The construction industry is notorious of being unfair, throat cutting, unethical, adversarial and unscrupulous environments. This always leads to ongoing rhetorical, yet interesting, arguments AS IF these characteristics stem from its toxic culture or mismanagement, and AS IF the government regulations and legislations are just a stench of tokenism, and many AS IFs may continue…
For the first episode of this long-deserved commentary, let us just look at the NSW’s Security of Payment (SOP) Act, which has recently amended, and how integrated is the SOP Act with the Home Building (HB) Act.
From a layperson’s perspective, these two Acts are different but should ‘conceptually’ work together to optimise the implementation effect, minimise payment disputes, and more importantly protect the rights of stakeholders. Of these, the protection of rights is a dark and grey area in which ‘who will possibly get the best out of’ and ‘who would be possibly victimised’ by these Acts. The question of “Fairness” in the light of justice is always being challenged and remain unclear. For this, how would you, as an individual, define and perceive fairness? Does fairness really exist in the construction industry? This is a question that deserves another look considering the increasing number of bankruptcies filed, and building disputes over the past five years particularly the post COVID-era.
In brevity, the SOP Act offers a fast-track payment or debt recovery and adjudication process for agents or claimants for their work done and materials supplied. The HB Act regulates residential building work and offers consumer protection, including licencing for builders, mandatory contracts, and statutory warranties. All these eventually point to the classical principal-agent problems in construction. Arguably, the SOP Act sounds great and a Holy Grail – a phrase used by Hutchinson (2019) in her article on “Security of Payment Act NSW: Holy Grail or Pandora’s Box”.
Often, the structure of SOP Act adjudication processes seems favouring claimants in payment disputes with an adjudicator’s determination is immediately enforceable – unless respondents decided to pursue further court proceedings. An overall picture that emerges from here is that an adjudication process may consider as a tactical game for claimants to frame arguments and present evidence to their advantages, and in turn strategise it into a ‘Pay Now, Argue Later’ exercise. i.e. a game for strategists. Although, this ‘favouritism’ perception is often contestable in the light of protecting the integrity of procedural justice, and considering the reliability, validity and sufficiency of evidence presented.
A question, worth noting at this moment, is whether a claimant should be entitled to payment if the quality and progression of work have been challenged and questioned. To this, how would adjudicators judge quality over the amount of work completion? How would adjudicators foretell the completed work is free from defects throughout the entire defect liability period? Also, are adjudicators experienced or well-trained enough to differentiate between inferior and quality work? Of course, respondents could apply to the NSW Supreme Court or District Court for a stay of the adjudication payment if they perceive the adjudication outcome being unfair and unreasonable. The paradox of the adjudication process here is the immediate enforcement of payment upon adjudication determination without consideration of the long-term risk of latent defects. This thus discriminates against builders or main contractors, putting them into arrays of risks. Particularly, the builders or main contractors are the key respondents of any payment disputes put forward by their subcontractors, tradesmen and suppliers.
Next, let us dive further into the potential issue of defective work under the SOP Act. Technically, the standard retention clauses involve a maximum 5% of the contract value for principals (a.k.a. main contractors or builders) to cover any defects or incomplete work carried out by their agents (a.k.a. subcontractors or tradesmen). It is notable (which anyone with some common senses of the current market sentiment, inflation rate and cost of living should know) that the 5% retention is basically insufficient (in terms of material and labour costs) to rectify defects, cover late-stage design or compliance declarations, and manage claims under statutory warranties – just to name a few. To make things worse, one would imagine who should bear the cost and responsibilities should the relevant agents go into administration or bankruptcy. This phenomenon or expectation is not impossible at all, instead very possible nowadays – considering about 2832 Australian construction companies had gone under during 2023/2024 based on ASIC statistics. This leads to an interesting question mark… if builder or main contractors went bankrupt, owners or clients might be protected by their homeowner warranty to complete the work or rectify defect… how about if subcontractors and suppliers become insolvent, who should the main contractors or builders, who are usually their principals, look for? This thus paints a picture of financial imbalance and risk exposure for main contractors or builders – particularly latent defects are usually discovered late in a building’s lifecycle – not mentioning that the statutory warranty period for residential building work last six and a half years with a potential 6-month extension.
In summary, from the perceptive of a builder or main contractor, withholding payment could be very unfair to subcontractors and suppliers who are in constant need of cash flow and have already completed work and delivered materials. However, this does not mean the builder or main contractor needs to be the main funder of a project, and assuming all risks, since: the project retentions are small relative to potential defect costs, which subject to constant increasing rates, and some defects may not be obvious until late in the warranty period. In short, all parties face procedural unfairness in the current payment and contracting system.
With all these in mind, one may ponder:
- Why smart and AI technologies have not been designed and adopted to facilitate and support the informed decision making rather than relying on framed evidence and adjudicators’ judgement and experience?
- Why there is a lack of integration and consideration between the SOP Act and statutory warranties?
- Why is not the government playing the key broker and ‘insurer’ of the construction supply chain? For example, if subcontractors and suppliers went bankrupt, should the main contractor refer to the government authority for assistance? Why can’t the main contractor, suppliers and subcontractors be protected as per project clients under the home insurance warranty?
- How could Australian government fulfill its national target of building 1.2 million homes across Australia by 2029 if the current mechanism is not favourable for the construction supply chain?
- Who to blame for this ongoing procedural unfairness in construction?
- Was the government the key culprit of the current situation of the construction industry and number of bankruptcies in construction? Have some government stimulus grants – especially during the COVID period, backfired?
- The list goes on….
Disclaimer: This article is for general information purposes only and written based on personal observation and thoughts. The information should be interpreted with care.