Construction Law - Getting Paid What You're Owed: Changing the Retention Culture

I know we said we were going to give you a series of articles on the adjudication process, however, we think this warrants diversion. 

We recently attended the Queensland Building and Construction Commission’s (“QBCC”) information session on ‘Invoice and Payment Practices’. Listening to the questions from the audience, we realised one of the biggest concerns in the industry at present is in relation to the release of retention amounts at the end of a contract’s defects liability period.

Most of the focus over the last year has been spent highlighting the changes to industry practice brought about by the introduction of the Building Industry Fairness (Security of Payment) Act 2017 (“BIF Act”) and the repeal of the Building and Construction Industry Payments Act 2004 (Qld) and Subcontractors’ Charges Act 1974 (Qld), not to mention the controversy over project bank accounts. Slipping through the cracks, although just as important, the introduction of the BIF Act also saw additions to Part 4A of the Queensland Building and Construction Commission Act 1991 (“QBCC Act”) relating to building contracts (as defined in Part 4A of the QBCC Act). Have no fear, we are here to help.

The words that appear initalics in this article have special meaning, defined in the QBCC Act.

So, what’s new?

On 10 November 2017, the BIF Act introduced sections 67NA–67NC into Part 4A of the QBCC Act. These sections, which commenced operation on 17 December 2018, provide:

• if a contract does not specify a defects liability period and a retention amount or security is held under the contract, a statutory defects liability period of 12 months starting on the day of practical completion of a building contract now applies. It is parliament’s intention that this provision will create certainty for when a retention amount or security is to be released, ensuring contracted parties are paid what they are owed, when they are owed;
• if a retention amount is retained under a building contract, the contracting party must, unless they have a reasonable excuse, release the retention amount to the contracted party in accordance with the contract. This provision carries with it a maximum penalty of 200 penalty units ($26,100) or one (1) year imprisonment for failing to comply. A retention amount paid into court to satisfy a notice of claim under the BIF Act, or an amount subject to dispute between the parties to the building contract is exempt; and
• where a retention amount or security is held under a building contract, a contracting party must give the contracted party a notice within 10 business days (in the approved form found on the QBCC website) prior to the end of the defects liability period stating the following:
  
  
• the date the defects liability period ends;
• for a retention amount:
• the retention amount to be paid to the contracted party at the end of the defects liability period, if no amount is required to correct defects in the building work under the contract; and
• the date the retention amount is to be paid to the contracted party.

In circumstances where the defects liability period in a subcontract is linked to another building contract, the contracting party must give the contracted party notice within 5 business days.

Failing to provide a notice under thisPart is an offence and attracts a maximum penalty of 100 penalty units($13,055).

Do these changes apply toyou?

Part 4A of the QBCC Act applies to building contracts for buildingwork carried out in Queensland. This does not include a domestic building contract for work onprivate residences, or a contract exclusively for construction work that is notbuilding work as that latter term isdefined in the QBCC Act. Therefore,if you carry out work on homes or carry out construction work other than building work, for example, work relatedto public bridges, roadways and tunnels or water reticulation systems andstormwater drains, this Part may not apply to you.

Even though the amendmentsto the QBCC Act may not apply to you,most construction contracts include retention. Therefore, it is important youare aware of your rights and obligations.

So how do you ensureyou’re not out of pocket?

Most contracts allow for a principal or a head contractor (the contracting party) to require a contractor or subcontractor to provide a form of security to guarantee the performance of works under a contract and to safeguard against defects in the event the contracted party fails to satisfactorily rectify them. The simplest form of security is where the principal or head contractor withhold a specified sum of money from a contractor’s or subcontractor’s progress payments. In practice, up to 10% retention is commonly withheld from each progress claim until up to 5% of the contract sum is retained. Once the retention limit is reached (as determined by your contract), no further retention amounts can be deducted from any progress claim.

Usually, the retention is released over two (2) stages of a contract:

1. 50% at the time of practical completion; and
2. the remaining 50% upon the expiry of the defects liability period.

The usual practice is forthe works to be inspected at the end of the defectsliability period, unless there is an urgent need for immediaterectification. The contracted partythen attends to any necessary defects and, once satisfactory, retention is released.Release of retention is sometimes contentious. Further, many contracts have alimitation period in which the retention can be claimed and it is quitesurprising the number of contractors and subcontractors who are not followingup on amounts rightfully owed to them, within the time limits required.

Another issue we see oftenthat further complicates recovering retention is the principal or headcontractor may not issue a notice of practical completion. As most defectliability periods run from the date of practical completion, a contractor orsubcontractor can have difficulty knowing when the defect liability period isset to expire, often resulting in the limitation period expiring before theycan claim the balance of their retention. The amendments to Part 4A discussedabove will help solve that problem for building contracts but not thosecontracts excluded from that definition.

Pay when paid provisions

Something else aboutretentions you may not know is that payment of withheld retention monies cannotbe conditional or dependent upon events or obligations under another contract. Forexample, a subcontract that provides for the defects liability period to endwhen the defects liability period ends under the head contract.

Section 74 of the BIF Act provides that a ‘pay when paid’provision in a construction contract is void. In its simplest form, a ‘pay whenpaid’ provision is a term that makes payment to the contractor orsubcontractor or an entitlement to claim payment, contingent upon the principalor head contractor being paid, or on the occurrence of some event orcircumstances under another contract. 

In the recentdecision of Maxcon Constructions Pty Ltd v Vadasz [2018]HCA 5 the High Court took a broad approach in defining a ‘pay when paid’provision and determined that certain terms in a subcontract tying the releaseof retention monies to an event under the head contract will constitute a ‘paywhen paid’ provision and consequently be void. What this means is clauses inconstruction contracts that tie the release of retention monies to an eventunder the head contract and not to the completion of the subcontractors works(and any other obligations under the contract) will likely constitute a ‘paywhen paid’ provision and consequently, be void.

Therefore, you may be entitled to claim the final retention amount under the contract prior to the end of the defects liability period if release of the retention is contingent on performance of the head contract. In order to make a final payment claim under the BIF Act you must claim before the end of the longest of the following:

1. the period under thecontract, if any;
2. 28 days after the end of thelast defects liability period; or
3. Six (6) months after thecompletion of all construction work to be carried out or the completed supplyof all related goods and services.

If you do not claimwithin this time, you may not be entitled to apply for an adjudication. However,you may still have rights to the retained sum through the courts. Which ofthose limitation periods apply may depend upon the terms of the contract andwhether the provisions about the defect liability period are void or not.

Take-away:

• Understand your rights and obligations underthe contracts you enter and ensure you administer those contracts properly. Havingquality specialist legal advice readily available in the event of any doubt cangreatly assist in ensuring you are paid what you are owed. Remember, retentionis money owing to you under the contract.
• If you are a subcontractor, always have inwriting the date of practical completion for the portion of the works you arecontracted for. This should be done as soon as possible after the works reachpractical completion to ensure you are not liable to the contractor for longerthan necessary or that your rights to claim the balance of retention held isnot lost.
• if you are a head contractor or subcontractor,insist upon the principal/superintendent or head contractor issuing acertificate of practical completion or at least an acknowledgement so that youhave an undisputed date from which to calculate the defects liability period.
• If you are a head contractor, consider negotiatinglonger defect liability periods with subcontractors to overcome potentiallyvoid ‘pay when paid’ clauses. Extended defect liability periods in subcontractsmay cover the likely period of the head contract.
• If required, set up automated systems toensure you give the appropriate written notifications at the expiration of thedefects liability period to avoid penalty by the QBCC. The approved form can befound on the QBCC website.
• You may be entitled to interest for any amountpaid late, including retention.
• We cannot stress enough how important it is tokeep good records of all projects you are engaged in.

If you need any assistance indetermining whether your contract is a building contract or how to comply withthe new provisions of the QBCC Act,call us today.

Active Law’s construction team are very experienced in all aspects of construction law including statutory compliance and defence against prosecution, as well as all other aspects of law affecting the construction industry. The construction team at Active Law can swiftly identify your rights and obligations and can ensure you make the best submission possible in your circumstances. Active Law’s Paul Hick is an experienced construction lawyer with 35 years of construction experience. He is also a senior adjudicator under security of payment legislation in numerous states around Australia. Formerly employed with the QBCC, Active Law’s Emma Ward, has invaluable insight into QBCC process and legislation.

Disclaimer: Reliance on content.
The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.