Set-off clause: what it means, a typical example, and what to ask for
A set-off clause lets the builder deduct money it says you owe it from a progress payment it owes you. Some set-off is normal. The risk is in the drafting: whether the builder must give notice first, whether the amount must be proven, and whether it can reach into other contracts.
A typical builder version
The Contractor may deduct from any moneys due or becoming due to the Subcontractor any debt or other moneys due from the Subcontractor to the Contractor, or any claim to money which the Contractor may have against the Subcontractor, whether for damages or otherwise and whether under this Subcontract or any other contract.
Illustrative wording of the kind found in builder-authored subcontracts, not taken from any one contract.
What it means for you
Any amount the builder claims, whether or not it is agreed or proven, can come straight out of your payment, including amounts it says arise on a different job. Nothing requires the builder to tell you first.
- No written notice before a deduction is made.
- "Any claim to money": unproven claims and estimates can be deducted, not just agreed debts.
- "Or any other contract": a dispute on one job becomes a deduction on another.
What market looks like
Set-off limited to amounts due under this subcontract, notified in writing with particulars and the calculation, with five to ten business days to respond before the deduction is made. Your state's Security of Payment Act still requires reasons for paying less to appear in the payment schedule.
What to ask for
"The Contractor may deduct from amounts payable under this Subcontract only those amounts that are due from the Subcontractor under this Subcontract and that have been notified to the Subcontractor in writing, with particulars and the calculation, at least 5 business days before the deduction is made."
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Common questions
Is a set-off clause enforceable in Australia?
Generally yes, if it is clearly drafted. That is why the drafting matters before you sign: a clear clause allowing deduction without notice will usually be applied as written. The Security of Payment Acts still require a builder that pays less than you claimed to give its reasons in a payment schedule on time.
Can the builder set off money from a different job?
Only if the contract says so. Words like "or any other contract" allow it. Ask for set-off to be limited to amounts due under this subcontract.
One clause rarely tells the whole story
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General information, not legal advice. Example wording is illustrative. Check any clause you rely on against your full contract and your state's Security of Payment Act. Written by Mat Kennedy, The Construction Contracts Co.