As the last mouth in the payment food chain, subcontractors face a constant battle recovering payment for their work. A subcontractor’s charge allows a subbie to jump the queue to be paid first. This is a useful tool to keep on your belt, especially if you are concerned your upstream contractor is experiencing financial difficulties.
While the project trust regime is still being rolled out, subcontractors’ charges remain a useful and powerful tool to secure payment. This article explains what subcontractors’ charges are and how they can be used.
What is a subcontractor’s charge?
In essence, if a head contractor doesn’t pay you, you can place a charge on monies (including retention amounts) owed from the principal to the head contractor, leapfrogging the head contractor.
Subcontractors’ charges are regulated by The Building Industry Fairness (Security of Payment) Act 2017 (Qld) (the Act) in Queensland.
An example where a subcontractor’s charge may be useful is:
- Contractor Pty Ltd enters into a head contract with Airport Pty Ltd for the extension of the Gold Coast Airport;
- Contractor Pty Ltd engages Electrical Subcontractor Pty Ltd under a subcontract to complete the electrical package for the airport extension for the fixed sum of $3 million;
- Electrical Subcontractor Pty Ltd performs $1.5 million in works on the project;
- Contractor Pty Ltd is struggling financially due to issues on another project and consistently delays (or refuses) paying Electrical Subcontractor Pty Ltd;
- Airport Pty Ltd owes Contractor Pty Ltd for works performed on the project, including the electrical component of the head contract;
- Electrical Subcontractor Pty Ltd serves a subcontractor’s charge on Airport Pty Ltd over the monies Airport Pty Ltd owes to Contractor Pty Ltd; and
- the effect of the charge is that the money Airport Pty Ltd would otherwise pay Contractor Pty Ltd is frozen and must be retained by Airport Pty Ltd or paid into Court, pending resolution of the dispute. The important part is that it doesn’t end up in the pockets of Contractor Pty Ltd to be frittered away.
A subcontractor’s charge is especially useful when there are concerns that the contractor is in financial distress. The effect of the charge is that you, as a subcontractor, aren’t lining up with all the other normal creditors as you’re actually making a claim over money that is still held by the principal. This gives you a much greater chance of receiving something than a normal claim would if the contractor went into liquidation.
When can I submit a subcontractor’s charge?
When weighing up whether to issue a subcontractor’s charge there are two primary considerations to keep in mind.
First, the subcontractor needs to be engaged to perform work in relation to land or a building. The definition of “work” under the BIF Act is inclusive, and generally pretty broad. However, a subcontractor’s charge will not be available for work that is:
- the manufacture or fabrication of unfixed project components;
- the mere delivery of goods sold under a contract for the sale of goods;
- labour in connection with the testing of materials or the taking of measurements; or
- the hire of plant or machinery with labour (skilled or unskilled) to the extent it is being used for excluded work.
However, if a subcontractor performs work under the BIF Act that combines excluded and non-excluded work, the subcontractor’s charge will only be available for monies payable for the non-excluded work.
For example, looking back at our scenario again:
- Contractor Pty Ltd has engaged Electrical Subcontractor Pty Ltd under a subcontract to complete the electrical package for the airport extension for the fixed sum of $3 million;
- However now, Electrical Subcontractor Pty Ltd performs $1.5 million in works on the project, $100,000 of which is costs associated with the testing of materials or the taking of measurements on site;
- In this situation, Electrical Subcontractor Pty Ltd may still serve a subcontractor’s charge on Airport Pty Ltd over the monies Airport Pty Ltd owes to Contractor Pty Ltd.
- The charge, however will be limited to the monies owed to Electrical Subcontractor Pty Ltd by Contractor Pty Ltd in relation to the non-excluded work performed (i.e. the $1.4 million).
Secondly, there needs to be money payable to the contractor by the head contractor or principal. A subcontractor will not achieve anything by issuing a notice of charge if a principal has fully paid or overpaid a contractor. Subcontractors’ charges can only attach to amounts payable to contractors. Of course you don’t always know the situation at the time of issuing a notice of charge, so you would still err on the side of caution.
This can potentially cause headaches for subcontractors whose head contract allows the Principal to take-out works from the hands of the contract that is in financial distress. In these instances, the usual calculations methods often results nothing being payable by the principal. This can also lead to delays in the subcontractor’s charge process, while the Principal of the project “sorts things out”.
Timing and enforcement requirements
There are strict timing and procedural requirements for subcontractor’s charges.
A summary of the requirements for a charge and the subsequent process is as follows:
- a subcontractor must prepare the approved claim, which must:
- be in the approved form – Form s122 (available on the QBCC website);
- state the amount of the claim;
- include details of the work done by the subcontractor;
- be certified by a qualified person which includes registered architect, engineer, surveyor, or person licenced under QBCC Act; and
- be given within 3 months after project completion (or 3 months from end of defects liability period for a retention claim).
- the subcontractor must serve the claim on the principal (or the party you want to withhold payment from the contractor) and the contractor;
- following service:
- the principal must, until a court order is made in respect of the amounts claimed, retain the amounts that are or are to become payable to the contractor up to the maximum of the amount claimed in the subcontractor’s charge; and
- the contractor must, within 10 business days, respond to both the subcontractor and the principal stating whether the claim is accepted or rejected.
- if the amount is disputed, the subcontractor must commence court proceedings to enforce the charge. The proceedings must be started within 1 month after the notice is given, or within 4 months from when the retention amount is payable if your claim is only for the retention amount.
Subcontractors must strictly adhere to the timing and form requirements to ensure that their charges are enforceable. If you are late and miss the timeframes, your charge will be extinguished.
While there are sometimes limited ways in which you could possibly salvage the situation, such as “piggybacking” on other subcontractor’s proceedings, , this is not always viable. We would recommend getting legal advice as soon as possible if you are late in submitting a subcontractor’s charge.
What happens if the Contractor is in voluntary administration or liquidation?
As stated above, if you have served a valid claim and the amount is disputed, you must commence court proceedings to enforce the charge within the prescribed timeframe. However the timings and process for this can be tricky, especially if the contractor is in voluntary administration or liquidation (which is often the case).
First, if a contractor is in voluntary administration, the time frames in which to commence proceedings or take steps could potentially be extended. You should get advice on this for your specific circumstances, however.
Second, if a contractor is in liquidation, or has become subject to a Deed of Company Arrangement, you will require permission (leave) from the Supreme Court to commence legal proceedings against the company. Fortunately, leave can often be granted retrospectively (that is – after you have already commenced the proceedings in support of the charge). However this does add some significant costs to the process, as it regularly involves an entirely separate Court proceeding.
What happens if other subcontractors also submit a charge?
If the amount owed by the principal to the contractor can cover all the charges made by individual parties, then each party with a valid charge will generally receive full payment of its claimed amounts. However, if the amount owed to the contractor is insufficient to satisfy all the charges, then the amount recoverable will be reduced in proportion to the amounts of each charge.
- As we know, Contractor Pty Ltd has engaged Electrical Subcontractor Pty Ltd under a subcontract to complete the electrical package for the fixed sum of $3 million.
- However, now Contractor Pty Ltd has also engaged Flooring Subcontractor Pty Ltd under a subcontract to complete the interior flooring for the fixed sum of $1 million.
- Electrical Subcontractor Pty Ltd performs $1 million in works on the project. Similarly, Flooring Subcontractor Pty Ltd performs $500,000 in works on the project;
- Contractor Pty Ltd consistently delays (or refuses) paying Electrical Subcontractor Pty Ltd and Flooring Subcontractor Pty Ltd.
- Airport Pty Ltd owes Contractor Pty Ltd $1.2 million for works performed on the project, including the electrical and flooring component of the head contract;
- Electrical Subcontractor Pty Ltd and Flooring Subcontractor Pty Ltd each serve a subcontractor’s charge on Airport Pty Ltd over the monies owed to Contractor Pty Ltd, and commence proceedings to support their charges within time; and
- Airport retains the full amount it would have otherwise had to pay to Contractor – $1.2m, but this is not enough to pay each claim in full;
- The amounts over which the charges of Electrical Subcontractor Pty Ltd and Flooring Subcontractor Pty Ltd apply will be reduced to $800,000 and $400,000 respectively. They can still make a claim against Contractor for the balance of their debts.
Interplay with adjudication
Finally, a subcontractor’s charge can be a useful tool to secure payment on a project.
However, you will not be able to have two bites of the cherry by issuing a subcontractor’s charge and lodging an adjudication application. You will need to pick one or the other.
If you need any help with responding to or commencing a subcontractor’s charge, feel free to reach out. Given the importance of timing, we highly recommend doing so sooner rather than later.