CONSTRUCTION Alert: Trust account requirements for NSW projects over $20M to commence

Apr 8 2015

Publications

From 1 May 2015 head contractors on construction projects with a value of at least $20 million will be required to hold retention money in trust for subcontractors, in a separate trust account.
 

These changes are made by the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (NSW) (Regulation). 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 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:

Application

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) of certain details of the trust account.

Withdrawals from trust account

A head contractor may only withdraw money from the trust account:

  • For the purpose of payment of the money in accordance with the terms of the subcontract;
  • As agreed in writing between the head contractor and the subcontractor; or
  • 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:

  • An annual review report; and
  • 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.
 

Implications

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.

Written by:

Chris Humby | Senior Associate | +61 7 3338 7909 | chumby@tglaw.com.au
Miranda Nelson | Graduate Lawyer | +61 7 3338 7917 | mnelson@tglaw.com.au