Head contractors who enter into construction contracts with subcontractors after 1 May 2015 on projects with a value of more than $20 million must hold retention money retained as security in a retention money trust account.
The introduction of retention money trust accounts arises out of the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (“Amending Regulation”) published in March 2015.
The Amending Regulation imposes burdensome and costly administrative obligations and reporting requirements on head contractors, which will almost certainly result in the increased use of insurance bonds and bank guarantees as security under construction contracts. Typically, insurance bonds and bank guarantees are the favoured form of security for head contractors, however the introduction of the Amending Regulation is likely to signal the death knell for retention money being used as security under contracts between head contractors and subcontractors.
Scope of the Amending Regulation
The Amending Regulation applies to retention moneys held by a head contractor under its contracts with subcontractors where the value of the contract between the principal and the head contractor exceeds $20 million, ie the “project value”.
If the project value exceeds $20 million during the course of the project, most likely pursuant to variations of the head contract, the Amending Regulation applies to contracts entered into by the head contractor after the date that the project value exceeded $20 million.
Interestingly, notwithstanding the definition of ‘head contractor’ under the Security of Payment Act, the Amending Regulation appears to contemplate that there will only be one head contractor on a construction project.
Retention Money Trust Accounts
The Amending Regulation provides that retention money must be held by the head contractor in a trust account established with an approved deposit-taking institution.
A head contractor is only entitled to withdraw from a trust account if:
- it is to pay money in accordance with the terms of the construction contract under which the money was retained by the head contractor;
- as agreed in writing by the head contractor and the subcontractor concerned; or
- in accordance with an order of a court or tribunal.
Importantly, from the subcontractor’s point of view, the money held in the retention trust account cannot be used to pay any debts of the head contractor and is not liable to be taken as satisfying a judgment debt owed by a head contractor, eg a garnishee order against the trust account.
The Amending Regulation requires compliance with a number of administrative obligations, by head contractors in particular, including:
- notifying the Chief Executive of the Office of Finance and Services (“Chief Executive”) when a trust account is opened, becomes overdrawn or is closed;
- retaining records in relation to a trust money account for three years after the closure of the trust money account;
- preparing annual account review reports and retention account statements in respect of the trust account; and
- paying an annual fee of $1,500 to the Chief Executive to review the account review reports and retention account statements.
A failure to comply with the administrative obligations in respect of a retention money trust account, typically, results in a maximum penalty of $22,000.
Implications and Public Policy
The introduction of the Amending Regulation is a response to the inquiry conducted by Bruce Collins QC into contractor insolvencies, which was commissioned by the NSW Government. One of the findings of the Collins Report was that some head contractors were misappropriating retention money and using the retention money, supposedly provided as security by subcontractors, to boost their cash flow.
Inevitably, this had adverse consequences for subcontractors whenever a head contractor encountered financial difficulties and subcontractors were often out of pocket in head contractor insolvencies.
Undoubtedly, with respect to larger projects, the Amending Regulation should achieve the public policy aim of preventing head contractors from misappropriating retention moneys, primarily because very few head contractors will elect to use retention moneys. The Amending Regulation will drive most head contractors to require their subcontractors to use insurance bonds or bank guarantees, thus avoiding the scope of the Amending Regulation.
To the extent that head contractors intend to use retention moneys as security, they should consider whether the Amending Regulation may apply and, if so, they should remain mindful of their obligations to avoid incurring penalties.