Head contractors must soon establish trust accounts to hold retention money under subcontracts for certain projects as a result of new regulations made under the NSW Security of Payment legislation.
New regulations made under the Building and Construction Industry Security of Payment Act 1999 (NSW) in respect of retention money held under subcontracts will impose an increased administrative burden on head contractors for construction projects with a value of at least $20 million.
The Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (NSW) introduces new requirements for head contractors to hold retention money under subcontracts in a trust account.
Who will be affected?
The Regulation commences on 1 May 2015, and will apply to retention money held by a head contractor in relation to projects valued at over $20 million under a construction contract with a principal entered into after that date.
Retention money is money retained out of money payable by a head contractor to a subcontractor as security for the performance of obligations of the subcontractor under the subcontract.
A head contractor is defined by the Act as the person who is to carry out construction work or supply related goods and services for the principal under a construction contract (the main contract) and for whom construction work is to be carried out, or related goods and services supplied, under a construction contract as part of or incidental to the work or goods and services carried out or supplied under the main contract. In an arrangement where the principal contracts directly with subcontractors, the Act provides that there is no head contractor, meaning that the Regulation would not apply.
The value of a project is tested by the amount of consideration to be paid under the construction contract between the head contractor and the principal or, if that contract does not provide a value, then at the market value of the goods and services to be supplied. Where the value of a project is increased through a Variation so that it equals or exceeds $20 million, the Regulation will apply, but only to subcontracts entered into by the head contractor after the date on which the value of the project reaches $20 million.
Trust account requirements
Retention money to which the Regulation applies must be held in trust for the subcontractor in a trust account established with an authorised deposit-taking institution approved under section 87 of the Property, Stock and Business Agents Act 2002 (NSW) or by the Chief Executive of the Office of Finance and Services.
There is some flexibility as to the structure which a head contractor may adopt to set up trust accounts for affected projects. A retention money trust account may be established as a separate trust account for:
- the retention money held in respect of a particular subcontractor;
- all retention money held in connection with a particular construction project of the head contractor, or
- all retention money held in connection with two or more (or all) construction projects of the head contractor.
Withdrawals from a retention money trust account may only be made by cheque or electronic funds transfer and only in one of the following situations:
- for the purpose of the payment of the money in accordance with the terms of the construction contract under which the money was retained by the head contractor;
- as may be agreed in writing by the head contractor and the subcontractor concerned; or
- in accordance with an order of a court or a tribunal.
Record-keeping and reporting requirements
The Regulation also prescribes certain requirements for record-keeping and reporting in relation to retention money trust accounts. This burden falls almost entirely on the head contractor. Notably, the Regulation provides that the financial institution with which the trust account is established is not under any obligation to control or supervise transactions in relation to the account, or to see to the application of money disbursed from the account.
Within three months of the end of the financial year, a head contractor must provide the Chief Executive with an account review report in respect of the financial year, along with a retention account statement in the form set out in Schedule 2 to the Regulation. A fee of $1,500 must be provided on the submission of these documents.
The account review report is a report given by a registered company auditor certifying that in the auditor's opinion the account operator has complied with the requirements of the Regulation in relation to the account.
The Regulation also creates an offence of providing a retention account statement to the Chief Executive knowing that the statement is false or misleading in a material particular. The maximum penalty for this offence is a fine of $22,000.
Provision of information
The Regulation empowers the Chief Executive to require provision of specified information from a head contractor, a subcontractor or an authorised deposit taking institution.
Without limitation, a direction may require the recipient to provide information within seven days (or a longer period permitted by the Chief Executive) in respect of any of the following matters:
- the value of any construction contract entered into with a principal by the head contractor;
- retention money retained by the head contractor under a construction contract with a subcontractor; and
- a retention money trust account established by the head contractor for the purposes of the Regulation.