18 December, 2018
Fiocco Report on security of payment reform in the WA Building and Construction Industry recommends new SOP Act for WA
What you need to know
On 11 December 2018, the Government of Western Australia released John Fiocco's final report on security of payment reform in the WA building and construction industry (the Fiocco Report).
This eagerly awaited report makes 44 recommendations aimed at further addressing the ongoing issues of late payment and insolvencies within the WA building and construction industry.
The recommendations are far reaching and, if adopted, may significantly impact the way that the WA building and construction industry contracts and resolves disputes.
The most notable recommendation is that, whilst awaiting a harmonised national approach, WA should replace the Construction Contracts Act 2004 (WA) (CCA) with a new Security of Payment Act based on the "east coast" security of payment model.
The recommendations also suggest notable amendments to the timing and process for payment and adjudications of payment disputes under construction contracts.
Whilst the Fiocco Report recommends that the WA Government implement many of the recommendations set out in Mr John Murray AM's report, which was published in May 2018 following the Commonwealth review of security of payment legislation (the Murray Report), it also recommends that certain recommendations not be implemented in WA.
The WA Government is expected to consider the recommendations and their potential implementation and introduce initial legislative reforms during the first half of next year.
What you need to do
Prepare for an initial round of legislative reforms expected to be introduced in 2019.
Keep abreast of any changes to security of payment legislation in WA by subscribing to Ashurst Client Alerts.
Security of Payment in WA
Security of payment in WA is currently regulated by the Construction Contracts Act 2004 (WA) (CCA), which together with the legislation in force in the Northern Territory is known as the "west coast" security of payment model.
This model differs in a number of important respects from the "east coast" model (currently applicable in NSW, Queensland, Victoria, Tasmania and the ACT).
The Murray Report recently recommended the implementation of a harmonised national model of security of payment legislation based on the "east coast" model. However, previous reviews of the CCA, including the August 2015 report published by Professor Phil Evans (the Evans Report), identified the advantages of, and suggested the preservation of, the "west coast" model in WA.
Fiocco Report concludes IAG Review
Following the commitments made by the WA Government during the 2017 WA state election campaign, on 23 February 2018, the WA Government established the Industry Advisory Group (IAG).
John Fiocco was appointed to chair the IAG with assistance from East Metropolitan Region MLC Matthew Swinbourn.
The IAG was tasked with completing a full and careful inquiry based on the terms of reference, facilitate consultation with key industry stakeholders and make recommendations to improve security of payment for subcontractors in the WA building and construction industry. Initially the IAG's terms of reference included consideration of:
- reform to the Building Services (Registration) Act 2011 (WA) (BSR Act);
- the need for new or amending legislation to provide fairer contracting practices;
- improvements to the CCA rapid adjudication process;
- the introduction of statutory trust arrangements; and
- alternative and/or complementary reforms or measures to improve fairness and security of payment.
Following the release of the Murray Report in May 2018, the IAG's terms of reference were extended to include an inquiry into the extent to which WA should adopt the recommendations made in that report.
The publication of the Fiocco Report brings the IAG's review process to an end and presents 44 recommendations for improvement.
Please click on the image to enlarge.
Fiocco Report Recommendations
Notable recommendations
The Fiocco Report includes recommendations that have the potential to significantly impact the WA building and construction sector and current contracting practices, including the following:
Harmonisation
- WA should engage with the Commonwealth and other states and territories to implement many of the recommendations set out in the Murray Report and arrive at a harmonised national security of payment regime;
- WA should not wait for national harmonisation and should instead aim for improvement and national consistency in the meantime; and
- most notably, WA should replace the CCA with a new Security of Payment Act based on the "east coast" model (Proposed New SOP Act);
Statutory trusts and project bank accounts
- WA should implement and gradually phase in a statutory trust regime that includes: retention trusts for all retention money held pursuant to a construction contract; and cascading deemed trusts for all payments for works performed (in part or whole) by another party under a construction contract where the value of the head contract is over $1 million.
- In the interim, the WA Government should continue to use project bank accounts (PBAs) on the types of public works projects it considers suitable. This is consistent with the WA Government's recent announcement to extend the application of PBAs to a wider range of government projects with a value over $1.5 million. This announcement has received significant industry comment.
Application of the Act and the mining exclusion
- WA should discuss with state and territory counterparts narrowing of the mining exclusion.
Rights to progress payments
- The Proposed New SOP Act should provide increased rights for contractors to receive progress payments, including the introduction of shorter maximum payment terms (20 Business Days after a payment claim for head contracts and 25 Business Days after a payment claim for subcontracts) (see section below for comparison to CCA maximum payment terms).
Adjudication process
- The Proposed New SOP Act should introduce an adjusted timeline for fast track adjudication (see section below for comparison to CCA process).
Unfair contract terms
The Proposed New SOP Act should introduce restrictions on unfair contract terms, including:
- introduction of a requirement that contracts valued at over $20,000 and variations to those contracts be in writing;
- regulation of contractual provisions regarding security, including: requiring release of security no later than 12 months after practical completion; and requiring 10 business days' notice be provided before recourse to security; and
- restriction on contract terms that make claims for payment or extensions of time conditional on giving notice where compliance would not be reasonably possible, would be unreasonably onerous or where such non-compliance would result in prejudice to the other party.
Registration of building service professionals
- The BSR Act should be amended to introduce disciplinary processes to provide for the introduction of fines and demerit points, resulting in potential suspension or cancellation of registration, for failure to make payments in accordance with judgment debts, adjudicator's SOP Act determinations or arbitrator's awards or for coercive or threatening behaviour in relation to a person's rights under the Proposed New SOP Act.
Proposed new payment and adjudication timeline
- As noted above, the Fiocco Report recommends shorter maximum payment terms and an adjusted timeline for fast track adjudication.
- The diagrams below illustrate the timeline under the existing CCA and the timeline proposed for a Proposed New SOP Act.
Adjudication timeline under the Existing Construction Contracts Act
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Adjudication timeline under the Proposed New SOP Act
Please click on the image to enlarge.
Murray Report recommendations
Whilst the Fiocco Report recommends that the WA Government implement many of the recommendations set out in the Murray Report, it also recommends that certain recommendations not be implemented in WA. In particular, the Fiocco Report suggests that:
- (supporting statements) WA should not roll out a requirement for contractors to provide supporting statements with their payment claims until the cost and outcomes of this requirement in NSW have been reviewed;
- (application to residential building) the Proposed New SOP Act should not apply to all contracts for residential building work;
- (adjudicator appointment) parties should retain the ability to nominate their own adjudicator, rather than imposing a process for appointment of adjudicators by the regulator;
- (review of adjudication determinations) review rights in relation to adjudication determinations should not be expanded and the current process under the CCA for review of certain deficiencies by SAT should be retained; and
- (regulation of adjudicators) regulation regarding adjudicators, their registration, disqualification and fees should not be expanded.
Implementation
The WA Government is expected to consider all of the Fiocco Report recommendations and their potential implementation and introduce initial legislative reforms during the first half of 2019.
Report
A copy of the full report can be accessed on the Department of Mines, Industry Regulation and Safety website.
Ashurst will provide further updates on the implementation of the Fiocco Report in WA, including any legislative amendments introduced in 2019.
For further information, please contact:
Richard Guit, Partner, Ashurst
richard.guit@ashurst.com
