Construction Industry Security of Payment Ordinance: What the construction industry should know and do
- parischeng0
- Mar 24
- 4 min read
The recent gazettal of the Construction Industry Security of Payment (“SOP”) Ordinance on 27 December 2024 marks a significant milestone for the construction industry in Hong Kong. This landmark legislation aims to address longstanding payment issues and enhance protections for stakeholders throughout the supply chain. Late payments and cash flow disruptions have long plagued contractors and subcontractors, often leading to project delays and financial instability. By introducing clear payment obligations and a streamlined dispute resolution process, the SOP Ordinance brings Hong Kong in line with global best practices seen in jurisdictions such as the UK, Singapore and Australia.
Key Features of the SOP Ordinance
Prohibition of Unfair Payment Terms
The SOP Ordinance prohibits payment clauses such as "pay when paid," which have historically caused delays and uncertainties in the payment chain. This ensures that all parties receive their entitled payments on time, fostering a more reliable payment environment.
Adjudication Mechanism The Ordinance introduces a speedy, cost-effective, and binding resolution process for interim payment disputes. This mechanism ensures that disputes do not hinder project progress, allowing for a more efficient and uninterrupted workflow. Adjudicators will be appointed through registered Adjudicator Nominating Bodies (ANBs), ensuring fairness and expertise in dispute resolution.
Comprehensive Coverage The SOP Ordinance applies to: Main contracts for construction works in both public and private sectors in Hong Kong valued at not less than HK$ 5 million。
Main contracts for the supply of goods or services related to construction work valued at not less than HK$ 0.5 million. Subcontracts along the same supply chain, regardless of value.
This ensures protection for all tiers of stakeholders stakeholders, from large contractors to small suppliers.
Implementation Timeline The Ordinance was gazetted on 27 December 2024, with the Secretary for Development's authority to register and administer Adjudicator Nominating Bodies (“ANBs”) taking effect immediately. The remaining provisions will come into operation on 28 August 2025, governing construction contracts entered into on or after this date.
What the Construction Industry Should Know and Do
The SOP Ordinance is expected to bring several benefits to the construction industry, including:
Timely Payments Ensuring all parties receive payments on time, reducing financial stress and enhancing cash flow stability.
Reduced Wage Arrears By addressing payment delays, the Ordinance aims to reduce the occurrence of wage arrears for workers, promoting fair labour practices.
Lower Project Procurement Costs By reducing the price premiums associated with payment risks, the Ordinance may lower overall project procurement costs.
To ensure compliance with the Construction Industry Security of Payment Ordinance when it becomes effective, here are three preliminary steps you can take today:
1. Review and amend contracts
Prohibition of Conditional Payment Clauses: Ensure that your contracts do not include "pay when paid" clauses or similar conditional payment provisions, as these will be unenforceable under the Ordinance.
Payment Deadlines: Update your contracts to reflect the strict deadlines for payment responses and payments. The paying party must respond to payment claims within 30 calendar days and pay the admitted amount within 60 calendar days.
2. Train staff on new procedures
Statutory Adjudication Mechanism: Educate your team about the statutory adjudication process for resolving payment disputes. This mechanism provides a swift, cost-effective, and binding interim resolution.
Suspension Rights: Inform your staff about the right to suspend or slow down work under certain conditions if payment disputes arise.
3. Implement robust contract administration
Documentation and Record-Keeping: Ensure that all payment claims, responses, and related documentation are meticulously recorded and managed. This will be crucial for compliance and for initiating adjudication proceedings if necessary.
Regular Audits: Conduct regular audits of your contract administration processes to ensure they align with the new requirements and to preclude liability for unmeritorious SOP claims.
Frequently Asked Questions (FAQs)
1. How will the SOP Ordinance impact small suppliers and subcontractors? The SOP Ordinance includes comprehensive coverage that protects all stakeholders, including small suppliers and subcontractors, to benefit from timely payments, reducing financial stress and improving cash flow stability.
2. What should contractors do to comply with the SOP Ordinance? Contractors should review and update their contracts to ensure compliance with the new requirements, educate and train their staff on the adjudication process, engage legal and financial advisors, monitor cash flow, stay informed about any further developments, etc.
3. What are the consequences for non-compliance with the SOP Ordinance? Contracting out of the SOP Ordinance is prohibited, and “pay when paid” clauses, even if included in a construction contract, will be unenforceable.
4. What role do Adjudicator Nominating Bodies (ANBs) play in the SOP Ordinance? ANBs are responsible for appointing adjudicators to resolve payment disputes quickly and cost-effectively, ensuring that disputes do not hinder project progress.
5. How does the SOP Ordinance promote reliability in the construction industry? By prohibiting unfair payment terms and introducing a right to timely progress payments, the SOP Ordinance fosters a more reliable payment environment.
6. What support is available for companies to comply with the SOP Ordinance? Companies may consider seeking support from legal and financial advisors, as well as utilising fintech solutions like those offered by Riverchain at the early stage of the project, to manage cash flow and ensure compliance with the new regulations.
Conclusion
With the SOP Ordinance set to take full effect in August 2025, now is the time for construction industry stakeholders to prepare. By understanding the new regulations, updating contracts, training staff and engaging with legal and financial advisors, businesses can ensure compliance and take advantage of the stability and fairness this legislation brings. For further guidance, consult with industry experts or attend upcoming training sessions on the SOP Ordinance. If you have any questions or want to obtain further information, please consult your lawyers.
The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. Readers should seek independent advice before making any decisions based on this content. Riverchain makes no representations or warranties regarding the accuracy or completeness of the information and disclaims any liability for any reliance placed on it.