Statutory regulation of retention monies commences 1 May 2015, 
Do your contracts comply? 

Retention monies are commonly held as security under construction contracts to ensure contractor performance. Under such arrangements, a head contractor may withhold a percentage of the money payable to its subcontractors until particular milestones are met. The Building and Construction Industry Security of Payment Regulation 2008 (NSW) will introduce statutory regulation of certain retention monies and will commence today.

Regulation of retention monies 

Under the regulations, a head contractor who withholds retention monies from its subcontractors will be required to place those funds in a trust account with an authorised deposit-taking institution, separately from its own working capital. The regulations set out specific requirements for the establishment of trust accounts and allow the parties to agree the terms of withdrawal from the trust account in their construction contract. 
Under the new regulations head contractors will also be required to fulfil certain record keeping, audit and annual reporting obligations. A breach of these regulations may expose a head contractor to a maximum penalty of $22,000 per offence.

Who do the regulations affect? 

The regulations will apply to head contractors on projects where the head contract has a value of at least $20 million and was entered into on or after 1 May 2015. 
Importantly, these changes only apply to retention monies held under construction contracts between head contractor and subcontractor. Principals who withhold retention monies from a head contractor, or from subcontractors directly, will not be impacted. 
A head contractor is the party that contracts with the person who is ultimately procuring the construction work provided they have someone below them who they subcontract part of the construction works to. 
The regulations do not impact arrangements where security is provided in the form of an undertaking from a financial institution.


These changes will an impact both head contractors and subcontractors. 
Head contractors will no longer benefit from the temporary increase in working capital arising out of retained monies. These changes will also increase head contractor compliance costs and the associated risk of regulatory penalties across applicable projects.

What you need to do 

Head Contractors and subcontractors should seek legal advice to ensure that their construction contracts comply with the new regulatory obligations and to ensure that they adequately regulate recourse to and release of retention monies and the treatment of interest earned. 

Security of Payments Roundup 

2014 saw major amendments to construction legislation in New South Wales and Queensland.