A common concern among subcontractors in the building and construction industry is that retention money is sometimes not returned by head contractors. The Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (NSW) (Regulation) seeks to deal with this.
The Regulation applies to certain contractors, subcontractors and suppliers in the building and construction industry. Members should consider the implications of the Regulation. Members should also consider if the new laws give rise to "proceeds" which can be perfected against under the Personal Property Securities Act 2009 (PPSA) for any recovery process.
The Regulation gives effect to one of many recommendations by Bruce Collins QC in his report "Inquiry into Construction Industry Insolvency in NSW" in November 2012. The Regulation provides that from 1 May 2015, head contractors on construction projects with a value of at least $20M will be required to hold retention money in trust for subcontractors, in a separate trust account. Traditionally, these reflect a percentage of each invoice issued by a subcontractor for services and/or goods supplied.
The Regulation limits the use of retention money and creates new record keeping and reporting obligations for head contractors. The changes will apply to subcontracts entered into by a head contractor, where the head contract was entered into after 1 May 2015.
A summary of the changes is as follows.
The Regulation applies to retention money held by a "head contractor", being the person who will carry out "construction work" or supply "related goods and services" for the principal under a construction contract. "Construction work" and "related goods and services" are defined under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).
The SOP Act does not apply to some contracts, such as contracts for residential building work for a party who proposes to live in the property. Some mining work is also excluded from the definition of "construction work" under the SOP Act. These changes will not affect contracts which do not fall within the broad compass of a "construction contract" under the SOP Act.
$20 million threshold
The $20 million threshold is calculated by reference to the amount of consideration payable under the head contract. If the value of the contract reaches the $20 million threshold by variations, then subsequent subcontracts entered into by the head contractor will be subject to the trust account requirements.
If the $20 million threshold is reached after entry into the head contract, then the trust account requirements under the Regulation do not apply to subcontracts entered into before the $20 million threshold was reached.
Trust account requirements
The Regulation provides that retention money held by a head contractor must be held in trust for the subcontractor in a trust account with an “approved ADI”, an authorised deposit-taking institution, as in banks, building societies and credit unions.
The head contractor can choose to establish the trust account for a particular subcontractor, a particular project or for more than one project by the head contractor. The account name must include the name of the head contractor and the words “trust account”.
The head contractor must tell the deposit-taking institution that the purpose of the account is as a trust account under the Regulation. The head contractor must notify the Chief Executive of the Office of Finance and Services (Chief Executive) certain details of the trust account.
Withdrawals from trust account
A head contractor may only withdraw money from the trust account:
a. For the purpose of payment of the money in accordance with the terms of the subcontract;
b. As agreed in writing between the head contractor and the subcontractor; or
c. In accordance with the order of a court or tribunal.
A head contractor may not use retention money held in a trust account to pay the head contractor’s debts, albeit the head contractor may still have recourse to the retention money if the head contractor is permitted to do so by the subcontract.
Unless otherwise agreed, interest on retention money is also held on trust for the subcontractor.
It is an offence to withdraw retention money from a trust account otherwise than by cheque or electronic funds transfer.
Record keeping and reporting
The Regulation obliges a head contractor to keep records in relation to the retention money trust account. A head contractor is required to keep records of money paid in and out of the trust account, and retain such records for at least three years after the account is closed.
The Chief Executive has the power to request information from the head contractor, subcontractor or approved ADI, including in respect of the value of the construction project.
A head contractor must annually provide to the Chief Executive:
a. An annual review report; and
b. A retention account statement. The annual review report must be certified by a registered company auditor. The retention account statement must be in the form set out in the Regulation. Upon submission, a fee of $1,500 must be paid to the Chief Executive.
The Regulation was intended to benefit subcontractors, rather than sub-subcontractors, such as suppliers. However, suppliers may also benefit from the Regulation, as the retention money held in trust may give rise to “proceeds” which can be perfected against under the PPSA.
Of relevance to suppliers to subcontractors:
- A supplier may have a claim against the retention money held in the head contractor’s trust account for the subcontractor, if the supplier has properly documented, perfected and provided timely notice of its security interest under the PPSA. This may require the supplier to seek an order from the Court to this effect.
- A supplier might also obtain a greater payment more quickly (rather than through other unsecured debt recovery options), and despite the appointment of a liquidator to the subcontractor or head contractor.
Subcontractors on large projects will now have the additional protections for retention money under the Regulation.
Head contractors must familiarise themselves with the Regulation and consider, for projects that will meet the $20 million threshold, appropriate amendments to their subcontracts. In light of the Regulation, head contractors are also likely to consider insisting on other forms of security, such as bank guarantees, to avoid the trust account requirements.
Members should contact Peter or Chris to discuss their situation, and how the Regulation affects them.
Chris Humby is a senior associate in the construction team at Thomson Geer, Brisbane. He has expertise in building, construction and engineering law as well as construction contract drafting and advice and commercial dispute resolution. E: email@example.com P: +61 7 3338 7909
Peter Mills is a special counsel with Thomson Geer and is currently the Vice-President (Qld Division) of the AICM. Peter specialises in recoveries and compliance under the PPSA and its implications. E: firstname.lastname@example.org P: +61 7 3338 7921