Can You Deduct Subby Defect Costs in a NSW Payment Schedule?
Key Takeaways:
Failing to issue a payment schedule within the time required by the contract, or within 10 business days after service of the payment claim — whichever expires earlier — typically exposes a head contractor to the full claimed amount, limiting the ability to raise defect defences.
Vague references to "poor workmanship" in a payment schedule are highly likely to be rejected by an adjudicator; any set-off must explicitly quantify the cost of rectifying the defective work.
Contractual "pay when paid" provisions have no effect under New South Wales security of payment legislation and cannot be relied upon to withhold a progress payment.
A head contractor serving a payment claim on the principal must include the required supporting statement in the approved form; failing to do so exposes the head contractor to penalties of up to $110,000 for a corporation or $22,000 for an individual under section 13(7), while knowingly providing a false or misleading statement under section 13(8) carries the same monetary penalties and, for individuals, the additional risk of up to three months imprisonment. Notably, a missing or non-compliant supporting statement does not invalidate the payment claim itself (TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 93), but creates significant regulatory and civil exposure.
The subcontractor’s progress claim has just landed on your desk, but their work is riddled with defects, incomplete, and actively holding up the critical path. They are demanding full payment under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act), ignoring the fact that your team will now have to spend thousands rectifying their mistakes. You know the quality of the work does not justify the invoice, but the statutory clock is already ticking. The challenge now is translating your commercial frustration into a legally valid deduction that an adjudicator will uphold, rather than watching a contested claim convert into a mandatory payout.
The Immediate Decision: Assessing the Defective Work Payment Claim under the SOP Act
You may have less than 10 business days to respond if the contract requires an earlier payment schedule; in any event, the statutory deadline is the earlier of the contractual timeframe and 10 business days after the payment claim is served. The most disciplined head contractors treat the first 48 hours as a dedicated assessment window — the moment to gather evidence and lock down precisely what costs will be withheld — so that the formal schedule can be drafted and served well before the legislation shuts out your contractual defences. This "48-hour protocol" is the single most effective habit for protecting your position, and everything that follows is built around it.
Separating Statutory Entitlements under Section 8 of the SOP Act from Contractual Set-Off Rights
A subcontractor's entitlement to a progress payment under section 8 of the SOP Act in NSW must be contested via a formal statutory mechanism, regardless of broad contractual set-off rights.
The primary governing statute for this process is the SOP Act. As established by section 8 of the SOP Act, any party who undertakes to carry out construction work or supply related goods and services under a contract is statutorily entitled to a progress payment. This gives the subcontractor a right to be paid that runs alongside — and independently of — the specific terms of your head contract, subject to the SOP Act applying and to the limits in section 8(2) of the SOP Act concerning certain Home Building Act 1989 (NSW) matters.
When a dispute arises over defective work, head contractors often assume their contract’s broad set-off provisions allow them to withhold funds naturally. However, the enforceability of this clause depends on strict procedural compliance. A broad contractual set-off clause does not operate on its own under the SOP Act; its effectiveness turns entirely on the head contractor articulating that set-off within a valid payment schedule. If you fail to formally invoke this statutory procedure, your contractual right to deduct funds or run a liquidated damages defence may be sidelined during adjudication.
Navigating the Payment Schedule Deadline under Section 14 of the SOP Act
Under section 14 of the SOP Act, a respondent who is served with a payment claim may reply by providing a payment schedule. If the contract requires a payment schedule sooner than 10 business days after service, that shorter contractual timeframe applies; otherwise, the statutory backstop is 10 business days after the payment claim is served.
This is a hard procedural hurdle. The statutory timeframe is calculated in business days, so weekends, public holidays and 27–31 December are excluded, but the window remains extremely tight for gathering site evidence of defects. If you intend to deduct money for poor workmanship, the payment schedule is the only place you can raise those deductions. Because the deadline is absolute, commercial teams must begin collating evidence of defective work the moment the claim arrives, often working closely with NSW building and construction lawyers to ensure the document is served in time.
Head Contractor Risks with Supporting Statements under Section 13 of the SOP Act
When a party claiming entitlement to a progress payment triggers the statutory mechanism by formally serving a payment claim under section 13 of the SOP Act, head contractors face an additional compliance layer that subcontractors do not. A head contractor must not serve a payment claim on the principal unless the claim is accompanied by a supporting statement in the form approved by the Secretary, indicating that it relates to that payment claim and declaring that, to the best of the head contractor's knowledge and belief, all subcontractors (if any) have been paid all amounts that have become due and payable in relation to the construction work concerned. Mishandling this requirement can draw severe scrutiny from regulators.
The risk sharpens when you are simultaneously withholding funds from a defective trade. Under section 13 of the SOP Act, serving a payment claim on the principal without the required supporting statement, or knowingly serving a payment claim accompanied by a supporting statement that is false or misleading in a material particular, exposes the head contractor to substantial statutory penalties. For corporations, the maximum penalty under section 13(7) for failing to provide a supporting statement is 1,000 penalty units ($110,000); for individuals, 200 penalty units ($22,000). For the more serious offence of knowingly providing a false or misleading statement under section 13(8), an individual also faces up to three months imprisonment in addition to, or instead of, the monetary penalty. Importantly, however, the NSW Court of Appeal confirmed in TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 93 that a missing or non-compliant supporting statement does not of itself invalidate the payment claim or render its service ineffective — the statutory penalty is the primary enforcement mechanism, not claim invalidity. Nonetheless, a supporting statement known to be false creates separate civil exposure for misleading and deceptive conduct and will attract scrutiny from NSW Fair Trading as a compliance offence.
The practical exposure runs in two directions. First, an inaccurate or absent supporting statement may prompt the principal to scrutinise or dispute your upstream claim and can create separate regulatory or civil exposure, even though a missing or non-compliant supporting statement does not of itself invalidate the payment claim. Second, submitting a statement known to be false is treated by NSW Fair Trading as a compliance offence rather than a mere technicality, and it is the kind of conduct that attracts scrutiny during audits and can feed into licensing consequences.
The tactical discipline is to reconcile your downstream position before you sign anything upstream: where you are disputing a subcontractor's claim, the supporting statement should reflect the true state of that account rather than paper over it, because the document is far more likely to be tested when money is actually in dispute.
Drafting a Defect-Based Payment Schedule That Survives Adjudicator Scrutiny
With your upstream position reconciled, attention turns back to the schedule itself. You are now drafting the response document, and this is where most defect defences are ultimately won or lost. Vague complaints about "poor workmanship" or "delays" will not protect your cash flow if the dispute proceeds to an adjudicator. This section provides the exact mechanics for forensically quantifying rectification costs and linking them securely to the withheld amount in your schedule, ensuring your deduction is viewed as a valid set-off rather than an administrative excuse.
Why Generic "Poor Workmanship" Deductions Fail in NSW Adjudication
A NSW adjudicator is likely to reject any deduction for defective work in a payment schedule that lacks a forensic breakdown of rectification costs.
Head contractors frequently attempt to withhold funds by inserting a single line item into their schedule citing "defective works" or applying a blanket percentage reduction against the claim. If the subcontractor escalates the matter, an adjudicator is highly likely to dismiss these generic deductions entirely. Adjudicators require precise calculations that map the specific defect to a quantified cost of repair. A robust adjudication response NSW must move beyond broad grievances and establish exactly how the withheld amount was calculated.
What adjudicators actually look for is a defect-by-defect trail. For each item of allegedly defective work, the schedule should establish three things:
Identification — the defect described with enough specificity that the claimant could locate it on site.
The failed standard — the contractual requirement or specification the work does not meet.
A discrete cost — a specific dollar figure attributed to rectifying that item, rather than a global reduction across the whole claim.
A schedule that says "tiling to level 2 bathrooms falls out of tolerance under the specification, rectification quoted at $X per the attached quote" will survive scrutiny in a way that "defective tiling — $X" will not. The other recurring error is raising defects in the adjudication response that never appeared in the schedule; an adjudicator is generally confined to the reasons given in the payment schedule, so a defect you discover after serving the schedule, or one you simply forgot to particularise, is often shut out entirely regardless of how genuine it is. The lesson practitioners repeat is that the schedule, not the later submission, is where the case is won or lost, so every dollar withheld must be traceable to a described defect and a costed remedy at the moment the schedule is served.
Properly Quantifying Defect Rectification Costs in Your Schedule
To survive scrutiny, your payment schedule must be structured as a detailed evidentiary document. Simply stating that a trade failed to meet standards is insufficient; you must itemise the specific areas of non-compliance and attach the cost of fixing them.
This requires actionable evidence. Before serving your schedule, assemble:
Date-stamped photographs of the defective work, clearly showing the specific non-compliance.
Site diary entries contemporaneously noting the failure and its impact on the works.
Formal defect notices already issued to the subcontractor.
Third-party rectification quotes, or a detailed internal breakdown of the labour and materials required to perform the repair.
Crucially, every dollar you withhold must trace back to one of these sources rather than to a general impression that the work fell short.
If your head contract includes specific defect liability provisions or a strict construction time bar clause, you should explicitly cross-reference those clauses in the schedule to anchor your deduction to the agreed terms. Engaging a NSW security of payment lawyer at this drafting stage can be critical to ensuring the schedule meets the stringent requirements of the Act.
The Statutory Ineffectiveness of "Pay When Paid" Clauses under Section 12 of the SOP Act
When drafting a payment schedule, head contractors must be aware that they cannot rely on principal non-payment as a justification for withholding funds from a subcontractor.
Under section 12 of the SOP Act, provisions in construction contracts that make payment contingent on the payer receiving funds from a third party have no effect in relation to payment for construction work or related goods and services. This protection may be severely limited if you attempt to use "we haven't been paid by the developer yet" as your reason for scheduling a nil amount. Because "pay when paid" provisions have no effect under the SOP Act, an adjudicator is likely to dismiss this argument outright, exposing the head contractor to liability for the claimed amount.
The Legal Consequences of a Defective or Late Payment Schedule
If your commercial team missed the deadline, or if the schedule failed to properly detail the reasons for withholding payment, the legal landscape shifts dramatically against you. The subcontractor may now bypass your defect arguments entirely, pursuing the full claimed amount as an immediate statutory debt. This section details the harsh consequences of non-compliance and the narrowing options available if you are forced to defend an unanswered claim in court.
Liability Under Section 14(4) and Enforcement Consequences Under Section 15 of the SOP Act
If a respondent fails to provide a payment schedule within time, section 14(4) of the SOP Act makes the respondent liable to pay the claimed amount on the due date for the relevant progress payment. If the respondent then fails to pay that amount by the due date, section 15 of the SOP Act gives the claimant powerful enforcement options, including recovering the unpaid amount as a debt in a court of competent jurisdiction or making an adjudication application.
This creates a separate exposure channel that operates independently of the actual merits of the subcontractor's work. In debt recovery proceedings under section 15 of the SOP Act, the respondent is not entitled to bring a cross-claim or raise a defence in relation to matters arising under the construction contract — meaning defences such as defective work, incomplete work, or disputed valuation cannot be raised in those proceedings. It should be noted, however, that defences arising outside the construction contract are not necessarily barred by section 15(4) of the SOP Act: the NSW courts have recognised in decisions including Marques Group Pty Ltd v Parkview Constructions Pty Ltd [2023] NSWSC 625 that a respondent may in certain circumstances raise a defence grounded in the Australian Consumer Law, such as misleading or deceptive conduct, because such a defence does not arise "under the construction contract" within the meaning of the provision.
This can effectively lock out arguments that the work was defective or incomplete at the summary enforcement stage, converting a highly debatable invoice into an immediate statutory debt. If you find yourself in this position, seeking urgent commercial law advice is often necessary to navigate the immediate financial exposure.
The Subcontractor’s Pathway to Summary Judgment in NSW Courts
When a head contractor fails to serve a valid payment schedule in time and then fails to pay the claimed amount by the due date, the subcontractor is empowered under section 15 of the SOP Act to enforce the unpaid amount through the courts as a statutory debt. The standard procedure may involve the subcontractor seeking judgment to recover the unpaid amount.
In these proceedings, the court's role is not to assess whether the work was defective, but to confirm whether the circumstances in section 15 of the SOP Act exist, including that the respondent became liable under section 14(4) (SOP Act) because no payment schedule was provided within time and that the claimed amount remained unpaid by the due date. The legislation deliberately restricts the respondent's ability to bring cross-claims or defences arising under the construction contract — meaning arguments about poor workmanship, incomplete work, or delays are barred at this summary stage under section 15(4) (SOP Act). Defences not arising under the construction contract, such as those grounded in the Australian Consumer Law, may remain available but are fact-specific and legally complex. The focus remains strictly on procedural compliance, forcing the head contractor to pay the debt first and attempt to recover the disputed funds through separate, lengthier litigation later, a scenario where a well-timed Calderbank offer strategy may become relevant.
Exploring Jurisdictional Error Defences as a Final Recourse
If an adjudication determination goes against you, or if you are facing summary judgment, challenging the outcome is exceptionally difficult and strictly limited to specific legal grounds.
Identifying Jurisdictional Error: You may be able to challenge a determination in the Supreme Court if the adjudicator made a jurisdictional error. In Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4, the High Court significantly narrowed the available grounds for challenge by holding that courts have no power to review an adjudication determination for non-jurisdictional error of law on the face of the record. The practical effect is that judicial review is confined to true jurisdictional error — that is, proving the adjudicator lacked the authority to make the decision at all — rather than merely demonstrating a mistake of fact, contractual interpretation, or law within jurisdiction. Errors of the latter kind generally need to be addressed through separate civil proceedings under the construction contract, with section 32 preserving civil rights and allowing a court or tribunal to account for, or order restitution of, amounts paid under the security of payment process.
Contesting the Timing or Validity of the Payment Claim: A claim may be invalid if it was not served in accordance with section 13 of the SOP Act, including the statutory timing rules for named months, termination claims, and the applicable contractual or statutory period for service.
Applying Section 7 Exclusions: You might argue that the Act does not apply because the contract falls within one of section 7’s exclusions, such as contracts forming part of a loan agreement, a contract of guarantee or a contract of indemnity; contracts where the agreed consideration is not calculated by reference to the value of work carried out or goods and services supplied (non-value-based remuneration); contracts under which a party undertakes construction work or the supply of related goods and services as an employee; construction work or related services carried out outside New South Wales; or a class of construction contract prescribed by the regulations.
Considering Home Building Act 1989 (NSW) Issues: Separately, section 8(2) of the SOP Act may affect entitlement to a progress payment where the construction contract does not comply with section 4 of the Home Building Act 1989 (NSW), or where the work involves residential building work done in contravention of section 92 of the Home Building Act.
Reviewing Recent Legal Precedents: Navigating these narrow defences requires a thorough understanding of recent case law, which is frequently analysed in dedicated construction law publications, as judicial review is a complex, last-resort pathway with significant costs risks.
Conclusion
The arrival of a progress claim for defective work places a head contractor in a precarious position. The frustration of dealing with poor subcontractor performance is entirely valid, but the New South Wales security of payment framework offers no leniency for commercial grievances that are not translated into strict procedural compliance. As we have seen, relying on broad contractual set-off clauses or attempting to use generic "poor workmanship" as a defence in a payment schedule is fraught with risk. The legislation demands precision, evidence, and strict adherence to the applicable payment schedule deadline — whether that is the contractual timeframe or the 10-business-day statutory backstop, whichever expires earlier.
If that deadline is missed, or if the schedule lacks the required forensic detail to quantify the rectification costs, the legal landscape shifts rapidly. Where payment pressure is already escalating, an early dispute strategy may help preserve commercial leverage while the statutory process continues. The subcontractor gains the upper hand, often bypassing the dispute over the defects entirely to pursue the claim as an immediate statutory debt through summary judgment. In these scenarios, the head contractor is typically forced to pay first and argue later, severely impacting project cash flow.
To protect your financial position and preserve your contractual rights, you must treat every incoming payment claim as the potential start of litigation. Your immediate next step is to establish a rigorous internal protocol for assessing claims within the first 48 hours of receipt. This involves gathering photographic evidence, obtaining third-party rectification quotes, and ensuring that any intention to withhold funds is explicitly detailed and quantified in a valid payment schedule before the statutory window closes.
If a payment claim for defective work has just landed on your desk, the clock is already running. Speak with our team before the applicable payment schedule deadline expires — the earlier we are involved, the more of your position we can protect.
FAQs
What is the deadline for providing a payment schedule in NSW?
Under section 14 of the SOP Act, a respondent must provide a payment schedule within the time required by the construction contract, or within 10 business days after the payment claim is served, whichever expires earlier. If no valid payment schedule is provided in time, section 14(4) can make the respondent liable to pay the claimed amount on the due date, limiting the ability to raise defect defences later.
Can I deduct money from a payment schedule for defective work?
Yes, but the deduction must be explicitly quantified and detailed in the payment schedule. A NSW adjudicator is likely to reject any deduction for defective work that merely cites generic "poor workmanship" without providing a forensic breakdown of the rectification costs.
Are 'pay when paid' clauses valid in NSW construction contracts?
No. Section 12 of the SOP Act provides that a “pay when paid” provision has no effect in relation to payment for construction work or related goods and services, meaning it cannot be relied upon to withhold a progress payment.
What happens if I forget to include the section 13 (SOP Act) supporting statement?
A head contractor must not serve a payment claim on the principal unless it is accompanied by a supporting statement in the approved form, declaring that, to the best of the head contractor's knowledge and belief, all subcontractors (if any) have been paid all amounts that have become due and payable in relation to the construction work concerned. Failure to provide the statement attracts a maximum penalty of $110,000 for a corporation or $22,000 for an individual under section 13(7) of the SOP Act. Knowingly providing a false or misleading statement under section 13(8) (SOP Act) carries the same monetary penalty for corporations, and for individuals an additional or alternative penalty of up to three months imprisonment. Notably, the NSW Court of Appeal held in TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 93 that a missing or non-compliant supporting statement does not invalidate the payment claim itself; the principal remains obliged to respond with a payment schedule. The head contractor does, however, remain exposed to regulatory prosecution, civil claims for misleading and deceptive conduct, and potential scrutiny of its licensing position.
Can I rely on my contract's set-off clause instead of issuing a payment schedule?
A broad contractual set-off clause does not operate automatically under the Act to withhold funds. Its effectiveness depends on the head contractor formally articulating and quantifying that set-off within a valid payment schedule submitted within the applicable timeframe under section 14 of the SOP Act.
What are my options if I miss the payment schedule deadline?
If you fail to provide a payment schedule in time, section 14(4) SOP Act can make you liable to pay the claimed amount on the due date. If you then fail to pay, the subcontractor may recover the unpaid amount as a debt in court or make an adjudication application. In debt recovery proceedings under section 15 of the SOP Act, you are generally blocked from bringing cross-claims or raising contractual defences about defects at that stage. Challenging the outcome is usually limited to narrow grounds, such as jurisdictional error or establishing that the Act does not apply.
This guide is for informational purposes only and does not constitute legal advice. For advice tailored to your specific circumstances, please contact Merlo Law
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