Retention trust accounts now required for large NSW projects

By now, you should be aware of the changes to the NSW Building and Construction Industry Security of Payment Act 1999 which came into effect in April last year.

The April changes foreshadowed that future regulations could require retention money to be held on trust.

Those foreshadowed regulations have now been made, and will affect contracts entered into from 1 May 2015.

Do the amendments apply to me?

  • You are only required to hold retention money in trust if:
  • The project is located in NSW
  • You are the head contractor (meaning that you have contracted directly with the principal)
  • Your construction contract is valued at over $20m including any variations
  • Your construction contract is entered into after 1 May

I’m a head contractor — what do I have to do?

Under the new law, head contractors on affected projects are required to hold any retentions in a separate trust account for the benefit of the subcontractor(s) from whom the money was taken.

The head contractor can only withdraw from the account:

  • to pay money in accordance with the terms of the subcontract under which the money was retained;
  • as agreed in writing by the relevant subcontractor; or
  • in accordance with an order of a court or tribunal.

There are also very substantial record keeping and reporting requirements, including a requirement to participate in an annual audit process at a cost of $1,500. The head contractor commits an offence if it does not comply or provides a false or misleading statement as part of that process.

If you are likely to be a head contractor on any substantial new NSW projects, you should seek advice about the record keeping and reporting requirements for trust accounts.

I’m a subcontractor — what does this mean for me?

This change is good news for subcontractors. The requirement to hold retention monies in trust means that the head contractor cannot use those monies to fund other projects prior to completion of the work and the end of the defects liability period. Importantly, if the head contractor becomes insolvent the retention monies held on trust will not be available for distribution to creditors as a whole and can only be paid to those subcontractors who have a valid claim to them.

There are limitations, however:

  • It does not apply to projects outside of NSW, or projects that are already underway.
  • Smaller jobs, where the head contractor may be more susceptible to an insolvency event, are not caught.
  • It is only the head contractor that is required to use the retention trust account. Subcontract arrangements on large jobs are not caught, even if the value of the subcontract is itself over $20m.
  • There is still no cost-effective mechanism for resolving disputes about return of bank guarantees.

Whilst the changes will be welcomed by anyone who has been affected by an insolvency event, they do not go far enough to provide protection for everyone in the construction industry.

Need help?

Meyer Vandenberg’s commercial dispute resolution team can also help you with any contract administration issues you may have regarding approvals, payment, defects and retention monies on a building project, whether in the ACT or interstate.

For more information or assistance, please contact:

Alisa Taylor — Partner — Commercial Dispute Resolution Group
(02) 6279 4388