On 8 December 2014, the NSW Minister for Fair Trading released a draft retention trust scheme, the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2014 (Regulation). This regulation is set to commence on 1 February 2015, however the draft regulation, along with the accompanying regulatory impact statement, will be available for public comment until 8 January 2015.
The proposed regulation
A head contractor will be required to deposit retention money from its direct subcontractors into a trust account with an approved authorised deposit-taking institution (ADI). Interest on the account is also held on trust.
The retention money is not to be available for the payment of the debts of the head contractor. Having said this, the head contractor will be able to withdraw retention money for the purpose of applying the money in accordance with the terms of the relevant subcontract without the consent of the subcontractor.
A head contractor may have a single trust account for all its projects and there is no requirement for the account to be held by a government body as was previously contemplated. However, head contractors must have their trust account(s) audited and comply with the specified State trust account reporting requirements.
If a head contractor breaches the retention requirements of the regulation it may be liable for a penalty of up to $22,000.
ADIs are required to report overdrawn accounts and dishonoured cheques to the Chief Executive of the Office of Finance and Services.
Application of the regulation
The regulation will apply to all construction projects where the head contract is valued at $20 million or above, and which are entered into after 1 February 2015. It will also apply to construction contracts entered into after 1 February which have a contract value of less than $20 million but which increase in value to $20 million or above due to variations.
The associated regulatory impact statement provides that the regulation will only apply to non-residential projects. However, based on the draft regulation, the only limitation appears to be that it would not apply to contracts for construction work for the actual or proposed occupant of the dwelling. The regulation appears to apply to developer residential construction projects.
Implications for industry
- Head contractors need to investigate establishing trust accounts with ADIs and review their internal procedures to comply with the regulation.
- Subcontract terms addressing rights to call security and rights to interest on retention need to be reviewed and potentially redrafted or negotiated.
- There are likely to be additional costs in account keeping and compliance with the State’s trust account reporting and auditing requirements.
- Head contractors may push for alternative forms of security from subcontractors to avoid this regulation and any mismatch between the regulation of head contract and subcontract security it creates. Other security options which are not covered by the regulation include bank guarantees and insurance bonds. This favours larger subcontractors.
- Similarly, head contractors may prefer to use fewer subcontractors to reduce the impact of this regulation.
- Construction management may also become more popular as the regulation only applies to head contracts.
Comments should be sent to firstname.lastname@example.org. The draft regulation can be found on the NSW Fair Trading websiteat http://www.fairtrading.nsw.gov.au/ftw/About_us/Have_your_say/Security_of_payment_regulation.page.
General review of the Act
More generally, the NSW Government has advised that it will commence a full review of the Act in 2015, which will provide for a comprehensive revision of security of payment laws. Among other things it will examine the feasibility of imposing personal liability for company directors for retention trust offences.