The Building and Construction Industry Security Payment Amendment (Retention Money Trust Account) Regulation 2015 (NSW) (Regulation) commenced operation on 1 May 2015.  It is an important piece of legislation for head contractors entering into a construction contract with a value of at least $20M.

The explanatory note for the Regulation states:

The object of this Regulation is to provide for retention money held by a head contractor under a construction contract with a project value of not less than $20 million to be held in trust for the subcontractor from whom the money has been retained and for that money to be held in a trust account established with an authorised deposit-taking institution.

The Regulation aims to protect retention money paid by a subcontractor from dissipation by a head contractor. Retention money security is held by a contractor over its subcontractors in relation to latent defects which may otherwise not be discovered when the works a subcontractor has been completed.

It is common for a head contractor to withhold an agreed percentage of monies owed to the subcontractors to ensure performance of works  and to pay for defect rectification.  Usually 50% of the retention sum is paid to the subcontractor upon practical completion being reched and the balance at the end of the defects liability period.

Unfortunately it has been a common practice of head contractors to not return retention money to subcontractors, in part because retention money is not usually held in a separate account by the head contractor, it has often simply been treated as a discount from the contract sum.  Subcontractors do not always press for the return of retention money as this could imperil future work with a head contractor.

Under the new Regulation, a head contractor is now required to hold  retention money in a protected trust account to, amongst other things, provide protection for subcontractors against the head contractor going into liquidation.  It should also assist in head contractors returning the money to subcontractors promptly.

Key aspects of the Regulation include:

1. All head contractors are required to establish and maintain ‘retention money trust accounts’ for the benefit of subcontractors for construction contracts entered into after 1 May 2015, having a value of at least $20M. The value of the construction contract is calculated not as between the head contractor and subcontractor but between the head contract and principal. The value of the construction contract includes the value of variations. If the contract does not provide a value, then the value is to be considered the market value of the goods and services to be supplied.
2. The trust account is to be held with an authorised deposit taking institution (i.e. the head contractor’s bank). The trust account must have in the naming description of the account, the words “the trust account”.
3. Within 7 days of establishing the trust account, head contractors must notify the Chief Executive of the Office of Financial and Services (Chief) in writing of the details of the account.
4. The head contractor must set up the trust account as a separate trust account for either:-

• The retention money held in respect of a particular subcontractor;
• All retention money held in connection with a particular construction project; or
• All retention money held in connection with 2 or more construction projects.

5. The head contractor must not withdraw the retention money except in the following situations:-

• For the purpose of payment of money in accordance with the terms of the construction contract under which the money was retained by the head contractor; or
• As agreed in writing between the head contractor and subcontractor; or
• In accordance with an order of a court or tribunal.

6. The head contractor must keep the records of the trust account for at least 3 years following the closure of the account. The head contractor must also provide the Chief with an annual ‘account review report’, which is to be prepared by a registered company auditor, together with the annual fee. At present, the fee is $1,500.

7. In addition to preparing the account review report, the registered auditor must provide a statement to the Chief to declare:-

• That the head contractor has complied with the Regulations together; and
• The value of the construction contract.

8. It is an offence to provide a statement knowing that it is false and misleading. The maximum penalty for this offence is a fine of $22,000.

The Regulation affords the head contractor some flexibility in relation to the interest accrued on the retention monies.

For more information about the new Regulation, please contact us.