BuildSafe has considered what may be the most commonly asked questions and provided answers to assist owners, builders and subcontractors in making the decision to use the BuildSafe Security of Payment Scheme (Escrow).
BuildSafe is an independent and neutral third party with no financial interest in, or liability for, your building contract;
the BuildSafe Security of Payment Scheme (Escrow) is a simple, fair, no nonsense, commonsense scheme to help you carry out your building project sensibly and safely and to protect your financial interests when you do;
BuildSafe provides you with the tools to assist you to contract sensibly and safely in accordance with best practice to minimise the prospect of costly and destructive disputes i.e. BuildSafe provides fair, formal conditions of contract free of charge to all users of the service, a fair payment regime and a full suite of documents to allow you to contract effectively;
BuildSafe ensures that you have appropriate insurances in place to protect you from loss;
BuildSafe provides security for the contract deposit and the final payment;
BuildSafe will ensure that any disputes that arise are resolved fairly, promptly and cost effectively;
all instructions, forms and documents that you will need to register and participate in the Scheme are in a simple and easy to use format; and
the process is so simple that all you really need is access to a computer.
The Service is initiated when either the Owner/Principal or the Contractor fills in the Application Form (found on our website). The application form asks for basic contact information for both parties as well as basic details of the building/renovation project as well as the Security Amount payable and will take approx 5 minutes to complete. The Security amount may be either a) the BuildSafe recommended amount (to be calculated using our on-line calculator) or b) any amount agreed upon between the parties.
BuildSafe will then issue a conditional Notice of Acceptance confirming registration, and fixing a date for payment of the relevant BuildSafe fee and appropriate Security Amount in order to initiate the Scheme (with failure to make payment of the Security Amount on time resulting in acceptance being cancelled).
BuildSafe will issue a Notice of Initiation of the Scheme upon payment of the Security Amount by the Owner/Principal.
Once a Scheme has been initiated, the Contractor may apply to Register Subcontractors as Users of the BuildSafe Security of Payment Scheme.
Any Subcontractor nominated by a Contractor will receive an application form from BuildSafe to be completed.
The Subcontractor must then submit the completed application form to BuildSafe.
BuildSafe will then issue a Notice of Acceptance confirming Registration of the Subcontractor and fixing a date for payment of the relevant BuildSafe registration and administration fee (with failure to make payment on time resulting in acceptance being cancelled).
BuildSafe will issue a Notice of Initiation of the Scheme upon payment of the registration and administration fee by the Subcontractor
The amount will vary according to the value of the contract works – refer to the Fee calculator on the Website. The BuildSafe Fee is GST exempt so there is no GST to pay.
BuildSafe is an independent neutral third party which provides Security of Payment Services for the equal benefit of all parties to a construction contract. Therefore it is preferable that the Owner/Principal and the Contractor pay an equal share of the cost of registering and administering the Scheme. However, of course one party can pay the whole of the registration and administration fee if that is what the parties agree, but it makes no difference to how the services are provided and gives absolutely no priority whatsoever over how the services are delivered.
A Subcontractor must pay a registration and administration fee to join the Scheme. The fee is the same irrespective of the Subcontract value which simply reflects the greater extent of security available to Subcontractors in respect of lower value construction contracts.
You will need to pay BuildSafe non-refundable registration and administration Fee on the date specified by BuildSafe in the Notice of Acceptance.
If an adjudication is required, you will need to pay any fees and expenses in relation to that adjudication within two working days of an invoice being rendered by BuildSafe or any third party service provider.
These fees can be paid by direct credit or by credit card.
If any party fails to pay the registration and administration fee or the adjudicator’s fees and expenses by the due date, BuildSafe may either charge the nominated Credit Card where payment by Credit Card has been designated as the payment mechanism for the purpose of the Scheme, or deduct the relevant fees and expenses from the Security Amount.
BuildSafe keeps the interest on the Security Amount to offset the cost of providing the Security of Payment Scheme (Escrow). The overall cost of providing the Scheme has been carefully calculated to be funded partly by the registration and administration fee, and partly by the interest that accrues on the Security Amount.
The BuildSafe recommended Security Amount is calculated depending on the total Contract Value and the proportion reduces as the Contract value increases - refer to the Security Amount calculator on the Website.
This is because with lower value construction contracts, the contract works should, if properly and efficiently carried out, be completed in a relatively short period of time. In some cases that will be less than one month. In such a case the risk to the contractor of non-payment due to the default by the Owner is considerable because the works would be completed before any payment is due under the contract. Under the BuildSafe Security of Payment Scheme, the Contractor is protected from significant loss on smaller jobs because BuildSafe holds a large percentage of the Contract Price and will release that to the Contractor upon proper completion. The Owner is also protected by not having to pay the Contractor a large deposit to cover the Contractor’s risk at such time as there is little or no value of work in place.
On the other hand, the greater the value of the construction contract, the longer the period over which the contract works will be undertaken and over which progress payments will and must be made monthly to ensure cashflow for the contractor. In such a case, the risk to the Contractor of loss through nonpayment is relatively small during the early stages of the project with the risk progressively getting greater as the project nears completion. On the proper completion of the works, the contractor will receive the Security Amount from BuildSafe. Once again the Owner is protected by not having to pay the Contractor a deposit at the start of the project to cover the Contractor’s risk at such time as there is little or no value of work in place.
It can be easily seen that the Scheme works fairly and for the equal benefit of all parties to a construction contract.
You may of course choose to nominate your own agreed upon Security Amount to meet the individual requirements of your situation.
The Owner/Principal must pay the Security Amount on the date specified by BuildSafe in the Notice of Acceptance with failure to make payment on time resulting in the Acceptance being cancelled.
The Security Amount can be paid by direct credit or by credit card.
Please Note: If the Security Amount is paid by Credit Card, merchant fees will apply. You will need to contact us to confirm the additional amount that would be payable for the use of this payment facility.
All Security Amounts are banked into a Trust Account at the Auckland Savings Bank and no funds are released until the Owner is happy with the work and certifies the project has reached Practical Completion / Completion.
Once Practical Completion has been achieved, BuildSafe will release 90% of the Security Amount to the parties in the appropriate proportions.
Upon the expiry of the Defects Liability Period and when the Contractor has completed the Contract Works and remedied all defects notified by the Owner/Principal during the Defects Liability period and Completion has been certified by the Owner/Principal, BuildSafe will release the final 10% of the Security Amount to the parties in the appropriate proportions and BuildSafe's services are then complete.
The Security Amount will be released by BuildSafe to the Contractor at the two stages for payment, namely on Practical Completion and on Completion, provided that the Contractor has properly completed the contract works in accordance with the construction contract.
The Security Amount that the Contractor is entitled to at each payment stage will be released first, to any Registered Subcontractors in the same proportion of each Subcontractor’s subcontract price as the Security Amount is to the Contract Price i.e. if the Security Amount is calculated at 15% of the Contract Price, each Registered Subcontractor will receive 15% of the Notified Subcontract Price (90% at Practical Completion and 10% on Completion) and the balance will be paid to the Contractor.
For example on a $350,000.00 contract where the Security Amount is set at 15%, the Security Amount would be $52,500.00. On Practical Completion the Contractor would be entitled to 90% of that amount, i.e. $47,250.00. A registered plumbing subcontractor whose subcontract price was $20,000.00 would be entitled to receive 90% of 15% of $20,000.00 i.e. 90% of $3,000.00 or $2,700.00. If no other subcontractors were registered in relation to that project, the Contractor would receive the balance of $44,550.00 ($47,250.00 - $2,700.00 = $44,550.00).
The schedule for the release of the Security Amount on a similar project with more than one registered subcontractor could look something like the following:
|Security Amount as a Percentage of the Contract Price||15%|
|Security Amount at 15%||90% Payable on Practical Completion||10% Payable on Completion|
|Balance Payable to Contractor||$42,000||$37,800||$4,200|
Where the Security Amount available for distribution to the Contractor is less than the aggregate entitlements of each of the registered subcontractors because of default or breach on the part of the Contractor, the Security Amount available to the Contractor will be distributed among the subcontractors in the same proportions as each individual entitlement is to the aggregate entitlements of all the subcontractors.
For example, if the Security Amount available to the Contractor in the above example was only $500 on completion because of incomplete or defective work that the Contractor refused to complete or remedy, each registered subcontractor would receive a share of that Security Amount according to the proportion of each subcontractors entitlement to the total i.e. the plumber would receive 2/7 of that amount (being $20,000/$70,000 x $500 or $140) and the painter would receive 1/7 of that amount (being $10,000/$70,000 x $500 or $70). Each subcontractor would of course be entitled to recover the difference between the total Security Amount entitlement according to the value of the subcontract and the amount paid to the subcontractor by BuildSafe from the Contractor directly.
BuildSafe holds the deposit until the work is completed, and secondly, because of the way the payment regime is structured (in accordance with industry standard practice) a Contractor will almost always be about 3 weeks behind in getting paid – i.e. the Contractor’s claim to the end of any given month becomes due for payment somewhere between 2 and 3 weeks later depending on when the contractor gets its Payment Claim to the Principal, during which period further work will most likely be undertaken by the Contractor.
If the Contractor goes bust the Owner/Principal will have no further obligations under the contract and it will simply be a question of determining who is entitled to the Security Amount which in most cases will be a simple and straightforward accounting exercise and in the event of disagreement, the matter will be promptly resolved by adjudication.
By following the procedures outlined above, a home owner can minimise, and in fact can almost eliminate, the risk of loss in the event of a contractor going bust during the job.
Notwithstanding that position, BuildSafe strongly suggests that home owners employ a building consultant or quantity surveyor to assist them process each payment claim to ensure the contractor is paid fairly for the work properly undertaken, that defective work is identified early, and claims are not over-claimed or ‘front-loaded’.
Any Registered Subcontractors will receive a share of the Contractor’s entitlement (if any) of the Security Amount if the Contractor goes bust.
It must be understood that if the Contractor goes bust there will always be a risk that the Owner/Principal will be entitled to the whole of the Security Amount (for example, if there is defective work or the Owner/Principal suffers loss as a result of the Contractor’s default i.e. due to increased costs to complete or delay) and none of the Security Amount might be available for Registered Subcontractors.
BuildSafe does not and cannot insure against that risk. For that reason alone, it is absolutely essential that Subcontractors faithfully follow the payment and dispute resolution procedures under the Scheme and in the event of non-payment or a disputed payment claim, immediately invoke the adjudication provisions. In this industry, it will always be a case of the quick and the dead. Delay in dealing with non-payment of accounts can be fatal to a Subcontractor – so don’t do it for any reason, particularly for the daft reason that you don’t want to upset the Contractor in case you don’t get any future work – do you really want to work for someone who cannot or will not pay their bills? – make it easy for yourself and work for someone who can.
If the Owner/Principal goes bust, the Contractor will have no further obligations under the Contract and it will simply be a question of determining who is entitled to the Security Amount which in most cases will be a simple and straightforward accounting exercise. In the event of disagreement, the matter will be promptly resolved by adjudication. In most cases the Contractor will be entitled to a portion of the Security Amount, if not the whole of that amount, depending on the value of work completed and remaining unpaid at the time the Owner goes bust.
If the value of work undertaken, but unpaid, exceeds the Security Amount, the maximum recovery for the Contractor under the BuildSafe Security of Payment Scheme will only ever be the Security Amount. Once again, for that reason alone, it is absolutely essential that Contractors faithfully follow the payment and dispute resolution procedures under the Scheme to ensure payment matters/disputes are dealt with promptly.
If the parties do not agree about payment in relation to any progress claim or whether Practical Completion or Completion has been achieved, such a disagreement constitutes a dispute for the purpose of the Scheme and the Construction Contracts Act 2002. If a dispute arises, the complainant must give notice to any other party to the construction contract by completing the Notice of Dispute on the Website.
In the meantime any undisputed amount will be released by BuildSafe to the party or parties entitled to those monies.
If the parties are unable or unwilling to resolve the dispute directly within 2 working days of issue of the Notice of Dispute, the claimant must notify BuildSafe by completing the Notice of Request for Adjudication and any such dispute will immediately be referred by BuildSafe (acting in its capacity as a duly authorised agent of the claimant) to adjudication under the Construction Contracts Act 2002.
Adjudication typically takes two to six weeks depending on the nature and number of the issues and the commitment of the parties to the process. Any disputes in relation to Practical completion or Completion will be dealt with in a matter of a few weeks under the special fast track adjudication procedures that have been designed for use with the Scheme. Any hold up of payment associated with any such disputes would be minimal – that is how efficient the backup dispute resolution process is and needs to be.
The Cost of using the BuildSafe Security of Payment Scheme varies according the scale of the project.
You will need to pay an administration fee which ranges from $50 per party on small scale projects under $5,000 up to a maximum of $337.50 per party for a large scale $1m project. Please see our online fee calculator to find out how much it will cost for your specific project.
This amount is separate and in addition to the Security Amount which the Owner/Principal will need to pay: The Security Amount can be either the BuildSafe recommended amount (please see our online Calculator)
In addition to using the trust account part of the BuildSafe Scheme when you register your building project, you also get access to our fair and independent conditions of contract, guidance on managing the construction process and various form templates to help reduce the chances of there being any confusion or disputes during the works. The financial cost benefit of which is certainly valued at more than the fee to use the scheme itself.