In Head Contractors We Trust 3

Monday, April 13th, 2015
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retention money
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On 1 May 2015, amendments to the NSW Building and Construction Industry Security of Payment Regulation (2008) will come into force, requiring head contractors to hold retention monies on trust for subcontractors with an approved authorised deposit-taking institution (ADI), or bank. 

The new requirement only applies to contracts under which security for the subcontractor’s performance takes the form of retention money, rather than bank guarantees, bonds or unconditional undertakings. It also only applies when the value of the construction project (ie, the contract between the head contractor and principal) is over $20 million. Should post-contract variations push the value above $20 million, the retention money trust account requirements will come into play.

Retention money trust accounts explained

The new regulation was enacted as a result of the Collins Inquiry, which found that significant numbers of subcontractors do not receive retention money when they become entitled, often because the head contractor uses those funds as working capital or to satisfy debts.

Under the new regulation, head contractors must hold all retention money on trust by establishing a separate trust account for retention money held:

  • for a particular contractor; or
  • in connection with a particular construction project; or
  • in connection with two or more (or all) of the head contractor’s construction projects.

The accounts are administered by the head contractor. As such, the head contractor is able to access the funds without needing to prove its entitlement to a third party adjudicator. The head contractor is not permitted, however, to withdraw retention money except for the purposes of paying the money in accordance with the contract, in circumstances agreed between the subcontractor and head contractor, or by order of court. Interest earned on retention money is also held on trust, unless the parties agree otherwise. The head contractor is prohibited from using the funds to satisfy its debts.

Head contractors are also required to comply with certain administrative obligations such as notifying the Chief Executive of the Office of Finance and Services when the account is set up or if it is overdrawn or closed, keeping (and retaining) records and submitting an ‘annual review report’.

Head contractors face penalties of up to a maximum of $22,000 for non-compliance with certain of these provisions.

Head contractors, subcontractors and banks may also be directed to provide the Chief Executive with certain information about retention money trust accounts. Non-compliance could attract a penalty of up to $22,000.

How will this affect you?

Head contractors should be aware of the following:

  • Administrative burden: The regime undoubtedly imposes an administrative burden on head contractors in relation to retention money which did not previously exist. Head contractors should familiarise themselves with these requirements.
  • Reduced cash flow: Head contractors may prefer to use bank guarantees as security for payment of the balance of the contract sum rather than retention money, which will no longer be available as working capital.
  • Conflict with existing securities: Head contractors should check the terms of their own secured debt facilities as they may preclude the establishment of a separate trust account or make it difficult to do so.
  • Reduced value of security: As retention money will not be available to satisfy head contractor debts, lenders may discount the value of the trust account or require security to take an alternative form.

The protections afforded to subcontractors under the regulations are largely subject to what is agreed between the parties. As such, both head contractors and subcontractors should ensure that subcontracts providing for retention monies deal with the circumstances in which the head contractor is able to withdraw retention money from the trust account (for example, in the case of subcontractor default), and which party is entitled to the interest earned.

Despite the threat of penalties under the regulation, the potential also remains for head contractors to misuse the retention money held. In such circumstances, the subcontractor may have to enforce its rights through the courts. Subcontractors may as a result prefer bank guarantees to cover their non-performance over security in the form of retention money.

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  1. Whilst trust accounts are a good idea, the clear problem with this legislation is that it applies to contracts worth more than $20 million.

    From my recollection, the explanatory notes released at the time this scheme was announced showed that only around four percent of all commercial building projects approved for construction throughout New South Wales (the state in which these new rules will apply) even reach $1 million in value, let alone $20 million. This means the new regime will apply to less than four percent of all commercial building contracts and offers no protection at all for the 96 plus percent of commercial building projects within that state which will fall beneath the threshold value.

    Why you would make a rule to protect subcontractors in less than four percent of cases but give them no protection at all in more than 96 percent of cases is beyond me, but it is clear that this legislation goes nowhere near what is needed to be adequate protection for subcontractors in any way.

  2. David Chandler

    Rob and Andrew,
    Good article and comments however the fundamental problem here is that the new legislation is like putting a finger in a leaking dyke. It addresses the condition but not the cause. What legislators fail to recognise is that construction now involves rapidly changing business models which increasingly take on a global and industrialised construction framework.
    In that context more sophisticated supply relationships will need to be struck which respect what each of the parties bring to the table. The historical culture of clients, quantity surveyors and contractors to "bid shop" is one example. If the parties think this is the optimal point from which to start organising procurement relationships then they will be doomed to continuation of today's lousy productivity and costs. I am not suggesting soft contracting like alliance or partnering I am talking about genuine integration of design, manufacture and assembly. In such a relationship holding back payments due in a critical supply chain will be churlish and counter-productive. The sooner electronic pay when pay arrangements go into place the sooner this subject will fade as the relic it should be.

  3. Brendan Robinson

    Being involved as a subcontractor in the Reed Construction collapse this is well overdue as Reed had no retention system in place and by all accounts owed sub contractors more than 7 million in retention monies with myself being one of them
    This overhaul is long overdue and should be across all states and agree with Andrew that the contract threshold will have little effect and maximum penalties for non compliance of $22,000 will be of no deterrence to large commercial builders
    As a sub contractor who has worked for large builders on large projects you have very little or no protection and would be interested to now how many people have been prosecuted since the conception of security of payments act 2001