Contractor Payment Changes Have Victorian Developers on Back Foot

A new and powerful tool for contractors has been introduced in Victoria—and the industry has been caught off guard. Changes to Victoria’s Building and Construction Industry Security of Payment Act 2002 took effect last month. Those changes were floated late last year and aim to level the playing field for contractors, according to Holding Redlich Melbourne partner Dado Hrustanpasic. “We expect that the industry is not fully prepared for these changes to take effect as quickly as they did,” Hrustanpasic says. “Some might be taken by surprise at the changes to laws relating to their contracts and payment processes on their projects, and owners and head contractors could be caught out for payments they were not expecting or lose rights they thought they had.” ▲ The security of payment changes are aimed at preventing insolvencies and improving cashflow in the industry. Progress payments are common, but payment disputes that lead to adjudication in Victoria have been much rarer. “Previously, there were technical barriers that have now been lowered so it’s easier for claimants to take a disputed progress payment to adjudication,” Hrustanpasic says. The capacity for contractors to force payments is intended to support cash flow and potentially even reduce insolvencies in the construction industry, which were 2762 insolvencies in the year to March 2026, according to the Australian Bureau of Statistics—a 3.3 per cent decline on the previous year. But more adjudication claims are expected to trickle in as the industry comes to grip with the changes. Adjudication the last resort Adjudication has long been regarded as a last resort—a “nuclear option”—and Hrustanpasic does not expect that reputation to change any time soon. “In the upper tier, where there are fewer clients and relationships are important, builders will still be reluctant to take up that option and will still rely on negotiation,” he says. “But in the lower tiers and in the subcontracting chain, it’s likely to become more common to take progress payments to adjudication, because that’s potentially less of a concern for many in that part of the industry.” ▲ Holding Redlich Melbourne partner Dado Hrustanpasic: Adjudication more likely an option for lower tier builders. Tier 1 contractors, meanwhile, find themselves in an uncomfortable position—fielding claims from subcontractors while feeling unable to exercise the same rights against their own clients. “It should help some of those smaller players, but some of the bigger ones or for those facing major stresses on some projects it’s not really going to help,” Hrustanpasic says. “They’re stuck in the middle dealing with these claims from subcontractors, but perceiving that they can’t do the same to their clients.” Payment timeframes tighten The new rules impose stricter timeframes with little room for error. The whole process from submission of a claim to payment is supposed to take between four and six weeks, but the key issue is that the payment schedule submitted within 10 busness days of the payment claim effectively locks in a respondent’s position. “Under the new legislation, the respondent cannot add any new reasons for disputing a claim that were not included in the earlier payment schedule,” Hrustanpasic says. There is no flexibility if you miss deadlines in the process and the first payment schedule is “critical”. “You have to be ready within those 10 days to provide all the reasons if you propose not to pay, and why not.” The legislation also addresses notice periods in construction contracts—provisions that allow a claim to be denied if a contractor fails to submit notice within a specified window. ▲ Cash flow problems have been behinda number of major builders entering administration in recent years, including Robert &amp; Co and Probuild. “There was a perception that the notice period had, in some contracts, become absurdly short. “These notice periods are not banned, but they are subject to a new fairness test.” Maximum payment terms of 20 business days have also been introduced, applying to both existing and future contracts. “Victoria was a holdout in not having maximum payment terms. But that now applies to all existing and future contracts,” Hrustanpasic says. Security and retention The new Act also brings significant changes to how security—typically cash retention or bank guarantees, often equivalent to 5 to 10 per cent of the contract price—is handled at the end of a project. “The previous Act did not cover this at all. Now, depending on the contract, the contractor has a right to claim back that security at the end of the final stage of completion,” Hrustanpasic says. “Owners and head contractors will now need to provide notice before they can access that security. “This rebalances some of the commercial pressures at the end of the project, because there was a perception in the industry that a principal could just hold on to the security, essentially unmeritoriously, really just to do a deal at the end of the project.” The practical implication for principals is that getting contractors to return and fix defects may become more difficult. Thorough defect documentation will now be essential for anyone wanting to hold security legitimately. What developers can do Hrustanpasic anticipates a period of adjustment in the industry, but in the meantime, developers can prepare. “Changes to workflow processes are the main thing, because this applies now,” Hrustanpasic says. “As developers receiving claims have less opportunity to challenge claims later down the track, they need to be ready. “They need to monitor their projects consistently so they can be ready to provide payment schedules, monitor payment claims, and track all those things that are relevant to security.” Most standard contracts will also need to be revisited to reflect the new risk allocation, and documentation and preparation are the best defences. Shifting the balance Ultimately, the changes are a recalibration rather than a reversal of power. “At the end of the day, rights are not being taken away, it’s just giving the builders more avenues to more easily assert what might be their rights,” Hrustanpasic says. Whether the changes deliver on their broader ambition of reducing insolvencies remains to be seen. Construction is under pressure from multiple directions—skills shortages, elevated costs, and challenging development conditions—and improved cash flow alone cannot resolve all of them. “It could help, but objectively, it’s hard to see the signal from the noise” Hrustanpasic says. “There will still be insolvencies because of all the other factors making it difficult to undertake developments. “Helping cash flow will potentially reduce one pressure. But it’s not a magic bullet.”

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Clare Burnett
Tue 05 May 26

Contractor Payment Changes Have Victorian Developers on Back Foot

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