How should head contractors amend and administer their subcontracts in 2021 to ensure maximum protection

In today’s highly competitive market, contractors can often find themselves trapped in the crossfire between clients and subcontractors, with claims coming both ways.

In this update, we focus on the amendments to subcontracts that we consider to be the most essential in the mitigation of risk under head contracts.

“Back-to-back” with head contract

First and foremost, contractors should ensure subcontract conditions are back-to-back with the head contract conditions so that, where possible, any risks that have been assumed by the contractor under the head contract are passed down the line to subcontractors.

For back-to-back provisions to work effectively, they must be drafted into the subcontract. It is not enough to refer to the terms of the head contract. As an example, it is not uncommon for a head contract to control subcontracting. Therefore, any secondary contracting by the subcontractor should be appropriately regulated and subject to head contractor approval (if the head contract requires).

Payment Terms

The Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act) prescribes maximum payment terms under head contracts and subcontracts for building work. Maximum payment terms under a subcontract are 25 business days. Contractors should be aware of these maximum payment terms, as penalty interest applies if the payment terms are not met.

Conversion of subcontract security/retention

Head contractors should amend the conversion of security clause in their subcontracts:

(a) to allow recourse to security “immediately” following the provision of written notice;

(b) to allow recourse to security for any amount “claimed to be” due (liquidated or otherwise)
as distinct from “amounts unpaid after the time for payment” (per RCR O’Donnell v
Forge Group Power); and

(c) to expressly survive the termination or expiration of the contract.

These amendments ensure that a contractor can immediately convert security after receiving an unfavourable adjudication decision (see Fabtech v Laing O’Rourke, where the Court confirmed conversion in these circumstances as valid). For any money that may be owing to the contractor, the contractor should set-off those sums against progress claims made throughout the project to retain the full sum of security.


The set-off clause in a subcontract should be amended to:

(a) include amounts “claimed” to be due;

(b) include monies owing under other subcontracts between the parties; and

(c) expressly survive the termination or expiration of the contract.

These amendments will provide a wider right to set off any “claimed” amounts and means that a set-off can be applied across all projects with that subcontractor.

Converting security: Legislative notice requirements

Section 67J of the QBCC Act provides that, before having recourse to security under a building contract:

(a) the contracting party (e.g. head contractor) must give written notice to the contracted party (e.g. subcontractor), advising of the “proposed use” of the security and of the “amount owed”;

(b) the notice must be given within 28 days of when the party calling on the security became aware (or should reasonably have become aware) of its right to obtain the “amount owed”.

This notice requirement does not apply in cases where:

(a) work has been taken out of the hands of the contracted party (e.g. subcontractor);

(b) the contract has been terminated; or

(c) the security is being used to make a payment into court to satisfy a notice of claim of charge (subcontractor’s charge).

Converting security: When must the notice be given?

The key question is when this 28-day period begins to run, which will depend on the unique facts of each case. For liquidated damages, it has been held that the 28-day period commences from the date of issue of the certificate of practical completion.

The current position is not as clear when it comes to claims for unliquidated sums (i.e. damages which are not the subject of agreement between the parties and are determined by the court). In these cases, it is arguable that the 28-day period commences when the unliquidated sum crystallises or becomes ascertainable. An example of an unliquidated sum is a contractor’s liability to a third party for rectification of defects in work carried out by the subcontractor, but which the subcontractor failed or refused to complete itself.

Converting security: the 28-day sting

A failure to issue a 67J notice within the required timeframe will render the notice invalid. The absence of a valid 67J notice can result in a subcontractor successfully restraining a call on security.

Our tips to minimise the risk of an injunction when calling on security are as follows:

(a) If exercising rights to take the defective work out of the subcontractor’s hands, ensure strict compliance with the contractual procedures, which will usually include issuing a notice to the subcontractor that:

(i) identifies the defective work;

(ii) directs the subcontractor to rectify the defect; and

(iii) allows the subcontractor the timeframe stated in the contract for rectification work (or if no time stated, a reasonable time).

(b) Treat the 28-day period as a “time bar” and ensure your project managers know it.

(c) Include a mechanism in your contract to convert “unliquidated sums” to “liquidated sums”. This can be achieved by a clause allowing the superintendent to certify amounts as due and payable.

Release of subcontract security/retention

The new BIFSOPA reforms have led to significant changes in the QBCC Act, particularly concerning defects liability and the release of retention.

Sections 67NA-67NC of the QBCC Act provide for the following:

(a) Where a contract does not provide for release of retention at the end of an identifiable period, then a default period of 12 months will apply, starting from the commencement of the date of practical completion under the subcontract (statutory defects liability period): 67NA.

(b) If retention is retained under the subcontract, the contractor must release the retention amount to the subcontractor in accordance with the subcontract. The exceptions to this law include if the contractor has “reasonable excuse” not to release the retention or the retention is subject of a dispute between the parties: 67NB.

(c) A requirement that the contractor withholding retention must provide notice (in the approved form) to the subcontractor 10 business days before the end of the defects liability period (DLP). The notice must state the date the DLP ends, the amount of retention proposed to be paid to the subcontractor and the date of payment: 67NC.

Where the DLP in a subcontract is linked to another building contract (the head contract), the contractor must give the subcontractor 5 business days’ notice after being given a relevant notice for the DLP in the other contract.

Head contractors should establish internal notification protocols to alert their contract administrators as to the expiry of the DLP under their subcontracts to ensure compliance with the notice requirements under the QBCC Act. A failure to do so could result in significant fines of up to $26,110 or one-year imprisonment. A contractual obligation on the subcontractor to notify the contractor 20 business days before the DLP expires can assist with this.

Contractors should also amend their subcontracts so that security is held not solely to correct defects but also to provide a performance guarantee for the subcontract works.

It is an offence to fail to release ‘retention’ (not security) in accordance with the contract unless the retention is the subject of a dispute.

Protection from claims by liquidators

Most standard subcontracts provide that retention must be released to the subcontract at the following times:

(a) 5% of the contract sum within 14 days of the date of practical completion; and

(b) 5% of the contract sum within 14 days of the final certificate.

The final certificate is issued at the expiry of the DLP in response to the final payment claim by the subcontractor.

It is often the case that a final certificate is never issued. This begs the question of when a subcontractor’s right to the return of its security arises?

There may be cases where there are defects in the subcontractor’s work. We are increasingly seeing subcontractors entering liquidation and being unable to return to the site to rectify defects. In this scenario, it is unlikely for the subcontractor to see a return of its retention money.

A liquidator must weigh up their duty to pursue claims (in the interest of maximising returns to creditors), against the inherent risk of litigation, including being personally liable for costs. Retention under a building contract is usually perceived as low hanging fruit by liquidators because it relates to moneys withheld for work which has been performed – so it is common for liquidators to demand the return of retention as an alleged debt owing to the subcontractor.

A contractor can generally circumvent demands from liquidators if:

(a) the subcontract permits the contractor to terminate the subcontract immediately if the subcontractor commits an act of insolvency and the contractor issues a valid termination notice (to avoid the 67J notice requirement) as soon as the insolvency event is known;

(b) records of tax invoices, purchase orders, receipts of costs related to the completion of unfinished works and/or rectification of defects are kept and provided to substantiate set-off claims; and

(c) the subcontract contains a provision that preserves a contractor’s entitlement to hold onto the retention even where the contractor might otherwise be contractually required to return it.

“Pay-when-paid” provisions

Making the release of subcontract retention dependent on the release of the contractor’s retention under a head contract is void as “pay when paid” under BIFSOPA. The easiest solution to this issue is to require bank guarantees or insurance bonds instead of retention money. Unlike retention money, a bank guarantee or bond is arguably not “money owing” in relation to work under the subcontract.

Careful drafting may also circumvent the prohibition. It may be possible to tie the release of subcontractor retention to a third-party event: for example, tying an electrical subcontractor’s retention to the achievement of a sustainability rating. However, no reference should be made to payment under the head contract, operation of the head contract or work under the head contract. The due date for payment must depend on something related to the subcontractor’s performance.

Release at PC and FC

Head contractors should amend their subcontracts so that the subcontractor is required to supply:

(a) a deed of release as a precondition to practical completion; and

(b) a deed of release after final completion as a precondition to release the subcontractor’s final security.

This will avoid any unexpected ambush claims after practical completion, including adjudication applications.

In QLD, a contract may be amended to limit reference dates accruing between PC and FC (Tailored Projects v Jedfire). However, recent changes to the NSW BIFSOPA equivalent removed the concept of a reference date and introduced a statutory right for a claimant to lodge one payment claim per month. This means that in NSW, it is no longer possible to limit the accrual of reference dates under a construction contract. This change emphasises the importance for a contractor in NSW to require a deed of release as a precondition to PC to prevent progress claims after PC.

Valid Time Bars

Head contractors should amend their subcontracts so that the subcontract superintendent has the right to grant EOTs at their “sole and absolute discretion” (whilst being under no obligation to do so).

Earlier this year, in Growthbuilt Pty Ltd v Modern Touch Marble, the NSW Supreme Court confirmed that this amendment will ensure that neither an adjudicator nor court can exercise the subcontract superintendent’s discretion in favour of the subcontractor to award time barred EOT claims.

Concluding thoughts

The engagement of professional assistance in the preparation of your subcontract suite is an invaluable investment in assuring back-to-back contracts and protection of your rights in the event of a dispute.

Contact us for a fee estimate to update your subcontracts.

*As a disclaimer, the content does not constitute legal advice and should not be relied upon as such. Appropriate legal advice should be obtained in actual situations. Feel free to contact us should you require any assistance in resolving a legal dispute

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader’s specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

Key contacts:

Stephen Pyman- Director



David Cheel-  Senior Associate
Emma Ward- Senior Associate


This post doesn't have any comment. Be the first one!

hide comments

This is a unique website which will require a more modern browser to work!

Please upgrade today!