MEDIA RELEASE

UPDATE ON SECURITY OF PAYMENT ACT

1 The Building and Construction Industry Security of Payment (SOP) Act

came into effect on 1 April 2005. The Act was introduced to create a more conducive operating environment and a level playing field for all parties in the construction industry by providing a fast and low-cost payment dispute resolution procedure through adjudication. The Act ensures that any party who has carried out construction work or supplied goods or services will be entitled to payment and any party who is not paid (after adjudication) for work done will be allowed to suspend work (Annex A lists the key features of the Act). Industry Feedback and Key Observations 2 The overall feedback from the industry has been positive. Industry groups and firms1 surveyed by BCA indicated that there were some improvements in cashflow handling after the Act came into effect. Key improvements include: a) b) c) Timeliness of the main contractors in making payment by the due date; Certainty in obtaining payment which is due; Willingness of main contractors to attempt to settle payment amicably with the subcontractors so as to avoid adjudication;

Respondents to the survey include SCAL (Singapore Contractors Association Limited), REDAS (Real Estate Developers Association of Singapore, members of STAS (Specialists Trade Alliance of Singapore) and SMa (Singapore Manufacturers Federation) as well as 200 small and medium construction firms registered under BCA.

d) e)

More confidence in subcontractors to enter into contract with unfamiliar main contractors; Main contractors are more agreeable to provide express terms for payment periods as compared to the past when the subcontracts were silent on payment terms. This is due to the much shorter default periods prescribed in the Act2 that serve as a deterrent;

f)

Subcontractors are more professional and meticulous in preparing their payment claims according to the Act, detailing the breakdown and rates of the works done or goods supplied.

Adjudication Statistics and Cases 5 The Act has been largely successful in helping applicants claim due payment for work done. Since April 2005, 16 adjudication cases were filed with the Singapore Mediation Centre (SMC), of which 13 cases have been determined. Of the valid cases that were determined, all were in the claimants favour and more than half the claimants were awarded at least 90% of the claimed amount filed for adjudication. The claimed amounts (as stated in All applications adjudication applications) ranged from $20,000 to $450,000.

(except one where both parties agreed to an extended time) were determined within 14 days as prescribed in the Act, and the adjudication fees were less than $5,000 for most of the cases. The adjudication statistics are attached at Annex B. More details of some of these adjudication cases can also be found in SMCs website (www.mediation.com.sg). 7 BCA will continue to conduct seminars and work with the industry bodies

to raise awareness about the Act and monitor its effectiveness.

If the contract does not specify a response date and payment date, the default periods prescribed are 7 days and 14 days respectively.

Issued by the Building and Construction Authority on 17 November 2006 For media queries, please contact: Mr. Russell Woo Senior Corporate Communications Officer Tel: 6325 5199 Email: russell_woo@bca.gov.sg

ANNEX A KEY FEATURES OF THE SOP ACT 2004 Rights to payment for work done 1 Any party who has carried out construction work or supplied constructionrelated goods or services is entitled to receive payment for work done or for goods or services supplied. The respondent (payer) must give reasons to the claimant (payee) if he intends to withhold any payment. The claimant could apply for adjudication, if he disputes the reasons for non-payment or the amount paid. Limited period to respond to claims and make payment 2 While contracting parties may agree on a period to respond to payment claims and to make payments, the Act stipulates maximum limits to curb any unreasonably long period for payment, which would undermine the intent and effectiveness of the Act to improve cash flow. These limits are consistent with the norms practiced by the industry. The Act also stipulates default periods of payment response and payment due, if such agreements were not made between contracting parties. The maximum limits and default periods are listed below: Construction contracts a. b. c. The respondent must respond to a payment claim by a claimant within a maximum of 21 days. After serving the payment response, the respondent must make payment within a maximum of 35 days. If the contract does not stipulate the payment periods, the default periods of 7 days for serving payment response and 14 days for making payment will apply. Supply of goods contracts a. The respondent must make payment within a maximum of 60 days for payment due.

b. c.

If the contract does not stipulate the payment period, the default period for making payment is 30 days. The construction industry does not practise payment response for supply contracts.

Pay when paid made unenforceable 3 Pay when paid contractual clauses dictate that downstream payments are conditional upon upstream payments. With SOP, such clauses will be made void to make contracts fairer to parties lower down the value chain, as they will not be aware of the contractual arrangements between the parties upstream. Fast and low-cost adjudication system 4 The Act provides for adjudication, which is an alternative form of dispute resolution besides mediation, arbitration or litigation. It is faster, less formal and less expensive compared to arbitration or litigation. Adjudication does not require the consent of all the parties to proceed and must be completed within a short period of 21 days3. The adjudicators decision is binding for the particular progress payment in dispute. (Annex C compares adjudication against other avenues of dispute resolution.) 5 The Act allows the Minister to appoint Authorised Nominating Bodies

(ANBs) to train and certify adjudicators, maintain a register of adjudicators, establish the adjudicators fees and administer the adjudication process. The Minister has prescribed a limit on the adjudicators fees, so that adjudication will remain affordable. 6 Currently, MND/BCA has one appointed ANB, the Singapore Mediation

Centre (SMC). The industry views SMC as a neutral organization, which is also familiar with payment disputes and issues in the construction industry.
3

21 days include 7 days for ANB to appoint an adjudicator upon receipt of application and 14 days for the adjudicator to complete the adjudication.

Rights to suspend work and place lien on uninstalled materials 7 The claimant is allowed to suspend work or place a lien on uninstalled materials, after adjudication and if the adjudicated amount remains unpaid. Any third party (other than the respondent) affected by the claimants suspension of work will have the right to extension of time in his project. The claimant could also enforce the adjudicators decision as judgment debt to be enforced in court. Rights to pay sub-contractors directly 8 The principal (e.g. developer) can opt to pay directly to the claimant (e.g. sub-contractor engaged by the main contractor), in the event that the respondent (e.g. main contractor) fails to pay the adjudicated amount after adjudication. The principal can recover the payment by deducting it from subsequent payments to the respondent. This is restricted to parties within a principal-respondent-claimant relationship. The intention is to avert work suspension that may result in costly delays to projects.

ANNEX B Adjudication Statistics (April 2005 to September 2006)

(1) Number of Applications without payment response 15 with payment response 1 Status (a) Applications (valid) determined in favour of the claimant * - 11 in favour of the respondent 0
* include partial payment to claimant

16

11

(b) Applications determined as invalid (c) Applications pending determination (d) Applications withdrawn (2) Categories of Claimants vs Respondents (for valid applications) (a) Main contractor claiming developer/owner (b) Subcontractor claiming main contractor (c) Sub-subcontractor claiming Subcontractor (d) Consultant/designer claiming developer/owner (3) Claimed and Adjudicated Amounts (for valid applications) (a) Details of claimed amount Total claimed amount Maximum claimed amount for a case Minimum claimed amount for a case (b) Details of adjudicated amount Total adjudicated amount Maximum adjudicated amount for a case Minimum adjudicated amount for a case

2 2 1 Number 1 3 4 3

Amount S$ $2,069,182.94 $420,428.00 $26,380.00 Amount S$ $1,419,480.66 $420,428.00 $24,980.00

(c ) Adjudicated amount as a % of claimed amount 90% - 100% 80% - 89% 70% - 79% 60% - 69% 40% - 59% 30% - 39% 20% - 29% 0% - 19% (4) Adjudication Fee (ex GST) (for all applications) (a) Range of adjudication fee for a case Maximum adjudication fee for a case Minimum adjudication fee for a case (b) Distribution of adjudication fee $750* - $1,999 $2,000 - $3,999 $4,000 - $5,999 $6,000 - $17,999 $18,000 - $19,999
* $500 application fee + first hour fee ($250 / hour)

Number 6 1 0 1 0 1 2 0

Amount S$ $19,0000.00 $1,250.00 Number 1 8 3 0 1

ANNEX C Comparison Table on Different Avenues of Dispute Resolution: Adjudication Binding but not final. Party is required to pay adjudicated amount first. Party can pursue their rights in Court or arbitration. Take 21 days to complete from application of adjudication. Mediation Not binding and not final. Subject to consent of both parties. Arbitration Binding and final Litigation Binding and final

Decision outcome

Time Taken

Parties may take a long period to agree to mediation. Process usually takes one day (maximum 2 days) to complete upon appointment of mediator. Mediators fee is $400 to $600 per hour.

Take 6 months or more to complete upon appointment of arbitrator.

Usually will take a few months. Court hearing is faster than arbitration because of the court' s rules.

Cost

Adjudicators fee is $250 per hour (or $2,000 per day) subject to minimum of $3,000 and maximum of 10% of claimed amount, or about $28,000 (14 days), whichever is lower.

Arbitrators fee can range from $300 to $800 per hour. An arbitration proceeding Total cost will be can cost from $80,000 to usually about $3,000 to more than $100,000 $5,000 per mediation (excluding lawyers fee). case. Lawyers fee is much higher ranging from 2 to 5 times or more of the arbitrators fee.

Court fee is about same as the arbitrators fee though may be slightly less due to shorter duration. (Assuming a 14-day hearing: Court fee is about $65,000)

Adjudication may or may not require the involvement of lawyers. Lawyers fees, if any, will be minimal due to the short duration of adjudication. Consent of parties Does not require both parties to agree. Adjudication can commence as long as claimant submits a valid adjudication application. Require both parties to agree to go to mediation. PSSCOC Either party can initiate arbitration. Parties to agree on the arbitrator, failing which he shall be appointed by Chairman of Singapore International Arbitration Centre. SIACOC Either party can initiate arbitration. Parties to agree on the arbitrator, failing which he shall be appointed by President or Vice President of SIA. Confidentiality Process and decision is confidential. Process and decision is confidential. Process and decision is confidential.

Lawyers fee is about the same as in arbitration.

There are provisions in both PSSCOC and SIACOC to allow parties to go to court. Either party can initiate litigation. Court rules take precedence.

Process and decision is not confidential.