New rules and penalties for retentions regime

Wednesday 11 August, 2021

The Construction Contracts Act 2002 (CCA) was intended to significantly change the way that payments were made in the construction industry by encouraging regular and timely payments between the parties to a construction contract. In 2015, a retentions regime was introduced which applied to head contractors and subcontractors. When the retentions regime was introduced, it was criticised because it did not impose penalties for non-compliance. The Construction Contracts (Retention Money) Amendment Bill will change that by clarifying the requirements of the regime and imposing penalties for non-compliance.

What are retentions? And why are changes needed?

Retention money is withheld by one party to a contract, for example, a head contractor from a subcontractor, as security to ensure that the contractor or subcontractor performs their obligations under the contract. Retentions are usually released after the construction project is completed or at the end of the defects notification period, which can be months. Currently, parties holding retention money do not have to keep it separate, which can cause problems if they become insolvent and have mixed retention money with their working capital.

How is the CCA changing?

Retention money will automatically be held on trust and must be held separately from other assets or money belonging to the party holding it. It can either be held in a bank account or as a suitable financial instrument, such as a guarantee or insurance policy, but can no longer be held as liquid assets, such as accounts receivable.

It is likely that most retentions will be held in a bank account once the Bill passes. The bank account must be established and used only for retention money and the account name must include the phrase “retention money trust account”. The bank must be made aware that the account is a trust account. The party holding the retention money will own any interest accruing on the account. Parties can choose whether to have one retention money account or separate accounts for each contractor or subcontractor. If they have only one account, they must keep proper accounting records to show which payment relates to which contractor.

Reporting on retention money

The party holding retention money must report to the contractor at the time, and at least every 3 months after:

• The amount of money held, the contract it relates to and the date the money was retained, and the total amount of money held.
• The bank account details, including bank, branch, account number, and name of the ledger if the account has separate ledgers.
• If the retention money is a financial instrument, the name of the issuer, the protected amount, and identifying information for the instrument.

Receivership or liquidation

If the party holding retention money goes into receivership or liquidation, the receiver or liquidator becomes a trustee of the money and must collect, manage, and pay it in the same way that the party withholding the money is required to under the CCA. Retention money does not become part of the insolvent assets. As a trustee, the receiver or liquidator is entitled to reasonable fees and costs from the retention money account and is not liable for any unlawful or improper actions that occurred before their appointment.

Penalties

The Bill introduces new penalties for failing to comply with the retention regime. Parties that do not comply with the retention regime can be convicted and fined up to $200,000 for failing to keep retention money as required. If the party is a body corporate, its directors can also be fined up to $50,000. It is also an offence to fail to keep proper accounting records of retention money, punishable by a fine of up to $50,000.

Timing

The Bill is currently before the Transport and Infrastructure Committee, which is due to report back on 11 November 2021. Businesses and directors working in the construction industry need to be aware of the changes, as directors may face criminal charges if their company fails to comply. We will keep you updated on any changes to the proposed legislation.

If you have any concerns about how these changes could affect your business, our construction experts can help.