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.