Security of Payment Reform: Unpacking the Changes
Protecting Retention Monies and Release of Consultation Paper
In recent publications we have provided an overview of some of the changes that have been made to the Building and Construction Industry Security of Payment Act (NSW) 1999 (SOPA). Here we discuss the implications of the reforms specifically with regard to retention monies.
The reforms to SOPA are a part of the response of the NSW Government to the recommendations made by the Independent Inquiry into Construction Industry Insolvency.
One of the key amendments to SOPA includes provisions for the establishment of trust accounts to protect retention monies to address the difficulties faced by subcontractors in having retention monies released by head contractors especially when head contractors become insolvent.
In a separate Consultation Paper issued by the Government in November 2013 the Government has called for submissions from the public in response to a proposed retention fund model.
“Retention money” is defined 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.
An example of the difficulties in obtaining the release of retention considered by the Inquiry was the liquidation of Reed Constructions Australia Pty Ltd (RCA) where the liquidator for RCA found that more than $7 million in sub contractor retention monies held by Reed
“…. had been used to fund working capital requirements on RCA projects
and as at the date of appointment the company had no cash at bank…..”
The Inquiry also found this practice was not uncommon and that many contractors and builders were using subcontractor retention monies to:
- Pay off the tail end of a previous project;
- Invest in other business ventures;
- Pay business overheads and head office staff wages;
- Invest funds on the short term money market;
- Fund discretionary personal purchases.
Against that background, the majority of witnesses and written submissions in the Inquiry indicated widespread support that the retention monies should be held in a trust account until due and payable.
This would protect the retention money throughout the duration of the project and in the event of insolvency of the head contractor.
Recommendations of Inquiry
After considering a range of submissions and evidence, the Inquiry recommended that:
- retention monies be deposited into a trust account;
- retention monies be paid out on agreement between the head contractor and the contractor;
- retention monies cannot be used by the holder of those monies for any purpose other than for the reasons provided under the contract;
- SOPA deal with the disputes relating to the bank guarantees and retention money.
What are the amendments?
Included in the amendments to the SOPA is the provision of regulations that may:
- require retention money to be placed into a trust account with their own financial institution or into a trust account established and operated by the Small Business Commissioner;
- include provisions for:
- the authorisation of payments out of a retention money trust account;
- keeping of records in connection with the operation of a retention money trust account;
- the inspection of those records by the Small Business Commissioner; and
- the resolution of disputes in connection with the operation of a retention money trust account.
A failure to comply with the procedures set out in the regulations may attract a penalty of $22,000.
Release of Consultation Paper
The full extent of the trust account procedures is not yet known, however in Consultation Paper: A Statutory Retention Trust Fund for the Building and Construction Industry released in November 2013, the Government has requested industry comment on a proposed retention trust model.
The trust fund model explained
In brief, the Consultation Paper proposes that:
- The trust fund be administered by the Office of Small Business Commissioner (OSBC).
- The trust fund comprise of subcontractor’s cash retentions held by head contractors or other subcontractors.
- The monies paid into the trust fund be subject to a dual authorisation process at the time that an entitlement to the funds arise.
- The trust monies be paid out of the trust fund by the OSBC directly to the subcontractor or contractor.
- The OSBC administer the trust fund as the statutory trustee.
- The OSBC provide lodgement, custody, payment, information and early dispute resolution services.
- In the event of a dispute with respect to the release of funds, the matter would be subject to the early dispute resolution services offered by the OSBC, or a determination by an Adjudicator through the statutory processes under the Building and Construction Industry Security of Payment Act, or by a decision of a court of competent jurisdiction.
- The funds would be released once the dispute has been resolved.
Appearing below is a diagram extracted from the Consultation Paper that sets out the proposed retention trust model. (Click image for a larger view).
The Department of Finance and Services has invited comments to the Consultation Paper by 22 January 2014.
Following consideration of the stakeholder responses, the Government will develop a regulatory impact statement. The model will also consider the need for businesses to be informed of the changes so that businesses can make necessary changes.
We will keep you informed of developments as they arise.
If you would like any further information on this topic, please contact: