We previously wrote on 1 August 2022 to advise of the commencement of Phase 1 of WA’s new Security of Payment regime under the Building and Construction Industry (Security of Payment) Act 2021 (SOP Act) - that article is available here.

As of 1 February 2023, Phase 2 of the Western Australian government’s roll out of the new Security of Payment regime takes effect. The key changes under Phase 2 are the introduction of a retention trust scheme for high value projects and a 5 day notice requirements which must be met prior to having recourse to security.

We recommend parties consider:

  • the security provisions in any new contracts; and
  • their process for holding retention funds,

to ensure they comply with the new requirements.

Key takeaways

  • Parties must give at least 5 business days’ notice prior to having recourse to performance security.
  • Retention money retained under a construction contract valued at $1 million or more from 1 February 2023 must be paid into a trust account within 10 business days of the contract being entered into or once the contract value exceeds $1 million within 20 business days.
  • The trustee may only withdraw the retention money from the trust account to the extent they have a contractual entitlement to do so. Retention money cannot be used to pay third-party creditors or set-off against liabilities arising under a different contract.
  • It is an offence to threaten or intimidate claimants in relation to making a payment claim under the SOP Act.

Recourse to Security Notice

From 1 February 2023 a party must now give at least 5 business days’ notice prior to taking recourse to contract security (whether bank guarantees or retention monies). This requirement also overrides any contrary provision in the construction contract.

Practically this is likely to make parties think twice and be sure that they have a clear and absolute entitlement to call on security before doing so. Otherwise, the 5 business day period may provide the other party with enough time to seek an injunction restraining a party from calling on the security. This advance notice may also enable contractors an opportunity to negotiate a commercial outcome in lieu of having the security called.

Retention Trust Scheme

Another key change taking effect from 1 February 2023, relates to the holding of retention money. A party who receives retention money under a construction contract valued at $1 million or more (including GST) must hold that retention money on trust for the benefit of the party who provided the money in a dedicated trust account within 10 business days of the parties entering into the construction contract.

This new requirement will also apply to any construction contracts entered into after 1 February 2023 once their value exceeds $1 million (i.e. as a result of a variation). If this occurs, the retention money must be paid into the trust account within 20 business days of the contract value exceeding the threshold. Parties should therefore consider adopting a consistent approach for any new contracts (including those with a value of less than $1 million) to avoid getting caught out if the contract is varied.

From 1 February 2024, the scheme will apply to construction contracts with a value of $20,000 or more (including GST). It is important to note that the thresholds are not retrospective, meaning that the scheme will not apply to construction contracts entered into before the relevant commencement date and subsequently exceed the relevant threshold after the commencement date.

There are certain construction contracts to which the scheme does not apply, these include:

  • head contracts directly with the State Government or Commonwealth principals;
  • contracts directly with individual homeowners for home building works valued at $500,000 or more (including GST), unless the contract is for a residential development business or for works on two or more dwellings on different lots of land; and
  • small-scale residential contracts irrespective of the value of the contract.

Retention money is defined broadly to include money (including GST) withheld from payments made under a construction contract as performance security (for example, money withheld from progress payments) or money paid upfront by or on behalf of one party to the other to be retained as performance security (for example, cash provided up-front at the start of the contract as performance security). It is important to note that retention money is still retention money for the purposes of the scheme if it is called by another name, such as ‘hold back’. Any attempt to contract out of the scheme, whether by calling retention money by another name or otherwise, will be unenforceable.

Whilst each trustee need only have one retention money trust account which may hold retention amounts across a number of different projects, the trustee is not permitted to set-off against the retention money any liability of the other party under a different contract or across various projects, regardless of what the contract provides. We note that the scheme does not affect other common forms of security used in the industry such as bank guarantees.

The retention money must be held in the retention money trust account for the duration of the construction project until it is due to be paid or otherwise applied under the terms of the construction contract.

Other changes

In addition to the above, from 1 February 2023, the following new regulatory powers will also come into effect.

  • It is an offence punishable by a $50,000 fine to directly or indirectly threaten or intimidate, or attempt to threaten or intimidate, a claimant or person entitled to make a payment claim in relation to their entitlement to do so or their exercise of any other rights under the SOP Act.
  • There will be disciplinary offences and registration exclusion for building contractors with unpaid building services debts.
  • The Building Services Board now has power to exclude persons with a history of financial failure.