Raising the Roof on Construction Contracts

What is a the Construction Contracts Act?

Contracts (whether verbal, written or both) involving construction work are governed by the Construction Contracts Act 2002 (Act). Construction work is defined broadly within the Act and includes (but is not limited to) the construction, erection, installation, alteration, repair of any building or structure. Construction work also includes any design, engineering and surveying work.

The Act creates a payment regime focused on regular and timely payments allowing for steady cashflow between parties. Payees provide ‘payment claims’ for work they have completed. The payer must either make the payment sought in the payment claim, or provide a ‘payment schedule’ outlining various matters including any disputed amounts, and the portion of the payment claim which is accepted as being owing (if any).

It is important to strictly observe the legal rules relating to payment claims and payment schedules.  There can be severe consequences if the rules are not followed.

What is a ‘payment claim’?

The Act provides payment claims must:

1. be in writing;
2. identify the contract (whether written or verbal) to which it relates;
3. identify the work and relevant work period to which it relates;
4. state the claimed amount and due date for payment;
5. indicate how the payee calculated the claimed amount;
6. state that it is a payment claim issued under the Act; and
7. be accompanied by certain prescribed information including:
1. an outline of the process to respond to the claim; and
2. the consequences of not responding or not paying.

It is important to ensure the payment claim issued is in line with these requirements under the Act to ensure it is treated as valid if the payee later needs to rely on the payment claim to recover the claimed moneys as a debt owed (discussed below).

What is a ‘payment schedule’, and why is it important

A payment schedule is a means by which a payer must dispute a payment claim. Similar to a payment claim, a payment schedule must meet certain requirements mandated by the Act.  A payment schedule must:

1. be in writing
2. identify the payment claim to which it relates;
3. state an amount which the payer proposes to pay, if any (Scheduled Amount); and
4. if the Scheduled Amount is less than the claimed amount, the payment schedule must also:
   1. state how the Scheduled Amount has been calculated;
   2. explain why the Scheduled Amount is less than the amount claimed; and
   3. if payment is being withheld, explain why it is being withheld.

A payment schedule must be provided within the agreed timeframe stated in the contract or, if the contract is silent, 20 working days after the payment claim is served on the payer.  It is essential these timeframes are strictly observed.  Further, if the payer indicates it is prepared to pay a Scheduled Amount, the payer must make payment of that Scheduled Amount on or before the due date for the payment to which the payment claim relates.

If a payer either fails to provide a valid payment schedule or pay a Scheduled Amount on time, the payee can issue summary court proceedings or potentially a statutory demand for the claimed amount or Scheduled Amount (as the case may be). The Act also allows the payee to suspend works in accordance with the provisions contained in the Act.

If a payee does not use the payment claim process properly, the payee will not be able to rely on the strict enforcement protections provided by the Act. Similarly, if a payer fails to use the payment schedule process correctly, they may be faced with needing to pay considerable sums to the payee, even though the payer might consider those amounts are in dispute.  Payers who fail to comply with the payment schedule process are commonly required to pay claimed amounts, and then argue the dispute later to attempt to claw the money back.

If you have concerns around your construction contract, please contact our litigation team.