The Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2014 (NSW) (Regulations) were published on the NSW legislation website on 5 March 2015 and will commence on 1 May 2015. Under the new Regulations, head contractors will be required to establish and maintain ‘retention money trust accounts’ for the benefit of subcontractors. The Regulations will have significant implications for the construction industry and penalties of up to $22,000 per offence may apply for breaches of the Regulations.
Retention monies are a common form of security in the construction industry to secure the performance of subcontractor obligations. Construction contracts commonly provide that head contractors may withhold a percentage of the money owed to subcontractors from payment claims, up to a specified percentage of the contract sum.
In 2012, the NSW Government commissioned an independent report (the Collins Inquiry) into insolvency in the construction industry. The Collins Inquiry found that significant numbers of subcontractors had not received their retention money back upon fulfilling their obligations under their construction contract. The Collins Inquiry also uncovered instances of head contractors using retention monies as working capital and to pay head contractor debts.
In response to the findings of the Collins Inquiry, the New South Wales Government has introduced these Regulations and hopes that the Regulations will provide greater protection for subcontractors through the establishment of retention money trust accounts which regulate when head contractors can access retention money.
Application of the Regulation
The Regulations will apply to ‘constructions contracts’, as defined in the Building and Construction Industry Security of Payment Act (1999) NSW, entered into after the commencement date of the Regulations in circumstances where:
- the head contractor is permitted to retain out of money payable by the head contractor to a subcontractor an amount as security for performance of the obligations of the subcontractor under the contract; and
- the value of the construction contract between the head contractor and the principal is greater than $20 million (head contract). The head contract value for the purposes of the Regulations includes the value of variations under the head contract. Accordingly, if the value of the head contract reaches $20 million after the head contract between the head contractor and principal was entered into, then retention moneys for all subcontracts between head contractors and subcontractors entered into after the date of the relevant variation under the head contract which increases the value beyond the threshold, become subject to the Regulations.
The value of the subcontract is irrelevant for the purposes of the Regulations. The Regulations will not apply to contracts for residential building work where the party for whom the work is carried out resides in or proposes to reside in those premises and will not apply to subcontracts where the security provided is in the form of a bank guarantee, bond or unconditional undertaking.
Key provisions in the Regulation
Head contractors will be required to deposit retention moneys into separate retention money trust accounts with approved authorised deposit taking institutions (ADI). Within 7 days of establishing the retention money trust account, head contractors must notify the Chief Executive of the Office of Finance and Services (Chief Executive) in writing of the details of the account. The Regulations provide the head contractor flexibility to set up the retention money trust account as a separate trust account for either:
- retention money held in respect of the particular subcontractor; or
- all retention money held in connection with a particular construction project; or
- all retention money held in connection with 2 or more construction projects.
The Regulations expressly exclude head contractors from using the retention money (including to pay debts), unless the head contractor becomes entitled to call on the retention money in the following circumstances:
- for the purposes of payment of money in accordance with the construction contract under which the money was retained by the head contractor (for example, if the construction contract allows the head contractor to call on security for subcontractor default);
- as agreed in writing between the head contractor and subcontractor; or
- in accordance with an order of a court or tribunal.
The Regulation imposes further reporting requirements on head contractors with regards to the retention money trust accounts including:
- notifying the Chief Executive in writing where the retention money trust account has been overdrawn or has been closed;
- keeping records of the retention money trust account for at least 3 years following the closure of the account;
- providing the Chief Executive with an annual ‘account review report’ prepared by a registered company auditor including a statement from the auditor that the head contractor has complied with the Regulations together with an annual fee of $1,500; and
- more controversially, the value of the construction contract entered into between the principal and the head contractor.
The Chief Executive is also afforded power to require head contractors, subcontractors, or the approved ADI, to provide specific information in relation to the Regulation in order to monitor compliance with the Regulation.Head contractors should also be aware that the right to interest on retention monies in a retention trust account is for the benefit of the subcontractor unless otherwise agreed by the parties.
In addition to:
- familiarising themselves with the trust account requirements and reporting obligations in the Regulations; and
- considering the financial and accounting processes which will need to be established in order to comply with these new requirements,
head contractors should review their standard form contracts to ensure that recourse rights to retention moneys are expressly and adequately addressed. Head contractors will also need to consider whether their standard form contracts deal with the benefit of interest monies held in retention money trust accounts and the basis on which retention moneys are to be returned to a subcontractor.