Michelle Cirson (00:01)
Hello, welcome to the Subbies Toolbox Podcast. I'm your host, Michelle Cirson, construction adjudicator, lawyer, and founder of the Subbies Toolbox. Today, after many many questions from my previous episodes, I'm going to explain to you what an accounts receivable escalation procedure includes or contains within it. So this might be a little bit of a boring podcast.
Please don't switch off because I'm going to give you the juice on what you should be putting in your accounts receivable escalation procedure if you're doing construction work. So, without further ado, in the construction industry we have special laws to help you get paid. They're called security of payment laws. And your accounts receivable escalation procedure needs to capture and record the steps that your staff need to take or you need to take.
In the process from the point that you are preparing your invoice. In fact, further further earlier, you need to actually capture some of the steps in your contract review process to make sure that you can make payment claims in the right time frames that you need to be paid so that you can deliver work or get materials or big pieces of equipment on site on time. And then you need to follow the process. So, in terms of the bouncing ball, I want you to think of the bouncing ball as your invoice. So you're gonna it all starts with a payment claim, you're gonna
give your
You give your invoice. Now, once you give your invoice, the builder is supposed to give you a payment schedule, or if you're in the Northern Territory, they call it a notice of dispute. But for the purposes of this podcast, I'm just going to keep it the terminology as a payment schedule because most of you will be familiar with the wording that I'm using. So you give your invoice, the builder is required within a time frame under the Security of Payment Act in your state or territory to give you a payment schedule. And then from that point
You have options about what you can do if the builder is saying they're not going to pay you in full. Now, where it can get really complicated is if the builder doesn't give you a payment schedule, because in many states or territories, you're actually required to give what's called a second opportunity notice to give a payment schedule. And the way that I see subcontractors get tripped up all the time is giving that second opportunity notice to give a payment schedule after the due date for the payment schedule
has expired. So each state and territory has time frames for you to for the builder to give you a payment schedule in reply to your payment claim. And there can be differences within the different states and territories. So I'm not to try and quote you time frames in this podcast. For the purposes of the podcast, what you need to know is you give a payment claim, builder is supposed to give you a payment schedule under the Security of Payment Act if they're not going to pay you in full. If the builder misses the deadline to give you a payment schedule in many states or territories
You have to give what's called a second opportunity notice, and it is a notice telling the builder that you intend to apply for adjudication and that they have X number of additional days to give a payment schedule. So this can be also different in different states and territories. The time frame, the second chance for them to give a payment schedule might differ depending on what state you're in.
Now, if the builder still doesn't give you a payment schedule, then you are required to apply for adjudication within a period of time after the deadline to give a payment schedule has expired. And I see subcontractors come unstuck all the time because the time frames within the security of payment laws around the country are very complicated to understand and interpret. So if you pick up a Security of Payment Act around the country and you try to map out or work
out the time
Time frames for doing things, it is not straightforward. So if you're relying on AI to do this process for you, you could very well come unstuck. And in fact, one of our Subbies Toolbox members did this very thing last week. They had a deadline for a payment schedule to be given by their builder. The builder did not give one, and it asked Claude, what do I do now? And Claude said, Well, you have to give the second opportunity to give a payment schedule notice and helped the subcontractor draft that notice. Now
A side thing is we actually have these template notices inside our security of payment toolboxes in this for Subby's toolbox members. So this member actually had access to the template that I had personally drafted and also a flowchart on when the timing to give this, but
In a moment of, well, this might be quicker, I'll just ask Claude rather than try and log into the toolbox or talk to Michelle about it. I don't want to bother her, I'll just jump into Claude and I'll ask the question. So Claude helped this toolbox member draft that second opportunity notice. He gave it to the builder and then he said to me, Hey, the builder didn't reply to my second opportunity notice. I think I'm ready to apply for adjudication. Can we talk about this in the QA? So when we were talking about it in Zoom, I checked the contract.
The due date for payment and the process that subcontractor was supposed to have followed. And very quickly I said to him, Listen, you've given your second opportunity notice too early. You gave it as soon as he missed the deadline for a payment schedule, and you were supposed to wait until the due date for payment and then give it. And he's saying to me, But how can this be the way it works? Why do I have to wait till the due date if the builders missed the deadline?
Yeah, I completely agree. Sometimes the way that our legislation is drafted by people who are not in business in Parliament don't really think logically about when we should be paid or when we should have the ability to chase that payment. So that is one of the pitfalls of the drafting of the security of payment legislation is that if you don't get given a payment schedule, you have to wait until the due date for payment in the states and territories that require the second opportunity notice before you can give it.
give the builder a second opportunity which means that they get time after the due date for payment to tell you why they're not paying you whereas the act was meant to facilitate you being told prior to the due date coming around so that you had certainty over what the builder agreed to pay you and what they didn't. So all that aside, the point I'm trying to make is that this particular toolbox member put it into Claude, asked it the question and he sent me a screenshot of Claude's answer when he went back after our Zoom meeting and said, hey Claude what gives?
I asked you this question. You told me that I needed to give it after the payment schedule due date had come around and the builder didn't give me one. I gave it and I was wrong. And Claude admitted and said, yeah, sorry, that was my oversight. I've misinterpreted this. You were actually supposed to give it from the due date for payment. Now, this this sub Subbies toolbox member, thankfully.
In our sessions, we have touch points so regularly that he never got too far down his process before I caught him and said, Hey, just let the real human help you with the stuff because the AI person isn't clear-cut all the time or always in the right. So thankfully, we caught him and we've been able to get him back on track so that second opportunity notice is able to be given from the due date. But the accounts receivable escalation procedure.
And the templates that you need to be able to take those steps. If you set that up properly and you don't just rely on AI to have that done, then you will know when these deadlines come around, and you won't have to worry about it when you are in that pressure cooker period where you go, the builder's not paying me, or I didn't get paid for this last month, and he's still ghosting me on it. No, he's not going to pay me for it. How do I make this builder do what I needed to do? I need to know whether he's going to pay me this money. Your accounts receivable
Escalation procedure, if you put it together when you're not in that pressure cooker moment of time, if you put it together in advance when you don't even know who the builder's going to be, it helps you take a step back out of the emotion of the situation and identify what you will do in every single situation. So when you are consistent, you become non-threatening. So if you use a procedure that looks procedural, it looks like you're using templates and forms and that you've got email scripts and
Things like that, the builder isn't going, geez, you're contractual because you haven't drafted something in the middle of being in the emotion of it. In fact, you drafted it back when you were completely probably bored out of your brain writing your SOPs for your business. Now, the toolbox procedures that we have for the accounts receivable escalation procedure are in what I call good bloke language. They're intended to be non-threatening and matter of fact, and explain to the builder you would appreciate that the Security of Payment Act requires
Us to give you this notice. We're really willing and able to do whatever's required. Please just do your part, Mr. Builder, and give me my payment schedule or tell me whether or not you're paying me. So escalating your accounts receivable escalation procedure consistently and procedurally makes you non-threatening. And in fact, telegraphs to the builder that
You're a professional subcontractor, you know what you're doing, you know how to get yourself paid, and you've got somebody helping you with these things. So, what goes into an AREP A.R.E.P accounts receivable escalation procedure? The first thing is knowing when your reference dates are under your contract so that you give your payment claims in the time frame that is the correct time frame to give them under the contract. Now, this is a very important point because in
Almost well in every state and territory except for Victoria, if you put your payment claim in on or after the reference date, then you ha will have a valid
Payment claim for the purposes of having a valid reference date. And the reference date is the date the contract says you're allowed to put your payment claim in, or if the contract doesn't say anything at all about when you can put your payment claim in, it would be the last day of the month. So you need to identify in your contract when does this contract say I'm allowed to give this payment claim.
The age-old pushback the builders have given in the past has been, well, you didn't give your payment claim on the 25th, and so therefore you're not getting paid until the end of next month. That has never been able to fly because the Security of Payment Act said you have to put your payment claim in on or after.
Reference date arises from each reference date on or after the reference date. Victoria has just had a security and payment legislation update, and in that update, they say that if you give your payment claim prior to the reference date, it's taken to have been given on the reference date, and the time starts ticking for your due date for payment
On that reference date. Now, this is not something that I'm a fan of, but it is something you need to be aware of because now if you do not give your payment claim on the reference date in Victoria, it will be taken to have been given when the reference date comes around. So if your reference date is the 25th of the month and you give it on the 26th, because when you sent the email, you accidentally left off the accounts in the accounts accounts at
buildingcompany.com.au, you accidentally left off the S, you got a bounce back, but your staff member left for the day, didn't realise it didn't go. Builder never got it on the twenty fifth. So on the twenty-sixth you come to work and you go like, gosh, we accidentally sent it on didn't it bounced back or didn't get sent. I'm gonna resend it now this morning. You hit send. Well
Your payment claim having been given on the 26th, which is after the reference date, will now be taken to have been given on the next reference date, and you won't be able to be paid for a whole extra month. So this is a real problem with the drafting.
But it is the way that builders have always argued if you don't get your payment claim in on time, you're going to get kicked into the next month's progress claims. So having an accounts receivable escalation procedure, step one, is knowing what your reference date is and making sure your procedure supports you in being ready to give your payment claim on that reference date as best you can. And in the states and territories where they can't get away with that, yes, you can give it on or after, but we like to do the good bloke, just jump through the hoop if the hoop costs us nothing.
to jump through our process because if you are working to an imaginary deadline and going, I'll have to have it in on the 25th because the builder says it has to go in on the 25th.
The benefit to you commercially is that you're invoicing more frequently. You're not letting the kick letting time lag between when you could have given an invoice and when you might be entitled to be paid. So those invoices will become due earlier if you give them on the reference date. So there are commercial benefits to just doing what the builder's asking. Plus, it does feed into the good bloke approach to your what counts receivable escalation procedure, which rule number one is don't unnecessarily rock the boat. If we can comply and it costs us nothing to do the admin, we just do it. We do it to keep
The peace because we want to behave non-threatening. That said, if the builder starts pushing back or taking a position that they actually doesn't suit us and they're not entitled to, we have the ability within that procedure to communicate appropriately to the builder why we shouldn't have to have to do what they're saying or we shouldn't have to wait longer to be paid. Step two is making sure that you have a valid payment claim. And
This is quite an interesting situation because a lot of subcontractors have on the bottom of their invoices from Xero or their accounting software have put on there this is a payment claim made under XYZ Act, whichever state or territory you are.
And they assume that because they wrote that on their invoice that it's a valid payment claim for the purposes of the Act. But that's not all you need to do to have a valid payment claim under the Act. You actually need to have a payment claim that identifies the work that you carried out, and there's about half a dozen other little criteria to tick that will effectively get you kicked out of adjudication if you do it the wrong way. So for example, if you inconclusively claimed an amount for payment, so if you on the front page
of your trade breakup you say I want to be paid $262,000 and on the second page there is a summary that says I want to be paid $219,000 including GST and there is no obvious explanation.
as to why there are two separate figures that you're claiming on your payment claim and the builder can't work out precisely what it is you want to be paid, that would not amount to a payment claim under the Act, even if you wrote on there the endorsement, this is payment claim made under the Act. So
Won't go into detail in a 20-minute podcast about all the things you need to have on your payment claim. The point that I'm making is that your accounts receivable escalation procedure needs to have provision in it to check and make sure that your payment claim you're giving is given on or after the reference date or in Victoria on the reference date, and step two that you have a valid payment claim. The next part of the process is all about time frames and good bloke admin. So the the next part of the process, once you give that payment.
claim is the builder's payment schedule. And we often have really robust discussion about this in our Zoom QA with our toolbox members because some of them say, well aren't I better off to just let them miss the date than to follow them up in a happy good bloke way and say, hey don't forget to give me the payment schedule for my invoice this month or hey just letting you know the deadlines tomorrow, are we still going to get a payment schedule?
The reason that I always try and get the builder to give you a payment schedule in an accounts receivable escalation procedure, I always recommend that we have good bloke follow-up.
In the period between when you give your payment claim and when you receive your payment schedule. That is because, number one, the sooner the builder commits to what they're going to pay you, the more certainty you have around being paid, and the better your chances are of enforcing it if they admit that something is required to be paid. So you want to get them to put themselves forward in a position as quickly as possible because then you have them admitting an amount that is due for payment. The longer you give them to
Dream up reasons not to pay you, the less likely you are to be paid. So we always recommend that in your accounts receivable escalation procedure there is good bloke follow-up between when you give your invoice and when you give get your payment schedule. The other reason is because if you miss getting a payment schedule within the first time frame that the builder is required to give you one, in many states and territories, as I said earlier in this podcast, you have to give them a second chance to give one. So it's better for you to get the information earlier and lock
them into a position rather than be in limbo and then have to do the admin required to give a second opportunity notice. So always better to do the good bloke follow-up prior to the payment schedule being given. The third reason is because you're always trying to prepare your next payment claim and you're going to want to know what they have agreed to pay in your certified amounts prior to preparing that next payment claim. Now this is probably going to get a little bit
Technical for some of you listening, but we always recommend in our payment claims rather than claiming everything that you've ever done less previously certified, we recommend that you claim everything you've ever done less previously paid into your bank account. And that's because builders sometimes will give you payment schedules and then they still won't pay you. And if time has run for you to enforce those prior payment schedules, it's possible that you are not going to have that amount back on
the
table for payment in your next payment claim that you might have already given before you realised the builder wouldn't pay.
To be able to chase all that money at once. So the cost of debt recovery can be exponentially more if you have not got everything on the table every single month for payment. So everything we've ever done, less previously paid into our bank account. Some of you will say, well, if I start using the previously paid amount and the builder's already certified my last payment claim, they're gonna get their knickers in a in a knot because they're gonna have to give me a payment schedule because I'm reclaiming everything from last month, which has been certified, it's just not been paid yet. Fully appreciated.
They might get their knickers in a knot, however, they have to give you a payment schedule anyway under the Act. So it actually is better for you, and it costs them nothing. They have to do this paperwork anyway to just acknowledge that that's not due yet, due on this date, and it can be as simple as that in their payment schedule. But the
The problem you have, the Achilles heel you have, is that if you don't put that money back on the table for payment and you just trust that they will pay you for last month.
If we end up in a Barney this week, they will just turn the tap off on all of your prior payments, and you will have no choice but to give a fresh payment claim, reclaiming unpaid amounts from prior claims, and the builder will have bought themselves an extra month and a half in the process. So I'm here to look after you, the subcontractor. That's why I recommend previously paid into our bank account, not previously certified, when you're doing your payment claim template. Now, if you are
Do not get a payment schedule. You need to know what the timeframes are and capture in your account's receivable escalation procedure whether or not you have to give her a second opportunity notice. And
For example, in Queensland, there is no requirement for a second opportunity notice. So the deadline for you to apply for adjudication will just start ticking after the due date for payment. So you're going to be in a situation where if you're working in multiple states or territories, you're going have to understand the time frames for different states and territories about whether there's a second opportunity notice and when you would apply for adjudication.
Now, in terms of applying for adjudication, you're going to be wondering: should I be doing it this month or should I just wait till the end of the job? Because I don't want to upset them now. They have certified $300 out of my $420,000 payment claim, and I'm really, really hanging out for at least that $300,000 payment. I could probably survive if they give me the $300,000, but
If I fight them on it, they probably won't pay any of it, and then I'm going to be on the hook for this $420,000 and chasing them through adjudication. So I give you that example because that's the most common pushback I get from subcontractors when we say, hey, you need to escalate your accounts receivable escalation procedure. If you do not get a payment schedule, you need to be looking at the procedure to suspend work. So that's the next step in the process. No payment schedule, no payment by due date. Do we suspend work? And if you're in Queensland,
you have other options as well. You have a set
Notice of intention to apply for legal proceedings, a section 99 warning notice, and you also have a monies owed complaint option as well. That is in no other state or territory other than Queensland at the time that I'm recording this podcast. So bear that in mind that in different states and territories you will have different options. Now, in some other states and territories, you will have the ability if money is in a project trust account, so Western Australia and Queensland come to mind, that you can give what's called a PPS registration under the personal
Property security register. So if you are a beneficiary of a trust account, an amount becomes due under your contract. In Western Australia, you can make a registration at that point. In Queensland, at the point in time that you become a beneficiary of a trust account, you can make a PPS registration at that point in time. Also, something else to capture on your account's receivable escalation procedure. Now I want to be up front with you guys.
I've really bamboozled you with a whole bunch of steps in this podcast. And you could by rights get the transcript, stick it into AI, and ask it to create you an accounts receivable escalation procedure based on what I have said to you. But I am concerned that the steps and the nuances required for each different state and territory, and also the steps and nuances where the case law behind the Security and Payment Act, so judge-made decisions.
Judge-made principles are not captured in the security of payment legislation. So this is quite a complicated process, and oftentimes what I see is subcontractors trying to have a crack at this and then not having any success, upsetting their clients because they're wrong on the timing or because
They upset the clients because they're actually, you know, going early or being too aggressive in the way that they're explaining things. So having a systematic approach, you really need to have the templates and the tone of what you're asking for needs to be done in a strategic way so that you're not upsetting the Apple cart. You're actually just giving them what I call the Telstra treatment, which is the procedural treatment that everyone knows needs to go
be endured in order to go through a process and come out the other end. And if you're listening to this podcast and you're trying to take notes, you're getting frustrated with me, I apologise. But
If I was to sit here and explain to you step by step what to put into an accounts receivable escalation procedure for every state and territory, I'd probably exceed the length of this podcast with all the toolbox recordings that we have in there, which took me six months to record. So we have eight different jurisdictions. Every single state and territory has a different security of payment law. I think four have been updated in the last five years, so they don't stay the same, they actually change. And being across
All of these things is not fair on a subcontractor. You are organising people to go to site, you are tendering, you are doing the payroll, you are doing marketing for your business, you're worrying about licensing, you're pricing up jobs, you're trying to find appropriate solutions to buildability issues on site. There are no end of business-related things that you need to be across and intimately understand in order to actually achieve good business outcomes for you.
Understanding the minutiae of every state and territory's security and payment law, even just one state, if you're just working in one state, understanding the ins and outs of that is not something you need to be an expert in, it is just something you need to have a procedure for so that you can fall back and know at every given point in time I have been
On the right track, or I know that when I get to a point in this process, I need to go and get some help so that I don't get too far down the rabbit hole without having enforced my right to payment. So one thing that I will say is you won't have heard me say in there that you need a letter of demand. So in your accounts receivable escalation procedure, I don't recommend you give letters of demand. The reason I don't give letters of demand in construction is because construction has its own laws to get you paid. It doesn't require
You to give a letter of demand, and if you give a letter of demand, all you're telling the builder is you haven't worked out how to get paid yet. So when I was builder side, we would receive letters of demand and I would look at them and go, cool, they haven't worked out how to get paid yet. Nothing to see here, nothing to worry about, nothing they can enforce. They've given me a letter of demand, and that is it. The other thing I don't recommend in construction, unless we're chasing an amount less than $4,000, is a debt collector.
So
There is another podcast about that, why you shouldn't use debt collectors in construction. So dig that one up if that's of interest. But if you're listening to this podcast and you want to know more about what is the right accounts receivable escalation procedure I should have in my business based on where I'm working and the nature of work that I'm doing and the people that I'm working for, then you can book a scoping call with me and I will I will have a look at it. I will sit here with you on Zoom and we can talk through exactly what you're doing. The the call will always be with me.
It's not going to be with some random person. You will actually get FaceTime with me for a free scoping call to work out what is the best way for you to implement an accounts receivable escalation procedure in your business. So, marketing will put that link in our show notes. And if you would like to book a scoping call with me, please do that. The sooner that you get this under control in your business, the less likely you are to have amounts that you can't use this special regime to get paid for. And sometimes when you run out of time,
To use security of payment laws in construction, you have to use the court, and that can be very expensive. So, always very important to as quickly as humanly possible enforce that accounts receivable escalation procedure. So hopefully that was helpful, and yeah, I look forward to hearing from some of you.
