Subcontractor Wants Payment But Work Is Defective: Your Legal Position

You hired a subcontractor. They finished the job. Now they want payment — but the work is defective, incomplete, or not to specification. They are threatening a letter of demand or tribunal action.

You may be entitled to withhold some or all of the payment for work that does not meet the agreed standard, depending on your contract and the defects. But strict time limits can apply if the subcontractor uses your state’s Security of Payment Act. This guide explains your legal position, how to quantify the defects, and how to respond if the subcontractor escalates.

Your Legal Right to Withhold Payment

Under Australian contract law, payment and performance are linked. If a subcontractor fails to complete work to the agreed standard, you are entitled to withhold payment proportionate to the defect.

Key principles:

• Breach of contract — defective work is a breach. The subcontractor has not fulfilled their contractual obligation.
• Set-off — you can deduct the cost of rectifying defects from the amount owed.
• Substantial performance — if the work is mostly complete but has minor defects, you typically pay the contract price minus rectification costs.
• No performance — if the work is fundamentally defective or incomplete, you may owe nothing.

The Australian Consumer Law also applies if the subcontractor is a trader and you are a consumer or small business. Services must be rendered with due care and skill, fit for the specified purpose, and completed within a reasonable time. If the work fails these guarantees, you have remedies including withholding payment, demanding rectification, or claiming compensation.

If They Serve a Security of Payment Claim

If the subcontractor serves a payment claim under your state’s Security of Payment Act, serve a payment schedule within the time limit, stating the amount you will pay and all your reasons for withholding the rest (including the defects). If you miss the deadline, you can become liable for the full amount claimed. In New South Wales, for example, the payment schedule must reach the claimant within 10 business days after you receive the payment claim. See our guide to progress claims and payment schedules.

Document the Defects Immediately

Before withholding payment, document everything. If the subcontractor takes you to tribunal, you will need evidence.

What to document:

• Photos and video — date-stamped images of every defect
• Comparison to specification — the contract, quote, or scope of work showing what was agreed
• Expert reports — if the defect is technical (electrical, structural, plumbing), get a licensed tradesperson to inspect and quote rectification
• Correspondence — emails, texts, or messages where you raised concerns
• Timelines — when the work was meant to be completed, when defects were discovered

If this goes to tribunal, the member will ask: “Did you tell them about the defects? When? What did they say?”

Quantify the Cost of Rectification

You cannot withhold payment based on vague dissatisfaction. You need to quantify the defect in dollar terms.

How to calculate:

1. Get quotes — obtain at least two written quotes from licensed contractors to fix the defective work.
2. Include consequential costs — if the defect caused additional damage (water leak, electrical fault), include repair costs.
3. Subtract from the invoice — if the subcontractor is owed $10,000 but rectification costs $3,500, you withhold $3,500 and pay $6,500.

If the defect is so severe that the work must be completely redone, you may owe nothing. But you still need evidence — quotes, expert reports, photos.

Example:

You hired an electrician to rewire a commercial kitchen. They left exposed wiring and failed to install proper circuit protection. A licensed electrician quotes $4,200 to rectify. The original invoice was $8,500. You are entitled to withhold $4,200 and pay $5,300 — or withhold the full amount until rectification is complete.

Notify the Subcontractor in Writing

Do not just refuse to pay. Send a formal written notice explaining:

• The defects identified
• The contractual standard they failed to meet
• The cost of rectification (with supporting quotes)
• The amount you are withholding and why
• An opportunity for them to rectify the defects themselves

This notice serves two purposes: it gives them a chance to fix the work, and it creates evidence that you acted reasonably if they take you to tribunal.

What to include:

• Reference to the contract, quote, or agreed scope
• Specific description of each defect
• Photos or expert reports attached
• Deadline for response (7-14 days is reasonable)
• Your willingness to release payment once defects are rectified

Keep the tone factual. You are pointing out a breach of contract and offering a resolution.

If They Threaten Legal Action

Subcontractors often respond with threats: “Pay me now or I will take you to tribunal.” Do not panic. They have to prove their case.

What they must prove:

• They completed the work to the agreed standard
• You owe the amount claimed
• There is no valid reason to withhold payment

If you have documented defects, expert quotes, and written notice, they will struggle.

What you should do:

1. Do not ignore it — if they serve a letter of demand or tribunal application, respond within the deadline.
2. Prepare your defence — gather all evidence (photos, quotes, correspondence, contract).
3. File a counterclaim if appropriate — if rectification costs exceed the amount owed, you may be entitled to damages.
4. Consider mediation — most tribunals require mediation before a hearing. It is often faster and cheaper to settle.

If they issue a statutory demand (unlikely for subcontractor disputes, but possible if they are a company), you have 21 days to respond.

Common Mistakes to Avoid

Paying in full to avoid conflict — once you pay, recovering money for defects is much harder. Withhold the disputed amount until resolution.

Withholding more than the defect cost — if rectification costs $2,000, do not withhold $5,000. The tribunal will order you to pay the difference plus interest.

Failing to give notice — if you withhold payment without telling them why, the tribunal may find against you.

Using emotional language — stick to facts. “The tiling is not level and does not meet the specified standard” is stronger than “Your work is rubbish.”

Ignoring tribunal deadlines — if they file a claim and you miss the response deadline, they may win by default.

Final Checklist

Before withholding payment or responding to a demand:

• [ ] Document all defects with photos and video
• [ ] Obtain at least two written rectification quotes
• [ ] Review the contract or scope of work
• [ ] Send written notice to the subcontractor explaining the defects and the amount withheld
• [ ] Keep all correspondence (email, text, letters)
• [ ] If they escalate, respond within the deadline
• [ ] Prepare your evidence bundle (contract, photos, quotes, correspondence)

You may be entitled to withhold the cost of fixing defective work. But you must act reasonably, document everything, meet any Security of Payment deadline, and respond promptly if they take legal action.

How Claim Done Helps

If the subcontractor sends you a letter of demand, Claim Done drafts your written response in about 5 minutes.

Upload the demand letter, your evidence (photos, quotes, contract), and a brief explanation. Our Programmatic Algorithms draft a response letter setting out the defects, the rectification costs and your reasons for withholding payment, citing the applicable contract law, consumer guarantees, and your right to set-off.

You get a professionally structured response letter to review and send, at a flat fee. It is not a Security of Payment payment schedule or a tribunal defence. No lawyers, no hourly billing, no waiting weeks.

What Claim Done delivers:

• Legal response citing breach of contract principles, consumer guarantees, and set-off rights
• Your position on the amount demanded, with quantified defect costs

But for straightforward subcontractor payment disputes under $25,000, Claim Done gives you a fast, affordable starting point.

Start your legal response to a subcontractor payment demand now.

Frequently Asked Questions

Can I withhold the full payment if only part of the work is defective?

No. You can only withhold an amount proportionate to the defect. Get quotes for rectification and withhold that amount. If the defect is so severe that the entire job must be redone, you may withhold the full amount, but you need strong evidence.

What if the subcontractor refuses to fix the defects?

Send them written notice with photos and rectification quotes. Give them 7-14 days to respond. If they refuse, withhold the rectification cost from payment and hire another contractor. Keep all evidence in case they take you to tribunal.

Do I need a lawyer to respond to a tribunal claim?

Not necessarily. Most tribunal claims under $25,000 are designed for self-representation. If they have filed a tribunal claim, Claim Done’s Tribunal Response drafts your response documents (a response summary, a defence position statement, a chronology and an evidence list). It does not make a counterclaim.

What happens if I ignore their letter of demand?

They may file a tribunal or court claim. If you do not respond to the tribunal application within the deadline, they may win by default. Always respond in writing, even if you dispute the claim.

Can I claim damages for consequential loss caused by defective work?

Yes, if the defect caused additional damage (water leak, electrical fault, business interruption), you can claim those costs. You need evidence: repair invoices, lost income records, expert reports.