Administering security of payment claims

Overview of SOP claim process

SOP legislation is in effect in each state and territory, setting out the entitlement to make a claim, the resolution of payments disputes and the process for recovering payment, for construction work which falls within the application of the SOP legislation. While the general purpose and effect of SOP legislation in each state or territory is the same, there are some important differences in the procedural steps for issuing and responding to a payment claim and the time frames that apply. If a party doesn’t comply with these requirements or timeframes, such as missing a specified deadline for responding to a claim, it can have significant and ‘automatic’ financial and legal consequences.

The guidance in this note is general in nature and doesn’t discuss the differences in the process or timeframes for making and disputing payment claims under the SOP legislation applicable in any particular state or territory. Navigate the Acumen side menu to access state and territory-specific guidance.

In general terms, the SOP claim and response process in each state and territory involves the following steps:

1. Contractor submits a SOP claim for the value of construction work or services performed, that is compliant with the requirements of the applicable SOP legislation.
2. Owner pays agreed amounts in full or disputes the amounts and responds to the contractor with a payment schedule/notice of dispute within the strict (and potentially short) timeframes. The timing for making payment of agreed claimed amounts is typically determined by the construction contract, otherwise it is the timeframe set under the applicable SOP legislation.
3. If the owner does not respond within the applicable time frame, they must pay the full amount claimed by the contractor in the SOP claim and may also lose the right to challenge the amounts or defend the enforcement of the payment.
4. If there is a payment dispute (the owner doesn’t accept the full amount of the SOP claim), the contractor may apply for the claim to be adjudicated. The owner can prepare and respond to that application within the specified timeframes.
5. The adjudicator then determines the amount payable by the owner in respect of the disputed SOP claim.
6. The parties may have rights to litigate or further arbitrate the payment dispute in accordance with the contract.

Refer to the flowchart below as a visual guide on the typical SOP claim process.

It is important to note that the architect is not a party to a SOP claim made by a contractor and does not have a specific role under the SOP legislation, in a SOP claim, or payment dispute between the owner and contractor. The architect may have a supporting professional role in assisting the owner-as-client to prepare its response to a SOP claim, so it is important that the architect is aware of the specific requirements and timeframes of the SOP legislation that applies to the project.

Refer to ‘Why is it important to be familiar with this legislation?’ section in Acumen note Security of Payment (SOP).

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The construction contract and administering a SOP claim

A contractor’s entitlement to be paid for work done, the process for making a payment claim and the procedure for resolving payment claim disputes is determined by the construction contract.

The SOP legislation aims to facilitate prompt payment for construction works or related goods and services performed under the construction contract and which fall within the ambit of the applicable SOP legislation. A contractor’s entitlement to make a payment claim under the SOP legislation is in addition to, and does not in all cases override, the terms of the construction contract.

A construction contract will typically have provisions setting out the conditions and process for the contractor to make a payment claim which reflect applicable SOP legislation. However, this is not always the case. For example, a principal-friendly contract form may specify pre-conditions, timeframes and a process for administering payment claims and resolving related disputes which may be more restrictive on or less favourable to the contractor.

The contractor might consider it more favourable to make an SOP claim which then triggers the prescribed SOP process and timeframes for any payment dispute. This is more likely in circumstances where the project is facing challenges, or the relationship and sentiments between the project parties becomes strained, or the contractor’s cash-flow is facing challenges. Whereas a payment claim or raising a payment dispute under the terms of the construction contract, may be more onerous on the contractor to comply with or less favourable in securing full payment of the claimed amount.

Even if a SOP claim is made, the architect’s responsibility is to administer the terms of the construction contract and to assess and certify payment claims in accordance with the contract. It is the owner-principal’s responsibility to meet the obligations and timeframes of the SOP legislation if a SOP claim is made.

If the parties did not enter into a construction contract or if the construction contract does not clearly outline the entitlement to and process for making and responding to a payment claim, then the provisions of the relevant SOP legislation will apply.

For more guidance on the application and requirements for SOP legislation and when it is invoked, refer to Acumen note Security of Payment (SOP).

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The role of the architect in administering a SOP claim

Under the SOP legislation there is no specific role for, nor requirements imposed on, the architect-as-contract-administrator. The SOP legislation gives the contractor an entitlement to make a claim and be paid for construction work and related services and a process for recovering payment from the owner as the principal to the construction contract. Strictly, it is the owner who responds to the SOP claim within the time frames set by the SOP legislation, or who is liable to pay the claimed amount in full. However, an owner-as-client may look to its architect to assist with this decision and the SOP process.

The architect may choose to not provide any support to the owner in connection with their response to a SOP claim and instead leave compliance with the SOP procedures and timeframes to the owner. This approach reduces the architect’s professional risk and potential for liability to the owner-client, for example in the event that the architect mishandles a SOP claim or the critical SOP timeframes.

Practically, however, an owner-client may expect or request assistance and input from its architect in:

• deciding whether to dispute an SOP claim or to agree to the amount and pay in full
• whether to dispute all or identified components of the SOP claimed amount
• preparing the owner’s response to the SOP claim and preparing any payment schedule/notice of dispute for which the architect’s assessment under the contract could be referenced to identified and dispute amounts claimed by the contractor.

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Assisting an owner in responding to a SOP claim

If the architect is considering handling SOP claims and responses on behalf of their client-as-owner, they should consider and be aware of the following:

1. The architect’s time and cost to handle the owner’s response to a SOP claim

The SOP legislation’s compliance requirements, strict time frames and dispute resolution procedures have the potential to increase the architect’s administration time and professional costs. As such, the architect should consider making adequate provision in the client-architect agreement to recover the value of its additional administration time incurred in the event of a SOP claim, and the basis for calculating the fees for that time.

Alternatively, if the architect prefers to avoid the potential for professional liability risk, the architect may prefer to not support the owner (other than to administer the claim and certification processes in accordance with the construction contract). If this is the case, the architect should ensure that the client-architect agreement specifies that services to administer SOP payment claims, responses and disputes is not included in (or is specifically excluded from) the scope of services. The architect should nonetheless make the client aware of the potential for SOP claims and the additional administrative burden involved and, in all cases to recommend to the client to get legal advice if a SOP claim is received.

2. The architect’s independent role under the construction contract

At law, the architect administering a construction contract takes on the role of a superintendent and has a duty to act impartially and independently* of the parties when assessing, valuing and certifying claims under the contract. Commonly-used standard-form industry contracts, such as the ABIC contracts, require the owner principal to ensure that the architect also acts 'fairly' with regard to the interests of both principal and contractor.

Under an architect-administered construction contract, the integrity of the contractual relationship between the owner and contractor relies in part on the independent assessment and certification by the architect of the work done and payment owed. It is important that supporting the owner in connection with a SOP claim does not compromise the architect's independent certifying role under the contract and at law.

If the owner-client attempts to interfere in the architect’s independence in assessing and certifying a payment claim under the contract, the contractor might come to question the architect’s integrity and may be more inclined to make payment claims under the applicable SOP legislation.

Refer to ‘If you are handing SOP claims on behalf of the client’ section in Acumen note Security of Payment (SOP).

*Depending on the actual terms of the construction contract, there may be an exception to or qualifications on this duty to act independently, or impartially and whether or not to also act 'fairly'. The construction contract may state that the architect-as-superintendent acts as the agent of the owner-principal.

3. Contractual and SOP time frames when assessing a payment claim

As mentioned above, the time frames for administering a payment claim under the construction contract and the relevant SOP legislation may not always align. Practically, the architect may need to request additional information and documentation from the contactor, including time to make site inspections, before the architect can properly assess and value the work claimed. This may take time and despite the timeframes in the contract for assessing and valuing claims, if the payment claim is made as a SOP claim, the time needed by the architect to assess the claim may risk exceeding the timeframes under the SOP legislation for the owner to respond to the SOP claim.

The SOP legislation may enable a contractor to make a claim beyond the time limits specified in the construction contract. It is important to be aware of any differences in the entitlement to make a claim; the timeframes for assessing claims specified in the construction contract and the set timeframes for responding to SOP claims in the applicable SOP legislation.

4. When the contractor serves an SOP claim

When a contractor intends to make a payment claim, the contractor will do so at the progress periods or at the specified stages or milestones and within the period of time set out in the contract. These payment claim events are often referred to in the SOP legislation as the ‘reference date’ which is the date after which the contractor is entitled to make a payment claim, or a SOP claim. If there is nothing expressed in the contract about a reference date, then the time set out in the SOP legislation will apply.

Most SOP legislation limits the contractor to making only one SOP claim for each reference date (typically, one claim per month) or similar trigger giving an entitlement to make a claim. The owner should be wary if more than one SOP claim is made relative to a given reference date; or if an SOP claim is sent ‘too early’ before the next valid reference date. A contractor can only send one SOP claim relative to a ‘used’ reference date. If there is doubt about whether an SOP claim is valid relative to a reference date, the owner should seek legal advice because this can be a complicated assessment to make against the SOP legislation.

A common and important pitfall arises when the contractor ‘serves’ the SOP claim on the architect only, and not the owner. In this instance, the architect should promptly confirm whether the owner has also been served with the claim. If the owner has not been served (and the architect is not receiving it as the agent of the owner), the architect should immediately direct the contractor to serve the claim on the owner in accordance with the requirements in the applicable SOP legislation. Doing so also makes it clear that the architect is not the agent of the owner for the purposes of receiving SOP-related documents and notices and avoids the legal and potential professional liability implications that come with being the owner’s agent.

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Architect’s certificate and the owner’s payment schedule

Generally, if an owner doesn’t agree with the amount claimed in an SOP claim, the owner can respond to the SOP claim by giving the contractor a ‘payment schedule’ or ‘notice of dispute’. Typically, an owner’s payment schedule / notice of dispute in response to an SOP claim should:

• identify the relevant SOP payment claim served by the contractor
• indicate the amount that the owner (or as certified by the architect) accepts and proposes to pay (the scheduled amount)
• be served on the contractor within the time frame required by the SOP legislation (this can be as early as 10 business days from the date the claim was received).

A payment schedule is intended as a document which evidences the owner’s ‘counter-claim’ and sets out what the owner considers to be the correct amount payable for the work done and in accordance with the entitlements under the construction contract. The legal effect and consequences under the SOP legislation of sending a payment schedule is different to the architect issuing a payment certificate.

The architect’s certification sets out the contractual entitlement to be paid, in the opinion of the architect. The certificate should provide information and state reasons about whether an item being claimed in the progress claim reflects the value of work done and the contractor’s entitlements under the contract. In turn, the architect’s certification and supporting documentation can be useful to the owner in preparing its response to an SOP claim and in setting out the owner’s reasons for accepting or disputing the claimed amounts. If the architect is also handling SOP claim responses on behalf of the client-owner, a well-prepared certificate with reasons could readily be adapted as the owner’s ‘payment schedule’ and save duplication of effort.

In the event that the contractor does not accept the owner’s payment schedule and seeks adjudication of the payment dispute, an architect’s certificate might be persuasive on the adjudicator’s thinking and decision on that payment claim. However, the adjudicator has a legal and professional duty to act independently and may well reach a decision that is different to (but ‘independent’ of) the architect’s assessment.

On the other hand, adjudication of payment claims by a third-party adjudicator is not a substitute for the architect's certification responsibilities under the terms of the contract. Nor should an adjudicator's involvement or decision (nor the prospect of their involvement) in an SOP claim dispute influence the architect’s assessment and certification, which in all cases the architect must perform in accordance with the terms of the contract and in exercising the standard of skill, care, and diligence expected of an architect.

Issues and risks: certifying payment claims and handling SOP responses

The architect should be mindful of the potential for professional liability exposure if assisting the owner to prepare its response to a SOP claim. As noted above:

• When assessing, valuing and certifying a payment claim under the contract: the architect acts independently and impartially.
• If the architect prepares and sends a payment schedule in response to a SOP claim on behalf of the owner: the architect acts as agent of the owner.

If acting as agent of the owner in handling SOP claims, the architect may have a professional exposure to the consequences of inadvertently not complying with the requirements and timeframes set by the SOP legislation. Example scenarios include if the architect prepares a payment schedule without the client’s authorisation, or if the architect serves an invalid payment schedule, or if the architect doesn’t or cannot send a valid payment schedule within the SOP timeframes. The financial impact on the owner-client of a payment claim dispute, the risks and their professional and financial consequences for the architect are elevated.

To assist in managing such risks, the architect should consider the following practical tips if assisting with or preparing the payment schedule on behalf of the owner:

1. If an SOP claim is received, recommend that the owner seek legal advice, preferably from a practitioner experienced with construction contracts, to ensure the owner complies with the SOP legislation.
2. Ask the contractor for all relevant documentation required to assess a payment claim — whether in advance of receiving a claim or promptly after a claim is received.
3. Carefully manage the time taken to assess and value the claim and provide your certification as promptly as practical, to allow time for the owner to prepare and submit the payment schedule within the SOP timeframe. This is particularly important if all or part of the SOP claim is being disputed.
4. Keep detailed records that justify amounts claimed and assessed in the certificate, making sure that notes, inspection reports and other information used to assess the progress claim are legible, clear and consistent. This will assist the owner who might need to submit this documentation to an adjudicator, to defend the payment dispute. In addition, an adjudicator is under a tight time frame to reach a decision, and comprehensive record-keeping and clarity in that documentation can assist the adjudicator in reaching their decision.
5. If the owner’s payment schedule amount is less than the SOP claim amount, it is best practice to also indicate reasons for withholding all or part of the payment or not agreeing to specific line items of the amounts claimed. Under most of the SOP legislation, providing reasons is required for the payment schedule/notice of dispute to be compliant and valid.
6. You could also check the contract and confirm for the owner-client, the contractor’s nominated address for serving notices, such as the owner’s payment schedule. This is the address (and can include email addresses or digital construction management software, depending on the terms of the contract) the owner should ‘serve’ the payment schedule / notice of dispute to.

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