The New South Wales Government says building contractors will be prosecuted for lying about paying subcontractors who have been exposed to serious insolvencies in the construction industry.

New laws have passed the Legislative Council that ensure prompt payments for subcontractors within 30 days.

The current cycles are 60 days and occasionally 120 days.

Finance Minister Andrew Constance says subcontractors were $1 billion out of pocket over more than 1,100 insolvencies from construction company collapses in 2011 and 2012.

He says the government is committed to a fairer system to protect subcontractors.

"We have seen instances in the past where people have signed statutory declarations saying that subcontractors have been paid, and it's turned out not to be the case," he said.

"The Department of Finance and Services can bring prosecution.

"People can face $22,000 fines or potentially jail time for providing false information that a subcontractor has been paid."

Mr Constance says the legislation will help to ensure subcontractors stay in business.

"We do not want to continue to see a repeat of some of those major collapses resulting in subcontractors being left, in some cases, tens of thousands of dollars out of pocket which could result in the closure of their businesses," he said.

The Master Builders Association says builders could be left high and dry by the laws.

It says amendments to the legislation ensures prompt payment between builders and contractors through a trust fund scheme, but not builders and clients.

The Association's Brian Sidler says builders could be bled for money from a client and unable to pay a subcontractor.

But he says they will still have to under the laws.

"The definition that was introduced in the amendment excludes the relationship between the client and the builder," he said.

"So the trust would only apply between the builder and the subcontractor."