Retention money trust accounts may soon become mandatory for head contractors in the NSW construction industry

13 November 2013

It is common place in the construction industry for a portion of contractual remuneration to be retained as security for the performance of the contract concerned. Mandatory trust accounts to deal with retention money held by head contractors in the construction industry may soon become law in NSW.

In our recent In Brief “NSW Government Takes First Step to Address the Insolvency Crisis in the Construction Industry we outlined reforms to the Building and Construction industry Security of Payment Act 1999 (NSW) (Act) and foreshadowed that the next tranche of reforms would likely include the introduction of a retention trust scheme for subcontractors.  That reform may now be implemented sooner than anticipated after the current amendment Bill was further amended before its re-introduction to the Legislative Council yesterday, 12 November 2013.

The further amendment provides for introduction of Regulations under which retention monies are to be held by head contractors in a segregated trust account, either through the head contractor’s financial institution or a trust account established and operated by the Office of Small Business Commissioner (Office).  The amendment to the Bill defines retention money 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”   The Regulations will stipulate the way in which the trust account is to be administered, and may make provision for:

  • the head contractor to establish a trust account with their own financial institution into which retention money is to be paid or to use a trust account established and operated by the Office;
  • procedures to be followed in connection with the authorisation of payments out of a retention money trust account;
  • procedures for keeping records of the retention money trust account;
  • the Office to be given powers to inspect trust account records;
  • a process for the resolution of disputes in connection with the operation of the retention money trust account.

A failure to comply with the procedures set down in the regulations may attract a maximum penalty of $22,000.

Provision for mandatory retention trust accounts responds to the Collins Inquiry’s recommendation that retention funds owing to subcontractors should be placed in trust accounts.  That recommendation responded to concern expressed to the Inquiry regarding an apparent practice of some head-contractors failing to release retention monies to subcontractors and instead using it prop up cash flow and working capital. 

While the full extent of the authorisation procedures and dispute processes are not yet known, readers should be aware that in government’s April 2013 response to the Collins Inquiry government expressed in-principle support for expansion of the statutory adjudicators’ jurisdiction, including a possible provision for “resolution” of disputes concerning the entitlement or otherwise to retain retention sums. 

The Office of the Minister for Finance and Services has advised that the Bill has a projected commencement date of April 2014.  Between now and then it is anticipated that government will seek further consultation with industry participants on the details of the retention money trust account scheme, amongst the other reforms.  The regulations are intended to follow shortly after the amendments take effect, so principals and head contractors now have only 6 months to assess their commercial and contracting arrangements.  

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Andrew Chew

Partner. Sydney
+61 2 9210 6607