Australia: Construction

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This country-specific Q&A provides an overview to construction law in Australia.

It will cover termination requirements and obligations, permits and licence, procurement, financing and security, and disputes as well as insight and opinion on challenges and opportunities.

This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/construction/

  1. Is your jurisdiction a common law or civil law jurisdiction?

    Australia is a common law jurisdiction. It is also a federal system with federal and state/ territory laws based on the constitutional allocation of jurisdiction in relation to specific powers. Consequently, both federal and state/territory legislation may apply to a specific legal issue. This may result in different legal approaches between jurisdictions (e.g. in relation to security of payment and proportionate liability legislation).

  2. What are the key statutory/legislative obligations relevant to construction and engineering projects?

    Whilst relationships between parties are regulated by contract, there is significant statutory intervention in the areas of:

    • security of payment;
    • work, health and safety;
    • environmental obligations;
    • industrial agreements and workplace arrangements;
    • misleading and deceptive conduct;
    • proportionate liability;
    • insurance; and
    • unfair contract terms for small businesses;.
  3. Are there any specific requirements that parties should be aware of in relation to: (a) Health and safety; (b) Environmental; (c) Planning; (d) Employment; and (e) Anti-corruption and bribery.

    (a) Health and safety;
    Model work, health and safety ('WHS') laws have been implemented across jurisdictions to achieve significant harmonisation. The common statutory regime imposes obligations on persons conducting a business or undertaking to provide safe work premises, maintain safe plant, manage risk, and obtain insurance and workers' compensation insurance for employees. Specific obligations are also imposed on entities which have been appointed as a principal contractor for building and construction work.

    (b) Environmental;
    At a federal level, a construction project that is likely to have a significant impact on nationally protected matters, such as threatened species of flora or fauna and heritage properties, may be referred to the environment minister. The minister may approve a project unconditionally or with conditions, refuse a project, or decide that federal assessment is required.

    Environmental requirements vary between jurisdictions. Generally, approval or licencing will be required if the project generates air pollution, noise, if it impacts biodiversity or heritage items, or involves environmentally hazardous chemicals or contaminated land

    (c) Planning;
    Planning legislation regulates development within specific zones. Where a construction project is permissible with consent in a zone, a development application is submitted to the designated planning authority and will be subject to specific development controls (e.g. building height, setbacks and floor space ratio). Where a construction project is permitted without consent, it can proceed without a development application (although other building and environmental consents may be required).

    (d) Employment;
    Employment relationships are generally governed by the Fair Work Act 2009 (Cth), which sets national minimum standards for maximum weekly hours, leave, notice of termination and redundancy pay. The Australian employment regime is unique in the application of 'awards' with force of law which establish additional minimum standards for employers and employees in industry and occupational-based sectors. Employees in the construction industry may be covered by the Building and Construction General On-site Award 2010, for example. Additional employment obligations are imposed on entities that have tendered for Commonwealth-funded work. Industrial disputes are subject to a Conciliation and Arbitration legal system which regulates how industrial action may proceed and allows for judicially imposed settlement of disputes.

    (e) Anti-corruption and bribery.
    Under the Commonwealth Criminal Code, it is an offence to provide, offer to provide, or cause a benefit to be offered or provided to a person that is not legitimately due to that person. The offer must be made with the intention of influencing a foreign public official to obtain or retain business or a business advantage that is not legitimately due to them.

    The Code imposes penalties of either imprisonment or significant fines for individuals and corporations. Additionally, if a contractor has illegally obtained the award of a contract, it will likely be void and unenforceable.

    Some states have independent corruption investigatory bodies, with significant legal powers to investigate corruption affecting government bodies.

  4. What permits/licences and other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?

    Licensing requirements vary significantly between jurisdictions. All states require licences for specific trades such as electrical, gas and plumbing work.

    In respect of building, New South Wales contractors require licences only for residential building work. In Tasmania and South Australia, licences are required to carry out both residential and commercial building work. Queensland has a comprehensive licencing system, which licences contractors for particular types of work subject to caps on the size of project for which the contractor is licenced. In some states, owners also need to ensure that the party they are contracting with holds the necessary licences to carry out building work.

    A breach of licensing requirements is an offence, with legislation in most jurisdictions imposing fines for both individuals and corporations, and in some cases unlicensed contractors are prevented from exercising their contractual rights (i.e. recovering payment).

  5. Is tort law or a law of extra contractual obligations recognised in your jurisdiction?

    Yes, tort law is recognised in Australia.

  6. Who are the typical parties to a construction and engineering project?

    The principal as the party procuring the work. Principals may contract with both design consultants and building to carry out and complete building work. Alternatively Design and Construct procurement models are commonly used, under which the Contractor engages the design consultants. Contractors will engage various sub-contractors to complete different aspects of the work, depending on their expertise. Project managers are also often engaged by a principal in such projects.

    Subcontractors are almost always engaged as most 'Tier 1' contractors have minimal capacity 'in house' to perform construction work.

  7. What are the most popular methods of procurement?

    All the standard international procurement models are commonly used in Australia (i.e. construct only, Design and Construct, Construction Management, EPC, EPCM). Early Contractor Involvement procurement models are increasingly used.

  8. What are the most popular standard forms of contract? Do parties commonly amend these standard forms?

    Whilst parties are free to use any contract, standard form contracts are commonly used as base documents for construct and design-and-build projects. These are generally modified to make them 'principal-friendly'. Large PPP and other infrastructure projects will commonly use 'bespoke' forms of contract.

    The most widely used standard form contracts are published by Standards Australia. Other commonly used forms are published by the Master Builders Association and Australian Institute of Architects. For major projects, traditional construct-only and D&C/EPC/EPCM contracts are common, along with BOOT/DCM style contracts for major public-private partnerships.

  9. Are there any restrictions or legislative regimes affecting procurement?

    Procurement rules generally apply to contracts awarded by government bodies using public money, or relating to public property. At the federal level, the Public Governance, Performance and Accountability Act 2013 (Cth) regulates government procurement. Legislation in each state and territory also establishes central bodies to conduct and regulate state procurement and publish codes of conduct. Rules also apply to local government procurement activities.

  10. Do parties typically engage consultants? What forms are used?

    Consultants are regularly engaged across the planning, design and construction phases of a project, depending on the project size and complexity. Consultants may be engaged by the principal, or by the contractor under a D&C model. Standards Australia and other professional bodies issue standard forms for engagement of consultants, although bespoke contracts are also used.

  11. Is subcontracting permitted?

    Yes. There are no statutory restrictions on subcontracting, however head contracts may restrict the amount or type of work that can be subcontracted or require prior authorisation to subcontract.

  12. How are projects typically financed?

    Private projects may be financed internally or through financier lending. Project financiers will usually require significant oversight of the contractual terms. Government projects are mostly funded by government allocations, however public-private partnerships are often used for procurement of very large economic and social infrastructure.

  13. What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?

    Security in the form of performance bonds is often provided to principals on contractors' behalves by the four major Australian banks. Increasingly, insurance bonds are also provided by large insurers. Bank guarantees are available and often take the form of an unconditional undertaking by a financial institution, or standby letters of credit given by the contractor to the employer. Parent company guarantees are also regularly obtained.

    It is the industry standard to withhold 5% to 10% of the Contract Sum as security, of which half is returned on certification of practical completion, and the balance on the expiry of the defects correction period (typically 12 months).

  14. Is there any specific legislation relating to payment in the industry?

    Each Australian state and territory has enacted legislation to regulate security for payment in the building and construction industry. These laws are not harmonised, with consequent differences between jurisdictions.

  15. Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?

    Security of payment legislation in all jurisdictions renders void "pay-when-paid" clauses in contracts for the performance of construction works, or supply of related goods and services, in Australia. A recent High Court of Australia decision, Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5 confirmed this position. It clarified that a pay-when-paid provision will have no effect if it "makes the liability to pay money owing, or the due date for payment of money owing, contingent or dependent on the operation of another contract".

  16. Do your contracts contain retention provisions and, if so, how do they operate?

    Retention provisions are permitted in contracts, but are less common than the provision of security by unconditional undertakings. Retention amounts are held in the same manner as third party security referred to in Section 12 above.

    There is ongoing legislative concern to minimise the effect of head contractor insolvency on subcontractors. On construction projects with a value of $20 million or more in New South Wales, retention money must be held in trust by head contractors. In Queensland, construction projects valued over $1 million are required to operate a project bank account.

  17. Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?

    Australian construction contracts commonly contain liquidated damages provisions for delay and (less frequently) for inadequate performance. Such clauses usually provide for a rate per day or per week (often subject to an overall cap), with the rate representing the additional costs and losses likely to be incurred by the principal.

    The decision of the High Court of Australia in Paciocco and Another v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 569 at [166], confirmed that in enforcing liquidated damages clauses the Court will take into consideration the wider commercial circumstances in which parties entered into the contract and whether the liquidated damages protect a legitimate interest, consequently restricting the potential for challenges to liquidated damages as a penalty.

  18. Are the parties able to exclude or limit liability?

    Parties are free to exclude and limit liability, except in relation to death and personal injury.

  19. Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?

    Termination for convenience
    Termination for convenience clauses are commonly included in construction contracts.

    Force majeure
    There is no common law doctrine of force majeure in Australia. However, it is common for a force majeure clause to be included in construction contracts, which will allow the principal (or sometimes both parties) to terminate if the force majeure event persists for an extended period (6 or 12 months). A force majeure clause will operate on its terms, based on what the parties define as a force majeure event, and the allocation of risk in those events. The clause may operate more broadly than the doctrine of frustration at common law.

  20. What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?

    Rights may be granted to third parties under tripartite agreements (e.g. to restrict variations and additional expenditure without approval, or step in rights in the event of a principal's breach or insolvency). Collateral warranties may also be required from the builder direct to a funder, purchaser or tenant.

  21. Do contracts typically contain strict provisions governing notices of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?

    Yes. Time bars will be upheld, but may be challenged on grounds of waiver and estoppel if there is a factual basis to do so.

  22. What insurances are the parties required to hold? And how long for?

    By law, parties to a construction contract are required to hold workers' compensation insurance and motor vehicle third party personal injury insurance for registered plant and motor vehicles. Contract terms will often require parties to hold other insurances for the duration of the project (in descending order of prevalence):

    • contract works insurance;
    • public liability insurance for on and offsite work;
    • professional indemnity insurance for consultants or where a contractor undertakes design obligations (usually required to be held for 6 years after practical completion, because of the 'claims made' nature of such insurance);
    • transit insurance for items transported to the site for incorporation into the works (optional);
    • insurance of contractor's plant and equipment
    • advance loss of profits insurance (optional).

    The principal will insure any existing buildings, and is responsible for the finished works from the date of practical completion. On very large infrastructure projects, a project-specific program of insurance will usually be put in place by the principal.

  23. How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?

    Adjudication is available under security of payment legislation, and is widely used as an interim procedure to resolve contractor payment disputes. However, adjudication is only binding on an interim basis. A party wishing to challenge the determination will use the contractual dispute resolution procedures to seek the final resolution of matters. In Western Australia and the Northern Territory, principals can initiate adjudication, unlike other Australian jurisdictions in which it is solely the prerogative of the contractor.

    Contracts generally contain tiered dispute resolution mandating alternate dispute resolution be undertaken prior to litigation. Mediation is a widely adopted process, along with expert determination to resolve matters of a specialist nature, such as valuation issues. International arbitration is also commonly used on large resources projects, which invariably involve international companies.

    Litigation is common as the final stage of a tiered dispute resolution clause, with dedicated Technology and Construction Lists in most jurisdictions which actively case manage construction disputes.

  24. How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?

    The Australian courts are very supportive of international and domestic arbitration. Applications made to the courts in support of an arbitration, such as an application to stay court proceedings, interim measures and orders relating to the taking of evidence, are addressed swiftly and in an arbitration friendly manner. It is difficult to set aside an award or to challenge enforcement as the Australian courts have considered the grounds for challenge in a manner that is consistent with international practice.

    Enforcement of an award where there is no challenge takes approximately 3 to 4 months. If there is an application to challenge enforcement, then the process may take 6 to 8 months depending upon the complexity of the grounds for challenge. The process may take a further 6 to 8 months if the court’s decision is appealed.

  25. Are there any limitation periods for commencing disputes in your jurisdiction?

    Yes, statutory limitation periods apply to prevent parties to a contract from commencing legal proceedings outside of a strict timeframe. However, careful consideration must be taken as time periods vary across jurisdictions and as between agreements and deeds (see further below).

    The parties are also free to include contractual time bars for the commencement of disputes.

    Security of Payment legislation
    In each state and territory, security of payment legislation imposes a time period for issuing a claim or dispute arising out of a contract. This differs across jurisdictions, ranging from 90 days to 1 year from when the dispute arose or when the work was last performed.

    Contract and tort
    Generally, statutory limitations in each jurisdiction provide that actions arising in tort or contract cannot be brought more than 6 years after the date on which the cause of action accrued (with the exception of the Northern Territory, which has a 3 year limitation period). A cause of action in contract accrues at the date of the breach of contract. In negligence claims, the cause of action accrues when the loss is suffered or incurred.

    Deeds
    Where an agreement is formed under a deed, as opposed to an agreement, the limitation period ranges between 12 to 15 years, depending upon the relevant jurisdiction.

    Long stop provisions
    Long stop provisions in New South Wales and Victoria provide that 'building actions' must be brought within 10 years after the date of the certificate of occupancy or certificate of final inspection.

  26. How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?

    Multi-party disputes are common. Liability for a breach of a duty to take care is apportioned under state and territory proportionate liability legislation. Some states allow parties to contract out of this legislation (Western Australia) while others expressly prohibit it (Queensland), or contain provisions exempting typical construction contracts from its application (New South Wales and Tasmania). Court rules allow for the joinder of parties to seek contributions, however this is not permissible in arbitration unless otherwise agreed to by the parties.

  27. What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?

    In the wake of the 2014 Lacrosse tower fire in Victoria, and the 2017 Grenfell Tower fire in London, the issue of non-compliant building products has been the focus of Australian federal and state government inquiry and recent legislation. Global supply chains have made greater regulation and quality testing necessary to ensure compliance with Australian standards.

    The Australian resources boom, and in particular the mining investment boom, has come to an end with the completion of large resources projects. The most significant opportunities within the construction industry now arise from infrastructure projects, which have been driven by government asset recycling schemes where the proceeds of sales of government assets in turn fund further infrastructure. In particular, there is a major focus on road and rail projects to improve city transit times.

  28. What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?

    Renewables
    A surge in the renewable energy industry is fuelled by new wind farms, large-scale solar photovoltaic and pumped hydro projects. The Australian Government is prioritising the development of pumped hydroelectric storage facilities through an expansion of the Snowy Mountains Scheme.

    Inland Rail and metro
    Government focus has rebalanced as between road and rail projects, with inland freight rail and capital city metro projects recently securing greater commonwealth expenditure. The Inland Railway project is the largest freight rail infrastructure project to be undertaken in Australia, and will extend from Melbourne to Brisbane through regional Victoria, New South Wales and Queensland.

    Sydney second airport and Aerotropolis
    The New South Wales and federal governments are focused on developing a new economic zone around Sydney's second airport, which is currently under construction in Badgerys Creek. In particular, this will involve the development of new road and rail connections across Western Sydney.

  29. How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?

    Pre-fabrication
    Pre-fabrication is increasingly used in the Australian construction industry. This relies on off-site construction, which can benefit the schedule, budget and skilled labour requirements of projects, particularly maximising labour resources and enhancing quality control. However, pre-fabrication limits flexibility to alter designs at later stages in the process, or make changes on-site.

    Building Information Modelling / BIM
    Building information modelling is increasingly used to drive time and cost efficiencies in the construction industry. We expect to see a significant push by government to mandate use of BIM, like in Europe and North America.

    3D Printing
    3D printing has the potential to reduce project costs through shorter project times and minimised material wastage. Large-scale 3D printing projects are still at the experimental stage in the building industry, however will continue to be a focus of Australian researchers, architects and engineers in coming years.