Retention sum headaches - The joys of trust accounting for head contractors
From 1 May 2015, head contractors on projects where the head contract value is $20 million and above must maintain trust accounts for retention sums withheld from subcontractors.
This bulletin highlights some key features of the Building and Construction Industry Security of Payment Amendment (Retention Trust Money Account) Regulation 2014 (SOPA Amendment Regulation).
Who and what is covered by the SOPA Amendment Regulation
The SOPA Amendment Regulation only has application to construction contracts with a value of at least $20 million entered into after 1 May 2015.
The amendments only apply to retention sums (referred to as ‘retention money’ in the SOPA Amendment Regulation), and no other forms of security. ’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.
Money is ’retention money‘ only for so long as it is held for that purpose.
The value of a construction contract is the amount of the consideration that the contract provides is payable for construction work carried out under the contract or for related goods and services supplied under the contract. If the contract does not provide for that amount, then the value is the market value of the work and the goods and services to be supplied.
Importantly, if the value is below $20 million initially, but increases due to variations, pushing the value of the contract above $20 million, then the trust account regime will apply to retention money held in relation to sub-contracts entered after the value of the head contract reached the $20 million threshold.
Obligations of head contractors
The big changes head contractors will need to make are to establish trust accounts to hold retention money with an approved deposit-taking institution, to maintain prescribed records of trust account transactions, and to meet reporting requirements (including an annual report by a registered company auditor).
Failure to properly open and maintain a retention money trust account may attract a fine of up to $22,000.
Other important provisions include:
- restrictions on the circumstances in which withdrawals may be made from a trust account; and
- quarantining money held in a trust account from availability to pay a head contractor’s debts.
What to do?
If you are a head contractor under a contract that falls within the SOPA Amendment Regulation you should seek legal advice to ensure compliance with these new obligations as soon as possible, and be prepared to put in place suitable systems to cope with the administrative measures that will be required. A review of pricing to address the additional cost of compliance might also be undertaken.
Alternatively, you could take the decision not to use retention sums as security and insist on bank guarantees or performance bonds instead.
Authors: David Creais and Ben Hardy