When Should a Builder Sue on an Unpaid Progress Payment Claim
By Ms Blaise Alexander, Lovegrove & Cotton.
Domestic building works are typically carried out in stages, and disputes between owners and builders may arise where the owner refuses to pay a progress payment claim (usually in the final stage of completion of building works) according to the agreed schedule.
When deciding on what options are open to the builder to seek to enforce payment of an outstanding progress payment claim it is important to understand and be aware of how each stage of completion of the building works is defined under the contract, and when to sue for payment or issue a default notice (also known as a notice of intention to terminate).
The terms of the building contract will reflect the provisions of the Domestic Building Contracts Act 1995 (“the DBCA”).
Caution is advised when considering suing for an unpaid progress payment, or to issue a Notice, as to act prematurely could equate to a statutory offence under the DBCA or possible repudiation of the contract.
It is vital to understand the stages in respect of each progress payments, with regard to both the definitions of each stage under the DBCA, and also the specific terms of the Contract.
Domestic building works are typically carried out in standard stages of construction, being comprised of:
- Base stage
- Frame stage
- Lock-up state
- Fixing stage
Each stage is defined by a subset of requirements for completion. Section 40 of the DBCA defines each stage:
“base stage” means —
- in the case of a home with a timber floor, the stage when the concrete footings
for the floor are poured and the base brickwork is built to floor level;
- in the case of a home with a timber floor with no base brickwork, the stage
when the stumps, piers or columns are completed;
- in the case of a home with a suspended concrete slab floor, the stage when the
concrete footings are poured;
- in the case of a home with a concrete floor, the stage when the floor is
- in the case of a home for which the exterior walls and roof are constructed
before the floor is constructed, the stage when the concrete footings are poured;
“lock-up stage” means the stage when a home‘s external
wall cladding and roof covering is fixed, the flooring is laid and external doors and external windows are fixed (even if those doors or windows are only temporary);
“fixing stage” means the stage when all internal cladding, architraves, skirting, doors, built-in shelves, baths, basins, troughs, sinks, cabinets and cupboards of a home are fitted and fixed in position.
The DBCA also regulates the percentage of payment that can be claimed by the builder for each stage of completed construction works for all stages: base stage – 10%; frame stage – 15%; lock-up stage – 35%; fixing stage – 25% (section 40(2)).
A builder cannot demand more than the amount agreed upon for each stage, or any amount not directly related to the progress of the construction works (DBCA section 40(2) and 40(3)). However, a builder is entitled to claim amounts for agreed variations to the contract.
Therefore, a builder must be clear about what the progress payment includes and the works that have been completed. No claims should be submitted before ensuring that the stage has actually been fully completed in accordance with the DBCA and the terms of the contract before a payment claim is made.
This way, if a dispute arises after the claim is submitted, the builder can be confident that they are in a strong position to defend the claim, and are justified in taking further action where the progress payment claim is refused.
Beware, also of the nature of the Contract entered into. Section 40(4) of the DBCA states:
“Subsections (2) and (3) do not apply if the parties to a contract agree that it is not to apply and do so in the manner set out in the regulations.”
A standard major domestic building contract includes two options for methods of payments, being ‘Method 1’ and ‘Method 2’ (also known as Method A’ and ‘Method B’). ‘Method 1’ reflects the stages in the DBCA and is the standard method for progress payments in the majority of domestic building contracts.
Method 2 may include specified variations to the description of each completion stage, percentages and payment schedule of the contract. The schedule of progress payments under Method 2 is agreed to by the builder and the owner, and includes a clause warning the owner of a change in their legal rights.
Therefore, a progress payment claim may validly differ from the standard schedule of payments and percentages set out in the DBCA, and still be compliant with the terms of the contract. Where progress payment claims are made they should be clearly itemised in order to minimise disputes from an owner to misunderstood or unexpected progress payment claims.
Where a dispute arises and a builder is considering suing for non payment of a progress payment claim, or issuing a notice of default, it is prudent to seek legal advice to establish that this course of action is both appropriate and reasonable, and also a legitimate option according to the terms of the contract.
It is important for builders to maintain detailed and accurate records, including financial records, during the completion of building works. This way, where a dispute arises, the builder has strong evidence to support a progress payment claim, and if necessary substantiate further action such as issuing a notice of default, a notice of termination or if it eventuates, defend a claim that the contract has been wrongfully terminated or repudiated by the builder, for example by conduct deemed unreasonable or without merit.
Where the progress payment claim relates to an early stage of building works, a notice of suspension may be an appropriate option to cease work and buy time while a payment dispute is resolved. Ordinarily a notice of default can only be issued where there has been a substantial breach of contract by the owner, nevertheless, great care needs to be taken to ensure that the default notice complies the terms of the contract.
Any notice should be carefully prepared and drafted, for example by a lawyer, and properly served on the owner. It should be borne in mind that in a worst case scenario these documents may form the basis of future proceedings in VCAT or court.
For related information refer to the following articles on this website:
“One Door Slams and Another Opens. What Does Contract Repudiation Mean For Builders?” written by Justin Cotton,
Director at this firm.
For further information, you can refer to Kim Lovegrove’s e-book available on our website (e-library), entitled “Building Laws for Builders”.