. Contractors who make a payment claim need to do so within the period of time set out in their contract (often referred to as the ‘reference date’) or, if there is no express provision with respect to a reference date in the contract, then the time that is set out in the SOP Act will apply.

The payment claim typically must contain the following:

• Identify what construction work the contractor has done or the goods or services supplied to which the claim relates.
• The amount of the payment claimed.
• Be in the form of a request for payment of the claimed amount (an invoice is generally satisfactory).

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To what construction projects does the SOP legislation apply?

The legislation applies to almost all commercial construction contracts involving building work.

There are limited exceptions for:

• the construction of single houses, generally where the house is for the client (varies state-by-state)
• finance agreements for use in the building industry (referred to as ‘tripartite’ agreements)
• in some states, construction contracts in the oil and gas and mining industries.

We recommend that you become familiar with the exemptions in the particular state or territory in which the project is located or where the construction-related services are performed.

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A general guide: Application of the SOP legislation

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Conclusion

Where SOP legislation is invoked, the owner will almost certainly have more work to do, with which the architect can only assist to a limited extent. The owner may also bear compliance and financial risk, for example if they don’t meet the SOP timeliness or requirements.

Some contractors or consultants may routinely make progress claims as payment claims under the SOP legislation, which they have a statutory right to do. Other contractors may never resort to the legislation or use it only when they believe prompt payment may be at risk, or in circumstances where the contractor-owner relationship has become strained.

Administering a payment claim under the legislation can be more complex (and risky). So for architects, prompt, clear, impartial and consistent certification of progress claims is essential. This will help maintain the confidence of the contractor and give the owner the information it needs to meet its payment and SOP obligations.

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