Security of payment for construction contracts - what you need to know about legislative changes

19 Jul 2017

On 1 May 2015, significant changes were brought about regarding the treatment of the security of payment for construction contracts.

The Building and Construction Industry Security of Payment Act 1999 (NSW) (Act) and the Building and Construction Industry Security of Payment Regulation 2008 (NSW) (Regulation) were amended to require retention money to be held in a trust account with an approved ADI for construction contracts entered into after 1 May 2015 valued at $20million or greater.

The value of the contract is determined on the consideration payable for construction work under the contract or, where the contract does not specify an amount, the market value of the work to be carried out and the value of goods and services to be supplied.

It follows, the requirement to hold money on trust extends to construction contract's that are initially under the $20million value but at a later date, after variation for example, reach the threshold. Retention money held by a head contractor under construction contracts entered into after the date the threshold was reached must be held on trust.

Application

Under the Act, a person carrying out construction works is entitled to progress payments, however these payments do not need to be secured in the form of retention money.

The Regulation will only apply in cases where the construction contract is at a value of more than $20million and the head contractor holds retention money– where money is 'retained out of money payable by the head contractor to a subcontractor' as security for the performance of obligations.

As a result, if security for the performance of obligations is taken in another form, for instance a bank guarantee, the trust requirements will not apply.

How much money is required to be held on trust?

There are no specific guidelines as to how much money must be held in retention. The usual industry practise is an amount of up to 5% of the total contract value.

Establishment of trust account

A retention money trust account may be established as:

(a) A separate trust account of the retention money held in respect of a particular subcontractor;
(b) A separate trust account for all retention money held in connection with a particular project of the head contractor; or
(c) A separate trust account for all retention money held in connection with 2 or more construction projects of the head contractor.

On the establishment of the trust, the approved ADI must be notified (in writing) that the account is a trust account for the purposes of the Regulation.

It is important to note the Regulation expressly waives any recourse or right of the ADI against money in the account. The bank/mortgagee cannot take security over this account. Additionally, the ADI has no obligations to control or supervise the account or transactions from the account.

The name of the account and description of the account must include the name of the head contractor and the words 'Trust Account'.

Effective date of the trust account

The Regulation and the Act do not provide any time periods to establish a retention money trust account.

However, after establishing the trust the head contractor must notify the Commissioner of Fair Trading in writing within 14 days of the:

(a) Name of the approved ADI, branch or BSB number of the branch at which the account has been established;
(b) Name of the account;
(c) Number of the account; and
(d) Opening balance of the account.

Can the funds in trust be used to pay claims or are the funds locked into the trust account?

The Head contractor must not withdraw retention money from a retention money trust account, except:

(a) For the purpose of the payment of the money in accordance with the terms of the construction contract under which the money was retained; or
(b) As may be agreed in writing by the head contractor and the subcontractor concerned; or
(c) In accordance with a court or tribunal order.

Any withdrawal under these exceptions must be via a cheque or electronic funds transfer and it is emphasised no withdrawal is permitted for the payment of debts of the head contractor.

Further, the Regulation expressly deals with interest, stating:

(a) 'Interest earned on retention money held in trust account is to be held on the same trust and dealt with accordingly, unless the construction contract otherwise provides or the parties otherwise agree in writing.'

How is trust retention money claimed?

Retention money is claimed as per the usual practices under the Act and the construction contract.

Trust records

Where:

  • Amounts have been deposited into or withdrawn from the trust account;
  • Money is still retained at the end of the financial year; and
  • If the contractor has not notified the Commissioner of Fair Trading in writing, within 3 months after the end of the financial year, that no amount is retained in the account and there have been no amounts deposited or withdrawn from the account during the financial year.

The head contractor must provide the Commissioner of Fair Trading with an account review report and a retention account statement in respect of the financial year (form of statement is in Schedule 2 of the Regulation).

The statement and report must be provided within 3 months after the end of the financial year accompanied with a fee of $1,500.

Building bond scheme

You may recall our previous brief on this scheme that under this scheme, strata constructions over three storeys in height are required to lodge a 2% building bond with NSW Fair Trading. Lodgement will be a condition precedent to obtaining the first occupation certificate for the development.

The bond is for the purpose of securing funds for the rectification of any defective building work. 15 to 18 months after the construction has been completed, any defective work will be identified in a report by an appointed building inspector. The building report will be provided to the Commissioner of Fair Trading.

The building bond must be held and available to claim no less than 2 years after the date of issue of the Occupation Certificate (OC). If not claimed or realised, the bond will be released to the developer within 3 years. It is proposed the release of the bond will commonly occur 2 years after the date of issue of the OC or after 60 days from the date the final report, showing no defects, was given to the Secretary.

The strata building bond and inspection scheme was predicted to commence on 1 July 2017 however has been postponed to commence on 1 January 2018. Hence, if a construction contract for strata scheme is executed on or after 1 January 2018, there will be a requirement to adhere to the scheme.

NSW Fair Trading has released a statement confirming they 'will not require developers of new strata schemes to lodge defect bonds before 31 December 2017'.

Further details regarding the practical implication of the scheme have not yet been provided by NSW Fair Trading.

For further information about this article, please contact Roger Mattar, Partner.

I would like to thank Kemp Strang Law Clerk, Adeline Technitis for her contribution to this update.

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