19 July 2006
Head contractors, major subcontractors and large professional service firms in Victoria may be further restricted in their use of the fast track process of access to progress payments in the security of payment legislation, following the passage last night of the Building and Construction Industry Security of Payment (Amendment) Act 2006.
While much of the Bill is familiar (see our Alert on the original Bill), there are further changes to what are regarded as claimable variations which were introduced during the Bill's passage through Parliament which may have an adverse impact on the cashflow of entities who are party to construction contracts exceeding $5m in value.
The amendments to the security of payment legislation will apply to construction contracts entered into from the date that the amending legislation formally commences, which is currently stated to be no later than March 2007.
What are the further changes to the Act?
The Bill was not passed in its original form. The Bill now passed includes:
The latter amendments modify section 10A of the original Bill, which relates to claimable variations. Section 10A creates a regime in relation to variation claims which is entirely unique to Victoria and leaves open the question of whether national uniformity in the security of payment regime will ever be achieved.
What is a claimable variation?
There are two classes of variations that may be taken into account in claims submitted under the Act when calculating the amount of a progress payment:
The most recent amendments impose a limitation on disputed variations that can be claimed such that a disputed variation will only be claimable under the Act:
The amendments go further to impose a cap on the aggregate value of disputed variations that can be claimed under the Act at 10% of the original contract sum. If the aggregate value of disputed variations exceeds this cap, a disputed variation will only constitute a claimable variation if the original contract price is $150,000 or less or the original contract price exceeds $150,000 and the contract does not contain a dispute resolution clause. All disputed variations over and above this cap can only be claimed under the dispute resolution regime provided for in the relevant contract.
How does this affect an owner or contractor?
It is highly unusual for a contract over $5m not to have a dispute resolution mechanism to resolve variation claims. Accordingly, the practical effect of these amendments is that where the original contract sum exceeds $5m, claimants will not have the benefit of the Act and will only be able to make claims for disputed variations under the dispute resolution regime provided for in the relevant contract.
These amendments appear intended to ensure that most small contractors and subcontractors will have the benefit of the Act and that owners, head contractors and large subcontractors will be excluded from the benefits of the fast track process provided under the Act. This may have an adverse impact on cash flow, particularly for head contractors who will now be exposed to compliance with the strict timeframes imposed by the legislation in respect of downstream variation claims from small subcontractors without being able to take advantage of the Act in respect of upstream variation payment claims.
How will we help you to comply with these new changes?
In recognition of the impact developments in security of payment legislation, such as the above, have on the construction industry, Clayton Utz has established a National Working Group to advise clients on compliance with the regimes which are now in operation around the country. This National Working Group will offer regular updates and training to ensure our clients are kept abreast of future developments in this area of law.
