The construction of infrastructure in Hong Kong has reached a peak in recent years, with a number of major infrastructure works in progress. With such a high demand for construction workforce, most workers have enjoyed a considerable increase in their wages, which, I believe, is good for them. However, it is not uncommon that workers do not get paid on time or rewarded for their hard work at all. To address the problem, we propose to introduce the Security of Payment Legislation (SOPL) for the industry to regulate the payment practices for works contracts through legislation, and to establish an adjudication mechanism to facilitate dispute resolution relating to works payment, in order to ensure that workers receive wages they deserve as soon as possible.
The local construction industry, in general, has all along been adopting sub-contracting as its mode of operation, as doing so offers flexibility in project procurement. However, the frequent payment disputes among the main contractors, sub-contractors, suppliers and consultants at the top and bottom of the supply chain upon completion of work or provision of services has not only affected the cash flow of the companies concerned, but also delayed payment of wages to workers. In 2011, the Government and the Construction Industry Council conducted a comprehensive industry-wide survey of payment practices in the local construction industry, targeting construction companies, consultants and suppliers of materials and machinery. The survey revealed that delayed payment due to disputes was common in the construction industry and amounted to more than $20 billion. The problem was particularly serious for sub-contractors, with their outstanding payments amounting to $9.9 billion, which was equivalent to about 12 per cent of their total business turnover.
In view of this, the Development Bureau set up a working group with the industry to explore the feasibility of introducing the SOPL for the construction industry and draw up the legislative framework. After deliberation, we believe that one of the reasons for delayed payments in the industry is the wide adoption of “pay when paid” clauses in works contracts from the upper stream of the industry to the lower stream. In other words, even if sub-contractors at the lower stream complete their work or services, contractors at the upper stream still refuse to pay them on the grounds that they themselves have not yet received any payment under the works contract. We consider that this kind of clause is unfair and should be abolished. The proposed SOPL would stipulate that the paying party (including developers) could no longer evade liability to pay through such clauses during court proceedings, arbitration or adjudication.
At the same time, we propose that the parties which complete work or services could make a statutory payment claim in future under the legislation, which would require the paying party to make interim and final payments within 60 and 120 days respectively after the receipt of the payment claims, in order to safeguard the cash flow of contractors and sub-contractors at the lower stream. If the paying party disputes the amount claimed, it would have to respond within 30 days. Payment disputes would be handled by the adjudication mechanism being proposed. The proposed SOPL also recommends that the claiming party has the right to suspend work and such an act would not be regarded as breach of contract. The proposed adjudication mechanism would expedite the handling of payment disputes, which would be faster and more cost-efficient than court proceedings or arbitration procedures.
The proposed SOPL would not cover repair, maintenance and renovation contracts for private buildings or facilities, or minor new construction works contracts worth less than $5 million. The main reason for these exemptions is to avoid imposing further legal burdens upon the individual owners of private properties, as some of them may not have experience or knowledge in managing works contracts.
We are conducting a three-month consultation with the industry and the public on the proposed SOPL starting from June 1. Please give us your views on ways to address delayed payment in the construction industry to ensure that workers can receive what they deserve for their hard work.
7 June, 2015
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