The Construction Contracts Act 2002 (the Act) was established to facilitate regular and timely payments between parties to construction contracts. Payment claims and payment schedules are an important part of the construction industry payment process. If not handled correctly, they can have significant payment and cash flow consequences. This article outlines the key requirements for payment claims and payment schedules, and the consequences of failing to deal with them correctly.
What is a payment claim?
A payment claim is a formal claim for payment made under the Act. It may take the form of an invoice, but it must contain specified information and be accompanied by the prescribed notice.
What should a payment claim include?
A payment claim must:
be in writing;
contain sufficient details to identify the construction contract to which the payment relates;
identify the construction work and relevant period to which the payment relates;
state a claimed amount and due date for payment;
indicate the manner in which the claimed amount was calculated;
state that the claim is made under the Act; and
be accompanied by the prescribed notice explaining how the payer should respond and the consequences of not responding or paying, commonly headed “Important Notice”.
Failure to include the required information may mean that the document does not operate as a valid payment claim.
How should a payer respond?
If a payer does not intend to pay the claimed amount in full, they must respond with a payment schedule within the applicable response period. A payment schedule must:
be in writing;
identify the payment claim to which it relates; and
state a scheduled amount.
If the scheduled amount is less than the claimed amount, the payment schedule must indicate:
the manner in which the payer calculated the scheduled amount;
the payer’s reason or reasons for the difference between the scheduled amount and the claimed amount; and
in a case where the difference is because the payer is withholding payment on any basis, the payer’s reason or reasons for withholding payment.
What if the payer does not respond or pay?
If a payer fails to provide a payment schedule within the specified timeframe outlined in the construction contract (or within 20 working days after the payment claim is served, if no timeframe is specified), they become liable to pay the full amount of the payment claim by the due date. If payment is not made, the payee may recover the unpaid amount as a debt and seek an award of its actual and reasonable recovery costs.
The payee may also serve a notice of intention to suspend work. Work may be suspended if the amount remains unpaid five working days after that notice is served. The same debt-recovery and suspension rights apply if the payer provides a payment schedule but fails to pay the scheduled amount by the due date.
Payment schedules need clear reasons
If the payer proposes to pay less than the claimed amount, the schedule must do more than simply state that the claim is disputed. It should explain each material reduction, the basis for it and how it affects the scheduled amount.
Case Study – Why clear reasons matter
A High Court decision involving a major construction project illustrates why payment schedules must clearly explain their calculations and reasons. A subcontractor issued a substantial payment claim. The head contractor responded with a payment schedule containing numerous deductions and proposing to pay nothing.
The Court accepted that some parts of the payment schedule adequately explained the head contractor’s calculations and position. However, significant variation and contra-charge deductions did not sufficiently explain their basis or calculation. Because those deficiencies affected a substantial part of the schedule, the payment schedule was invalid.
The Court did not require the calculations and reasons to be presented on a line-by-line basis for every item. The required level of detail depends on the circumstances and the parties’ established practices. The payment schedule must nevertheless give the payee enough information to understand the payer’s position and decide whether to challenge it.
Adjudication
The Act also provides a rapid adjudication process for construction-contract disputes. Any party may initiate adjudication without the other party’s agreement, and an adjudicator can be appointed under the statutory process.
Practical Tips
For contractors and subcontractors:
Ensure the claim contains all the required information.
State clearly that it is made under the Act.
Attach the current prescribed notice.
Keep evidence of when and how it was served.
Check the contractual due date and payment provisions.
Follow the statutory notice process carefully before suspending work.
For principals and head contractors:
Treat any document presented as a payment claim as time-critical.
Check the contractual response deadline immediately.
State the scheduled amount clearly, including where it is nil.
Explain the calculation and each material reason for paying less.
If relying on supporting correspondence or documents, identify them clearly in the payment schedule.
Pay the scheduled amount by the due date.
Issuing a payment claim through Xero or other accounting software? Ensure that the invoice contains all the required payment-claim information and attach the current prescribed notice.
Summary
Payment disputes can be time-consuming and often frustrating. If you’re unsure of your obligations under the Act, our Construction and Development Team has extensive experience advising on payment claims, payment schedules and construction payment disputes. Contact us today for advice on issuing or responding to a payment claim, or resolving a construction payment dispute.
