Faced with a seemingly endless tide of insolvency in the building and construction sector, the NSW Government commissioned an inquiry to recommend ways that the Government could attempt to reduce the likelihood and impact of insolvency. The inquiry, chaired by Mr Collins QC, published its report earlier this year (the Report). The Report made 44 recommendations for reform. We highlighted some of the Report’s more significant recommendations in our April Australian Construction Dispute Avoidance Newsletter.1

The NSW Government has now responded to the Report’s recommendations. It supports (in principle or otherwise) 26 of the 44 recommendations. Below we comment on a selection of the more significant recommendations supported by the Government:

  • Creating ‘project trust accounts’ and a ‘retention fund scheme’.
  • Amending the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act).
  • Educating the industry.
  • Investigating whether a new Building and Construction Commission is viable.

Construction trusts?

Over one-third of the Report’s 44 recommendations related to the bold suggestion that statutory construction trusts be required on projects over $1 million. Put simply, the Report recommended the creation of statutory construction trusts that would operate along the following lines:

  • Payments by principals to head contractors in respect of work done or material supplied by subcontractors would be paid into a separate bank account and held on trust for the subcontractor’s benefit;
  • Payment would be made to the subcontractor directly from the separate bank account. 

The Report contemplated that the above arrangement would apply to payments to and from all parties in the contractual chain (for instance, payment by head contractors to subcontractors in respect of work done or material supplied by sub-subcontractors would be paid into a separate bank account and then paid out in the same way).

The Government has largely rejected those recommendations for now. That said, the Government supports two trust initiatives—‘project trust accounts’ and a ‘retention fund scheme’.

Project trust accounts

The Government has said that it will trial ‘project trust accounts’ on some extant Government projects. From what can be gleaned from the Government’s response, the sole purpose of ‘project trust accounts’ is likely to be payment by the Government to subcontractors directly, wresting this obligation from head contractors. In that sense, ‘project trust accounts’ are likely to be loosely based on the statutory construction trust model recommended in the Report.

If the trial proves to be successful, the Government has indicated that it may implement ‘project trust accounts’ on all Government projects. At this stage, there is no suggestion that ‘project trust accounts’ will be required on private sector projects.

Retention fund schemes

The Government supports the creation of a ‘retention trust scheme’, which will be administered by the Office of the Small Business Commissioner (the Office).

The precise model for the ‘retention trust scheme’ is not currently known. It is, however, anticipated that principals (and contractors) will be required to pay any retention sums they receive from head contractors (and subcontractors) into the scheme’s trust account. Retention moneys will remain in the trust account until the payer of the retentions is entitled to be repaid them (such as on issuance of the final certificate, agreement between the parties, or, in the event of a dispute, as determined in arbitration, litigation or the like—as appropriate).

Some retention moneys are often held by head contractors until the defects liability period has passed (often one year after completion). This exposes subcontractors to the risk of losing its retentions well after the subcontractor’s involvement on the project has ended (they may be lost if the head contractor becomes insolvent before retentions are due to be released). In that sense, many subcontractors are most likely to welcome the model.

However, principals and head contractors may not be similarly encouraged by the model. Currently, they will generally hold retentions in their own bank accounts, and will accordingly be entitled to keep any interest that is earned on the retentions. The Government suggests that the Office will retain any interest earned on retentions for ‘education and administration purposes’.

The model for the ‘retention trust scheme’ will be subject to a regulatory impact assessment and to industry consultation. Given the Government has also signalled it will introduce legislation governing the ‘retention trust scheme’ by September 2013, that is likely to occur within a fairly tight timeframe.

Overall, whatever the eventual scope and form of the ‘project trust accounts’ and the ‘retention trust scheme’, it is likely that they will impose a heavy administrative burden (with associated cost) on the industry.

Amendments to the Act

Prompter payment

The Government supports many of the amendments to the Actrecommended in the Report. In particular, the Government supports reforms which aim to increase cash flow and encourage prompter payments and has signalled that it will immediately begin drafting proposed amendments to the Act in this regard. These amendments are likely to include new provisions requiring:

  • payment by principals to head contractors of undisputed amounts within 15 days;
  • payment by head contractors to subcontractors of undisputed amounts within 30 days; and
  • payment of penalty interest in the event of delayed payment.

Currently, under section 11 of the Act, payment under a construction contract becomes due and payable in accordance with the terms of the parties’ contract or, in the event this issue is not expressly covered by the parties’ contract, 10 business days after the making of a payment claim. The Report indicates that deadlines in parties’ contracts are currently often 45 to 60 days or even up to 120 days. The proposed new deadlines for payment accordingly are intended to promise increased cash flow.

Further, the sanction of interest in the event of delayed payment should assist in encouraging compliance with those deadlines.

Extending the Act’s coverage

In a measure intended to increase the Act’s coverage in relation to payment in the construction context, the Government supports removing the current requirement for a payment claim to state that it is made under the Act (section 13(2)(c)).  Removing this requirement will mean that it will be necessary for principals to respond to all claims in accordance with the Act’s requirements.

Further protection for subcontractors

As a prerequisite to the head contractor’s entitlement to payment, the Government supports requiring head contractors to provide to the principal a written statement confirming that its subcontractors have been paid what is due and payable to them. The Act is likely to include provisions making it an offence for the head contractor to make a false or misleading statement.

Power to the adjudicator

The Government supports extending adjudicators’ powers under the Act (such as enabling adjudicators to decide disputes relating to bank guarantees (on an interim basis) and to retentions). Despite this current support, the Government has indicated that these and other changes will not be considered until 2015, when the Act is due to be comprehensively reviewed. There is therefore no guarantee that this support will result in amendments to the law in the future.

Educating the industry

The Government supports the Report’s recommendations on education. To that end, the Government has confirmed that it will create an ‘industry Task Force’ to develop an education programme with the goal of improving subcontractors’ financial and business skills.

A new building and construction commission

The Report recommended to the Government that it analyse the cost and benefit of creating a building and construction commission responsible for such things as establishing a licencing system for commercial contractors and monitoring and auditing the financial affairs of all contractors.

The Government agrees. It has signalled that it will analyse the cost and benefit of the recommended commission and will release a regulatory impact statement to the public (which will, at a minimum, address the proposed licencing regime).

What does this mean for you?

The Government will now take steps to implement at least some of the recommendations it supports. Principals and contractors will need to start thinking about what changes they will need to make to adapt to the forthcoming legislative reform.

To facilitate that, principals and contractors should keep an eye on any calls by the Government for submissions in relation to a building and construction commission and a model for the proposed ‘retention trust scheme’ (for instance). They should also keep tabs on any legislation proposed to amend the Act and to create the ‘retention fund scheme’.