New Trust Regulations: Administrative Burden for Head Contractors

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What you need to know:

  • This amendment only applies to projects where the head contract has a value of at least $20 million.
  • Head Contractors are now required to open special bank accounts and keep subcontractors retention money separate from general operating accounts.  Head Contractors can only withdraw money from the trust account in limited circumstances.
  • Subcontractors are now entitled to have retention money withheld by a Head Contractor kept in a special ‘trust’ account. If in the event the Head Contractor goes into liquidation, there are remedies available to subcontractors to access those funds.

Background
In 2012, the NSW Government commissioned the Collins Inquiry due to the collapse of a number of major contractors. The inquiry found there was a significant issue with subcontractors not receiving back retention monies once their contractual obligations had been met. The inquiry also found that retention money was being kept with general operating accounts and often used as working capital or to pay other debts of the main contractors. Among the negative effects of this was that when insolvency occurred, the Subcontractors retention money was shared amongst a pool of creditors.

Project Value
The Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (NSW) came into force on 1 May 2015. It applies to all Head Contractors who enter into head contracts after this date with a value of at least $20m. If the head contract value is not initially $20m, but exceeds this threshold later due to variations, then subcontracts entered into after the relevant variation will be subject to the regulations.

Trust Accounts
Head Contractors are now required to establish and maintain ‘retention money trust accounts’ for the benefit of subcontractors from whom they withhold retention. The name of the account must include the head contractor’s name and the words “Trust Account”. Within 14 days of opening the account the head contractor must also notify the Chief Executive of the Office of Finance and Services of the name of the bank and branch, name and number of the account and its opening balance.

The regulations impose specific duties onto a Head Contractor when dealing with the Subcontractor’s money. A Head Contractor must not access and withdraw from the trust account unless it is entitled to call upon it:

  • As expressly allowed under the subcontract, such as for the purposes of returning it to the subcontractor or utilising it to recover the cost of remedying a defect; or
  • As agreed in writing between the Head Contractor and Subcontractor; or
  • In accordance with an order of a Court or Tribunal.

The Office of Finance and Services will check that Head Contractors are keeping trust accounts as required and a $1,500 administrative fee covering operating costs will be payable by companies when they submit their annual account audit reports. The Head Contractor is also required to provide the Office of Finance and Services with a report prepared by a registered auditor, within 1 month of the end of the financial year, certifying that the Head Contractor has complied with all the requirements within the regulations. These requirements impose a significant administrative burden on Head Contractors, which will only increase if the regulations are extended to contracts with a value of over $1 million, the intent to do which was foreshadowed in the Regulation Impact Statement.

Lessons to be learned:

  • Head Contractors who fail to comply with the regulations will face fines of up to $22,000 at a time. Therefore it is critical for contractors on projects where the head contract has a value of over $20m to review their financial and accounting processes, particularly with regards to the auditor’s report. It is also critical to have standard form subcontracts reviewed by a legal professional to ensure recourse rights to retention are expressly and adequately addressed.
  • Subcontractors should seek legal advice and have subcontracts presented to them reviewed for compliance and seek proof of the existence of the required trust accounts. Head Contractors will undoubtedly push for bank guarantees instead of cash retention, you should seek advice if this is suitable for your circumstances. In the event of collapse of the Contractor, Subcontractors should move quickly and get legal advice in order to secure their position and make a claim to the liquidator.
For further information, please do not hesitate to contact us.

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