Monday, May 31, 2010

Apples and Oranges - Payment Claims and Tax Invoices

It is common practice to amalgamate Payment Claims and Tax Invoices into one document.  This practice can lead to errors, may jeopardise your entitlement to a payment when you need it and creates unnecessary extra paperwork.



Payment Claims and Tax Invoices are similar business documents with different compliance functions.  A Payment Claim must comply with the requirements of the BCIPA (Payment's Act) and a Tax Invoice complies with taxation, particularly GST requirements.



By its nature, a Payment Claim is open to review and agreement.  The contractor makes a payment claim that the respondent is required to either accept, amend  or reject.  They either agree on the claimed amount, the scheduled amount or they submit to the adjudication process for a decision on the amount.



A Tax invoice, on the other hand, is a much more definitive document and can be much more difficult to unwind.  If a payment claim / tax invoice is amended (either by agreement, or by adjudication), it is an adjustment event for GST purposes and it must be "unwound".

If the amendment is made in the same Tax (BAS) period as the invoice, this can be done by cancelling the original invoice and re-issuing a new one.  The supplier and the recipient should attribute the GST and the input tax credit in accordance with the corrected invoice.

If the adjustment is made in the next BAS period and it is a reduction (most likely), an "Adjustment Note" must be issued by the supplier.  An Adjustment note must include the Australian Business Number (ABN) of the entity that issues it; be in the approved form; must show prominently the following words -  'Adjustment note' (You may also include the words 'credit' or 'debit', for example, 'credit adjustment note', 'debit adjustment note', 'adjustment credit note' or 'adjustment debit note'); or 'Tax invoice' (You can use these words where the adjustment to the price is shown as a negative or credit amount to the recipient).  An adjustment note must also include the following - the name of the supplier or the agent of the supplier; the name of the recipient or the agent of the recipient; the address or ABN of the recipient or the agent of the recipient; the issue date of the adjustment note;       The difference between the price of the supply or supplies before the adjustment event and the new price of the supply or supplies; a brief explanation of the reason for the adjustment, for example, 'discount', 'refund', 'rebate', 'return' or a code by which the reason is readily ascertained, such as REF for a refund; and the amount of the adjustment to the GST payable or a statement to the effect that the difference in the price of the taxable supply or supplies includes GST. (GST Ruling 2000/1).

Of course, both parties to the transaction must also make the adjustment in you next BAS statement, in accordance with GST Ruling 2000/19.  (This is not tax advice.  Refer to your accountant or bookkeeper for detailed advice on these processes).



It's a lot of extra work.



This is the reason that some head contractors adopt the "Recipient Created Tax Invoice" regime, where a "reverse" Tax Invoice is created and sent with the payment, thereby making sure that these notices and reversals are not a regular occurrence.

Often tax invoices generated by standard accounting systems, such as MYOB and Quickbooks, do not roll unpaid amounts forward. This puts claimants in a very vulnerable position, because it means that you must either dispute each and every invoice separately, or create a new payment claim when you least want to wait another month.

Tax invoices often do not show sufficient detail or information for your client to serve an informed payment schedule. This can go against the claimant in an adjudication application.

Standard accounting system invoices also often result in the overpayment of GST on retentions, where they apply.



There is another incompatibility.  A Payment Claim can be made once per month (unless otherwise agreed) after a "reference date", which is a date nominated in the contract (or the last day of the month). 

It is common for the reference date to be mid-way through the month to allow for payments to be processed before the end of the month.  This may not be compatible with your invoicing cycle.

If you are a supplier of goods, your system may issue a tax invoice with every delivery, or at intervals that are shorter than one month.  But under the Payments Act you may not issue more than one Payment Claim for each reference date under the contract, or after the last day of the month if there is no reference date in the contract.



Here is our recommendation for dealing with Payment Claims and Tax Invoices where you are not dealing with a contractor who issues Recipient Created Tax Invoices.



1) If you are a contractor, sub-contractor, consultant who is invoicing periodically (usually monthly) against a contract price or purchase order,


First send a Payment Claim.  The Payment Claim can be sent at any time after the reference date.  It is always best to include ALL the work you have done (and claim) on the contract and DEDUCT payments made.  This way you do not confuse or lose payments that have been adjusted.  



INCLUDE GST in the Payment Claim.



Wait for the PAYMENT SCHEDULE from your customer.

If you agree with the Payment Schedule, issue a Tax Invoice for the scheduled amount.

If you decide to apply for an adjudication of your Payment Claim, for any reason, wait until the adjudicators decision and payment before issuing a Tax Invoice.



2) Suppliers operate in different ways, depending on their accounting methods, but there are some typical approaches to billing.



A supplier may offer a fixed "price per unit" quotation for a particular project.  It will then  generate a tax invoice for every purchase order, based on the contents of the order (with or without a price agreement).  Otherwise, invoices are generated with every purchase or order, at the list price.



Invoices are amalgamated at the end of the billing period into a monthly Statement and customers are required to pay the amount of the statement within the terms of the agreement.


We recommend that the your Statement either doubles as your payment claim or is accompanies by a Payment Claim for the same amount.



It is unlikely that suppliers would want to change their tax invoicing arrangements, as described above, and most would have a regular credit note regime.  There is also less opportunity than with contractors and sub-contractors to disagree with claimed amounts, so the above recommendations for contractors may not apply, unless adjusting invoices is a regular and burdensome process.



If a supplier's terms are  payment on Invoice, the Tax Invoice may double as a Payment Claim, or adopt the contractor's method recommended above.

 The only proviso is that you may not issue more than one payment claim per payment period (usually monthly).

We do not suggest invoking the Payments Act after you are in trouble.
  This alerts the recipient to a pending adjudication claim and it extends the collection time quite dramatically.



The payment's Act is primarily a legislated credit management system.  We recommend that ALL contractors, sub-contractors, suppliers and consultants invoke the Act as a matter of standard business practice.  You are not required to call on adjudication to settle a debt, but when you need to, it can be done very quickly, in as little as 12 business days from the due date for payment and no longer than 15.



The payment's Act is not invoked by including it in a contract or terms and conditions of business.  It is invoked entirely at the discretion of the contractor or supplier of work done in Queensland by the issue of a Payment Claim that includes the details of the work. the amount claimed, AND the words - "This is a payment claim under the Building and construction Industry Payment's Act 2004 (Qld).

Thepowertool facilitates the preparation of payment claims and payment schedules that fully comply with security of payment provisions, saving everyone time and work. It helps to ensure that you get paid on time, every time.
If you want regular information about the Payments Act, you can subscribe to my newsletter here>>

Creating an Effective Schedule of Items for your Payment Claims

It is important to use an accurate schedule of contract items for claiming progress payments because it gives your client sufficient information to make a proper assessment and it is much more difficult to have your claim cut down or brushed off. If it is, you want to be able to challenge it immediately.

Bills of Quantities or bid take-off is often used as the basis for a schedule of items for progress payment claims. The bill of quantities is an important tool in the contractual interface between the parties, but it is not the right cost breakdown for claiming payment for a number of reasons, namely:

1) The BQ is not related to the flow of work, so relating completed work to each item is something of a guess;

2) It is too detailed for the purpose. Inspections for progress claims should be able to be done quickly. Adding % complete to the many labour and sundry items in a bill of quantities is time-wasting and of no benefit.

The value of the bill of quantities is in contract establishment and valuing variations.

The correct cost breakdown structure for valuing progress payments is the construction program or schedule. Bill of quantities items can be easily allocated to program activities. Most estimating programs have a facility to allocate bq items to other codes, including activity codes. Alternatively it can be done using a spreadsheet matrix.

Spreadsheets can be quickly imported into the powertool to create a meaningful schedule of items for quick site assessment of the value of work in progress (earned value). Using a hand held device, such as iPhone or iPad, linked to the powertool makes this a very efficient process.

Thepowertool automatically builds and serves your Payment Claim to comply with Australian (and NZ, Singapore and Malaysian) security of payment legislation. The schedule can also be used to update progress on your construction program.

Contact john.lowry@thepowertool.com.au for more information on setting up an effective payment schedule for your project.

Wednesday, May 19, 2010

Look out for Icebergs? - The Dangers of meddling with the Payment's Act when you do not understand the process

A recent Qld Supreme court decision is a clear warning to the construction industry that it is a high-risk strategy to amend clauses in standard contracts without aligning them to the legislated payment processes under the Payment's Act and without a clear understanding of the operation or intent of the Act. Contractors and subcontractors should be wary of signing agreements or being involved in informal processes that attempt to establish an entirely unnecessary "pre-agreement" to the legislated payment process.

[Simcorp Developments and Constructions P/L v Gold Coast Titans Property P/L; Gold Coast Titans Property P/L v Simcorp Developments and Constructions P/L [2010] QSC 162 (18 May 2010)]
An adjudication decision published on 14th May was overturned in what may be record time on 18th May 2010.

From reading the judgement of Douglas J, starting at [5] it is obvious that the drafting of amendments to the contract show little or no understanding of the intent or operation or the Payment's Act, by the clumsy effort to essentially bring the Superintendent's certificate into play in a way that, in effect, is designed to circumvent the payment process established by the Act. It is clear that the drafter has misunderstood the intent of the Act in relation to payment claims, payment schedules and tax invoices and the interface with contract provisions, including certificates.

Simcorp exacerbated its problems by misconstruing the reference date in its submissions [6] (ie., the date from which the claimant can claim for work done up to that date). Had the submissions been put more concisely and correctly to the Court, his honour might well have been led to the conclusion that the payment terms under the contract exceeded the maximum terms under the Act, that the convoluted "certificate" process might well have fallen foul of s.99 of the Act (contracting out) and that the payment claim was properly served under the Act.

As it was, the submissions clearly led his honour to the conclusion that the reference date was triggered by a certificate due on the 30th of the Month following the submission of a payment claim, and the payment claim was therefore made before the reference date, which he decided was 30th April instead of 23rd (or the 28th) February. In practice this would only be the case if the payment claim included work (or charges, such as interest on overdue amounts) after 23rd February, which amounts an adjudicator would have excluded from his decision.

His honour makes the point that the amended clauses did not add clarity to the process. What an understatement!

With respect to the argument that there was more than one payment claim in relation to a reference date, his honour reinforces earlier decisions (eg., Doolan & Rubikcon) in reading s17(5) of the Act to mean that where a payment claim that includes all the work of an earlier, rejected payment claim, it may not be re-submitted in a subsequent payment claim. If his Honour's interpretation is correct, then it forces a claimant to dispute an item rejected in a payment schedule, rather than accepting it for now and leaving it on the table for negotiation, whilst not foregoing the claimant's rights to ultimately have the matter adjudicated. His Honour's interpretation must lead to more adjudicated claims in order for claimants to preserve their right to ultimately dispute a rejected claim. It is a matter that may need clarification in the Act.

With respect to the claim that the adjudication application at the time that the court proceeding is on foot is an abuse of process, His Honour hints that it might indeed be the case, but does not decide the matter on the basis that it was clear Simcorp were seeking a discontinuance. It is a pity that this matter was not decided, since it leaves adjudicators in the invidious position of having to complete an adjudication decision in these circumstances, since there is nothing in the Act to prevent or curtail the adjudication in the event of a concurrent action.

This decision is a clear warning to the construction industry that it is a high-risk strategy to amend clauses in standard contracts without aligning them to the legislated payment processes under the Payment's Act and without a clear understanding of the operation or intent of the Act. Contractors and subcontractors should be wary of signing agreements or being involved in informal processes that attempt to establish an entirely unnecessary pre-approval process to the legislated payment process.

Thepowertool is designed to ensure that parties to a contract serve fully complying payment claims and payment schedules. It takes the work and risk out of payment in the construction industry; because payment really matters. More information at www.thepowertool.com.au

Thursday, May 13, 2010

Timeframes under the Queensland Payments Act (BCIPA) [others are the same or similar]

Timeframes under the Payments Act are strict and must be strictly adhered to if the parties are to protect their respective entitlements in relation to payment.

Payment claim

The payment claim must be served on the reference date (or after the reference date but not
before) specified in the contract or the last day of the month if no reference date is specified in
the contract.

In a recent case the claimant faxed a payment claim (a tax invoice) which did not
include the copies of invoices and the time sheets referred in the payment claim. The
claimant, however, did confirm the payment claim, including the supporting documents, by post.
The judge found that the facsimile transmission was incomplete. The payment claim was
served when the respondent received the payment claim along with the supporting documents
sent via post.


Payment schedule

The respondent is required to serve a payment schedule within 10 business days of the date
the payment claim was served.

Adjudication application

If the respondent serves a payment schedule within the timeframe referred in the Act then the
claimant must lodge an adjudication application within 10 business days of the date the
payment schedule was served. If the claimant fails to lodge the adjudication application
within the prescribed timeframe then the adjudication application will be out of time and the
adjudicator may not have jurisdiction to decide the matter under the Act.

Notice of intention to lodge adjudication application

If the respondent does not serve a payment schedule within the prescribed timeframe then the
claimant must serve a notice of its intention to apply for adjudication within 20 business days
immediately following the due date for payment.

The notice must state that the respondent
may serve a payment schedule on the claimant within 5 business days after receiving the
claimant’s notice.

The claimant must lodge the adjudication application within 10 business days after the end of
the 5 day period referred in the notice.

The claimant must comply with the 20 business day timeframe failing which the adjudication
application may be invalid and the adjudicator may not have the jurisdiction to determine the
matter.

Notice of Intention to Suspend Work

If the claimant fails to pay the claimed amount where there is no payment schedule, or the scheduled amount, where there is a payment schedule, by the due date for payment, the claimant may immediately (on the next day) serve a notice of its intention to suspend work on the site.

If the respondent does not pay the amount due on the due date, the claimant may serve a notice to suspend work. The claimant may stop work after 2 business days of serving the notice.

When the respondent pays the amount due, the claimant must return to the site within 3 business days of receiving payment.

(Example: The due date for payment is Monday; Claimant issues a notice to suspend on Tuesday morning; Claimant stops work on Thursday morning. - Respondent pays the amount due on Monday; Claimant must start work on Friday morning.)
Ranjit Khosla, AIQSANA Adjudicator


Thepowertool helps the parties maintain the strict time schedules under the Act with calendar reminders for key dates in the payment process and by encouraging the parties to act via the simple and efficient online forms and notifications.

Wednesday, May 12, 2010

Welcome to thepowertool

Welcome to thepowertool blog. We developed thepowertool for the construction industry because we know that payment really matters. When you work hard, outlay for materials and take the risks of business it really hurts when you don't get paid in full and on time. we developed the powertool to facilitate the highly regulated payment process under Australian, New Zealand, Singapore and Malaysian security of payment legislation. Thepowertool can quickly and efficiently create fully complying payment claims and payment schedules to ensure that you get what you are entitled to.

Even with the powertool, you must protect your entitlement to payment with good contract management. The aim of this blog is to assist parties to get the best value from thepowertool with tips and tricks to ensure that you keep your entitlement intact and recover your progress payments in full, on time.