NSW government proposes to reduce retention trust account threshold for construction projects to $10 million

These amendments aim to implement the recommendations of independent reviews relating to the construction industry.
Australia Real Estate and Construction
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The NSW Government has recently released the consultation draft Building and Construction Industry Security of Payment Regulation 2020 (Proposed Regulation). Subject to the public consultation process, the Proposed Regulation will commence on 1 September 2020 (with a transitional period for some reforms).

The Proposed Regulation will repeal the Building and Construction Industry Security of Payment Regulation 2008 (Current Regulation), which was otherwise set to lapse on 1 September 2021.

The purpose of the Proposed Regulation is to set out the administrative functions supporting the Building and Construction Industry Security of Payment Act 1999 (the Act).

The Proposed Regulation contains a number of provisions changed from the Current Regulation, which are intended to:

  • Provide greater protections for retention money by:
    • lowering the threshold for projects for which retention money trust accounts are required; and
    • introducing record-keeping obligations for retention money trust accounts;
  • Reduce regulatory requirements and improve administrative efficiency by removing reporting requirements; and
  • Clarify requirements for adjudicator eligibility, to improve consistency of outcomes for parties to a dispute.

These amendments also aim to implement the recommendations of independent reviews relating to the sector, such as the Independent Inquiry into Construction Industry Insolvency (the Collins Inquiry) in 2012 and the Review of Security of Payment Laws by John Murray AM (the Murray Review) in 2017.

Trust Accounts – lowering of threshold for retention trust money accounts to $10 million

In respect of the requirement for head contractors to pay retention money into a trust account, the Proposed Regulation lowers the threshold value for projects to which this requirement applies from $20 million in the Current Regulation, to $10 million in the Proposed Regulation.

Both the Collins Inquiry and the Murray review recommended that the requirement for retention money trust accounts should apply to all contracting parties under the Act. However, some stakeholders have raised concern that this would increase administrative burden on smaller businesses in the industry.

The NSW Government proposes to offset the increased regulatory burden arising from the lowering of the threshold by removing the annual reporting requirements in respect of retention money trust accounts.

Trust Accounts – other changes

A new requirement has been introduced in the Proposed Regulation for head contractors to deposit retention amounts into the retention trust accounts as soon as possible and no later than 7 days after receiving the money.

Additionally, the Proposed Regulation removes the current requirement for head contractors to submit annual reports on the retention money trust accounts to NSW Fair Trading, with the aim of reducing costs and administrative burden on head contractors.

Head contractors will be required to keep a separate ledger for each subcontractor in their trust account records, and to provide a copy of the ledger to the subcontractor at least once every three months (unless otherwise agreed in writing with the subcontractor, provided it is at least once every 12 months).

The Proposed Regulation introduces new penalties for some provisions and increases penalties for others (such as introducing a maximum of 1,000 penalty units for a corporation for breach of the requirement to hold retention money in trust). These penalties have been introduced to ensure compliance and improve accountability.

Adjudicator eligibility

The Murray Review recommended that adjudicators should meet minimum eligibility requirements for skills and experience. The Proposed Regulation addresses this by requiring adjudicators to have the following qualifications and experience:

  • A degree or diploma in architecture, building surveying, quantity surveying, building and construction, construction management, engineering or law conferred by an Australian or foreign university or tertiary institution; and at least 5 years' experience in the administration and management of construction contracts or in the resolution of disputes in connection with construction contracts; or
  • At least 10 years' experience in the management of construction contracts or in the resolution of disputes in connection with construction contracts.

The Proposed Regulation also requires eligible adjudicators to complete continued professional development (CPD), which will become mandatory from 1 September 2021. Additionally, eligible adjudicators must not have an actual or perceived conflict of interest (as would be concluded by a reasonable person).

Practical implications

The lowering of the threshold value for retention trust accounts to projects valued at $10 million may cause head contractors to give further consideration to the use of retention monies as the form of security to be applied to a construction contract given the expected increase in the administrative burden required to comply with the Act. Whilst the NSW Government has recognised this increased burden, and has attempted to alleviate it to an extent by removing the reporting requirement, it may not be sufficient to stop the flow of head contractors continuing to move toward bank guarantees or other forms of security in lieu of retention monies, where possible.

Whilst the introduction of minimum eligibility requirements for adjudicators is hoped to improve the quality of adjudication determinations made under the Act, its real value may be in minimising the extent of jurisdictional errors in adjudication determinations that are susceptible to review. Only time will tell whether this aspiration becomes a reality.

Consultation period

The Proposed Regulation is open for public consultation until 24 July 2020 and stakeholders and interested parties are invited to provide comments to NSW Fair Trading. The Proposed Regulation and an online form for providing comments are available here.

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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