It is common place in the construction industry for a portion of
contractual remuneration to be retained as security for the
performance of the contract concerned. Mandatory trust accounts to
deal with retention money held by head contractors in the
construction industry may soon become law in NSW.
In our recent In Brief "NSW Government Takes First Step to Address the
Insolvency Crisis in the Construction Industry" we
outlined reforms to the Building and Construction industry
Security of Payment Act 1999 (NSW) and foreshadowed that the
next tranche of reforms would likely include the introduction of a
retention trust scheme for subcontractors. That reform may
now be implemented sooner than anticipated after the current
amendment Bill was further amended before its re-introduction to
the Legislative Council yesterday, 12 November 2013.
The further amendment provides for introduction of Regulations
under which retention monies are to be held by head contractors in
a segregated trust account, either through the head
contractor's financial institution or a trust account
established and operated by the Office of Small Business
Commissioner (Office). The amendment to the
Bill defines retention money 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" The Regulations will stipulate the
way in which the trust account is to be administered, and may make
the head contractor to establish a trust account with their own
financial institution into which retention money is to be paid or
to use a trust account established and operated by the Office;
procedures to be followed in connection with the authorisation
of payments out of a retention money trust account;
procedures for keeping records of the retention money trust
the Office to be given powers to inspect trust account
a process for the resolution of disputes in connection with the
operation of the retention money trust account.
A failure to comply with the procedures set down in the
regulations may attract a maximum penalty of $22,000.
Provision for mandatory retention trust accounts responds to the
Collins Inquiry's recommendation that retention funds owing to
subcontractors should be placed in trust accounts. That
recommendation responded to concern expressed to the Inquiry
regarding an apparent practice of some head-contractors failing to
release retention monies to subcontractors and instead using it
prop up cash flow and working capital.
While the full extent of the authorisation procedures and
dispute processes are not yet known, readers should be aware that
in government's April 2013 response to the Collins Inquiry
government expressed in-principle support for expansion of the
statutory adjudicators' jurisdiction, including a possible
provision for "resolution" of disputes concerning the
entitlement or otherwise to retain retention sums.
The Office of the Minister for Finance and Services has
advised that the Bill has a projected commencement date of April
2014. Between now and then it is anticipated that government
will seek further consultation with industry participants on the
details of the retention money trust account scheme, amongst the
other reforms. The regulations are intended to follow shortly
after the amendments take effect, so principals and head
contractors now have only 6 months to assess their commercial and
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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