NSW Fair Trading has released for public comment a draft retention trust scheme titled Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2014. The draft regulation and regulatory impact statement are open for public consultation until 8 January 2015 with the regulation set to commence on 1 February 2015.
In late 2013, the NSW Government introduced changes to the Building and Construction Industry Security of Payment Act 1999 to ensure prompt payment of subcontractors and introducing penalties for contractors who provide false or misleading statements to induce payment.
In line with these reforms, and as foreshadowed in our 25 November 2013 alert, the Office of Finance and Services, has put forward a draft regulation to govern retention money held by a head contractor. The regulation, referred to as the ‘retention trust scheme’ and titled Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2014 (“Regulation”) requires that the head contractor hold any retention money in a trust account, with the money only to be used for agreed purposes. The regulation is set to commence in February 2015.
In line with the recommendations and responses to the Collins Inquiry, which addressed reasons for insolvency within the building industry, the Regulation aims to:
- protect subcontractor retention monies;
- improve transparency of payments to subcontractors; and
- minimise red tape.
The Regulation will affect construction contracts for non-residential builds with a contract value of $20 million or more which are entered into after the Regulation commences. Even if a contract falls short of the $20 million threshold at the time of signing, it may become subject to the Regulation as a result of any variation which increases the overall contract value. It will therefore be necessary to monitor contract variations in light of these changes.
Head contractors in particular should be aware of the following:
- Administrative requirements – the Regulation stipulates the naming; approval; and notification procedures required when setting up and maintaining the trust account. Failure to set up a trust account in accordance with the provisions of the Regulation carries with it a maximum penalty of $22,000.
- Rights to interest accrued on the retention money - the Regulation stipulates that any interest earned on the trust account is also held on trust, unless otherwise agreed in writing. This should therefore form part of the construction contract negotiations.
- Reporting requirements - the head contractor will need to provide the Chief Executive of the Office of Finance and Services with an account review report and a retention account statement for the account each financial year. The required fee to lodge this report is still to be determined. Any false or misleading information included in either report is subject to a maximum penalty of $22,000. The Regulation therefore also carries with it increased investigative powers for compliance officers who can review individual accounts.
- The money can only be used for agreed purposes – importantly the retention money cannot be used to pay for head contractor debts or any other purpose unless agreed to by the subcontractor.
While not reflected in the Regulation, the NSW Fair Trading media release states the possibility of making company directors personally liable for non-compliance with the new provisions.
The draft regulation and regulatory impact statement are open for public consultation until 8 January 2015 and comments should be sent to firstname.lastname@example.org. For further details on the consultation process, and links to the draft regulation click here to view these details on the NSW Fair Trading website.
Public consultation open 8 December 2014
Public consultation ends 8 January 2015
Regulation due to commence 1 February 2015