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In brief - Head contractors to be required to pay retention money into a trust account

New regulations in NSW will govern the release of retention money to subcontractors from a retention money trust account and provide for the resolution of disputes related to such trust accounts.

Building and Construction Industry Security of Payment Amendment Bill 2013 passed in November 2013

We recently reported on the introduction of a bill to the NSW parliament on 24 October 2013 proposing significant changes to the Building and Construction Industry Security of Payment Act 1999 ("the Act"). (See Significant changes proposed for security of payment legislation in NSW.)

The Building and Construction Industry Security of Payment Amendment Bill 2013 ("Bill") was passed with a significant amendment in the Legislative Council on 12 November 2013 and the Bill, as amended, was passed in the Legislative Assembly on 14 November 2013. Having passed both houses of parliament, the amended Bill is now awaiting assent.

It is anticipated that regulations for the new laws (particularly in relation to the supporting statements required to be provided by head contractors) will be drafted and published before the commencement date, which is yet to be proclaimed.

What is retention money?

"Retention money" is defined in the amendments to the Act as money retained by a head contractor out of money payable by the head contractor to a subcontractor under a construction contract as security for the performance of obligations of the subcontractor under the contract.

In addition to the significant amendments to the Act outlined in our recent article, the amended Bill introduces an amendment to the Act relating to retention money.

Currently, there is no requirement under the Act that retention money held by a contractor under a construction contract be held on trust for a subcontractor.

New requirements for retention money held by head contractors under construction contracts

The further amendment to the Act provides that the Building and Construction Industry Security of Payment Regulation 2008 ("Regulations") may require that retention money be held in trust for a subcontractor.

The Regulations may also require head contractors to pay the money into a trust account established and operated in accordance with the Regulations ("retention money trust account"), which may involve the establishment of a trust account by the head contractor with a financial institution or the establishment and operation of a trust account by the Small Business Commissioner.

The Regulations may provide for procedures to be followed in relation to the authorisation of payments out of the retention money trust account. They may also provide for record keeping in connection with the operation of the retention money trust account, inspection of those records by the Small Business Commissioner and the resolution of disputes in connection with the operation of the retention money trust account.

The Regulations may also create an offence punishable by a penalty for any failure to comply with the requirements of the Regulations.

NSW Department of Finance and Services to consult with stakeholders on retention trust model

The amendments to the Regulations to effect the protection of retention money through a statutory trust will be made following consultation by the NSW Department of Finance and Services with industry stakeholders about the NSW government's preferred retention trust model, which includes the following proposed components:

• The establishment of a statutory requirement in the Act that retention money to be held under a construction contract be paid into a central trust fund to be administered by the Office of the Small Business Commissioner (OSBC) as statutory trustee (rather than the establishment of a trust account by head contractors)

• The signing of an agreement by the head contractor and subcontractor and lodgement of documents with the OSBC specifying the maximum amount of retention money to be held in trust, when payments are to be withheld from progress payments and lodged with the OSBC, expected date of completion of the works, expected date of the 12 month defects liability period and account details of the subcontractor and head contractor for payment of funds

• The lodgement by head contractors of retention money with the OSBC by electronic funds transfer within 24 hours of that money being deducted from progress payments to subcontractors

• In the event of a dispute arising about the release of retention money, the requirement for the parties to participate in a form of mediation before any court proceedings (with the parties being free to nominate their preferred mediation/dispute resolution service in their contract or when the dispute arises)

• The release of funds by the OSBC once the dispute has resolved through agreement of the parties, determination by an adjudicator under the Act or by a decision of a court of competent jurisdiction

Regulatory impact statement to be developed and released to the public

The Department of Finance and Services released its consultation paper on 12 November 2013 and has invited comment by 22 January 2014. It is expected that following the receipt of stakeholder responses, a regulatory impact statement will be developed and released to the public before the commencement date of the retention trust model.

We will provide updates on the commencement date of the amendments to the Act and on developments relating to the proposed retention trust model as they emerge.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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