Can a head contractor deduct back-charges from a subcontractor's payment claim without giving notice?

Under the Security of Payment legislation, a head contractor who wants to set off back-charges against a subcontractor's payment claim must include the back-charges in the payment schedule — specifying the amount of the set-off and the reasons for it. A payment schedule that does not identify the set-off amounts in sufficient detail may be invalid, in which case the full amount of the payment claim is due. Additionally, many subcontracts require the head contractor to give written notice of back-charges before deducting them — and failure to comply with the notice requirements may preclude the deduction.

Builder & Subcontractor Dispute Lawyers — All States

Builder & Subcontractor Dispute Lawyers — Payment. Scope. Defects. Enforce Your Rights.

Q: Can a subcontractor use the Security of Payment Act against a head contractor?

Yes — the Security of Payment legislation in NSW (Building and Construction Industry Security of Payment Act 1999) applies to all construction contracts in the construction industry, including subcontracts. A subcontractor can serve a payment claim on the head contractor and, if the head contractor fails to provide a payment schedule or provides one that reduces the claim, the subcontractor can apply for adjudication. The SOP Act is specifically designed to protect subcontractors and contractors against slow payment and disputed progress claims — it provides a fast-track remedy that does not require the parties to resolve the underlying dispute about liability.

Disputes between builders and subcontractors — over progress payments, scope of work, variations, defects, and contract termination — are among the most common commercial disputes in the Australian construction industry. The Security of Payment legislation provides a fast-track adjudication remedy for unpaid progress claims. A building lawyer advises builders and subcontractors on their rights and manages disputes to resolution.

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⚠ Security of Payment adjudication applications must be lodged within strict time limits — typically 10 business days after the due date for payment or after receiving a payment schedule. Missing the deadline means losing the right to adjudication for that payment claim. Act immediately.

Construction Contract Law

Builder and subcontractor disputes — the legal framework

Builder–subcontractor relationships are governed by a combination of the subcontract, the principal contract (which is often incorporated by reference), and the Security of Payment legislation. Common subcontract forms include the AS 4902-2000 (construction management trade contracts), the AIQS standard subcontract, and bespoke forms prepared by head contractors.

The most contentious issues in builder–subcontractor disputes are: (1) scope creep — whether additional work was within the original subcontract scope or a variation for which additional payment is due; (2) back-charges — whether the head contractor is entitled to deduct the cost of rectifying defective work or completing incomplete items from the subcontractor's progress claim; (3) termination — whether the head contractor was entitled to terminate the subcontract for defective work or slow progress, and whether the subcontractor has a corresponding claim for wrongful termination; and (4) retention funds — whether the retention held by the head contractor has been properly released at practical completion and at the end of the defects liability period.

The Building and Construction Industry Security of Payment Act 1999 (NSW) — and equivalent Acts in all other states — gives contractors and subcontractors the right to serve a payment claim on the party who owes money. The paying party must respond with a payment schedule within 10 business days (NSW) — failing which the entire claimed amount becomes due and payable. If the payment schedule reduces the claim, the claimant can apply for adjudication. Adjudication determinations are made within 10 business days and are enforceable as judgments.

Dispute Matters

Builder and subcontractor disputes we handle

Unpaid progress claims

Recovery of unpaid progress claims — through Security of Payment adjudication (fastest) or contract dispute proceedings in the District Court or Supreme Court (for larger disputes).

Disputed variations

Disputes about whether additional work constitutes a variation for which additional payment is due — advising on the contract's variation clause and the evidence needed to support a variation claim.

Back-charges and defect deductions

Challenging back-charges — advising subcontractors on whether the head contractor's deduction is justified and the process for disputing it through SOP adjudication or contract proceedings.

Subcontract termination

Advising on the validity of a head contractor's termination of a subcontract — and the subcontractor's right to claim for wrongful termination, loss of profit on the balance of the contract, and quantum meruit for work done.

Retention release

Enforcing the release of retention — at practical completion and at the end of the defects liability period — when the head contractor refuses to release the retention without justification.

Defective subcontract work claims

Advising head contractors on claims against subcontractors for defective work — including the cost of rectification, the delay caused by defective work, and the right to set off those costs against the subcontractor's progress claim.

Frequently Asked Questions

Builder and subcontractor dispute questions answered

Can a subcontractor use the Security of Payment Act against a head contractor?

Yes — the SOP legislation applies to all construction contracts including subcontracts. A subcontractor can serve a payment claim on the head contractor and, if the head contractor fails to provide a payment schedule or reduces the claim, the subcontractor can apply for adjudication. The SOP Act provides a fast-track remedy that does not require resolving the underlying dispute about liability.

Can a head contractor deduct back-charges without giving notice?

Under SOP legislation, a head contractor who wants to set off back-charges must include them in the payment schedule — specifying the amount and reasons. A payment schedule that does not identify the set-off in sufficient detail may be invalid, making the full claimed amount due. Many subcontracts also require written notice of back-charges before deduction.

What is the difference between a retention fund and a defects liability security?

Retention is a percentage (typically 5–10%) of each progress payment withheld as security for the subcontractor's performance obligations. It is released in two tranches: typically 50% at practical completion and 50% at the end of the defects liability period. If the head contractor is insolvent, the retention is at risk — some states are legislating to require retention to be held in trust.