New NSW cash retention scheme to commence in early 2015

In New South Wales, a “ground-breaking” cash retention trust scheme will be established to ensure construction companies are prevented from using cash retention monies for purposes other than rectifying defects in the contract defects liability period. The scheme will particularly protect subcontractors in the industry from collapsing construction companies and the infamous “phoenix companies” who would in most cases, use their subcontractor’s retention monies for their own scheming purposes.

The National Electrical and Communications Association (NECA) was consulted and NECA NSWs Executive Director Mr Oliver Judd and NECA Legal’s Solicitor Director Mr Stafford Poyser attended a meeting with New South Wale’s Minister for Fair Trading, Mr Matthew Mason-Cox and his team. At the meeting in discussing the various options Mr Oliver Judd stated that it was the subcontractors that were most effected by failure by head contractors to refund retention monies. He specifically stated that: “At the end of the day, the retention monies belong to subcontractors and not the head contractor and it was about time this money was protected as such.”

The Minster acknowledged that in some projects the retention monies can represent up to 100 per cent of a subcontractors profit margin as is reflected in the Regulatory Impact Statement.

New South Wale’s Minister for Fair Trading, Mr Matthew Mason-Cox, said the announcement of the new scheme was part of the NSW Government’s response to the Collins Inquiry looking at causes of insolvency in the construction industry.

“Through our reforms, NSW will become the first state to protect payments for subcontractors by requiring construction companies to hold retention money in a trust fund”, Mr Mason-Cox said.

“Head contractors will be responsible for holding retention money in their own accounts, and NSW Fair Trading will be checking audit reports that require head contractors to show they are keeping trust accounts as required.

“This will end the widespread industry practice of using subcontractors’ trust money for the head contractor’s working capital purposes.

“At the end of the day, this money belongs to subcontractors and it’s about time it was protected as such.

“This principle underpins the proposed retention trust scheme and is widely supported by industry.’’

A draft regulation and regulatory impact statement has now been released by the Department of Fair Trading and is open for public consultation. New laws for the new retention trust scheme are expected to commence in early 2015.

Here’s all you need to know about the new cash retention trust scheme:

What contracts does it apply to?

The first of the measures to be implemented is in respect of larger projects, however the good news is that subject to successful implementation of these measure this scheme may be expanded to apply for subcontracts for non-residential projects with a value of over $1 million or more.

The new cash retention trust scheme will initially only apply to contractors for projects valued over $20 million.

You may think this does not apply to you, however this is the total contract value. For example even if your contract is only worth $30,000, but the overall project value is over $20 million this will apply to you.

Note as stated above the NSW Government is looking to reduce the 20 million cap over the years to apply to smaller contracts.

What are the penalties for failure to comply?

Failure to comply with the new cash retention trust scheme could result in construction companies being fined up to $22,000.00.

Further, the NSW Government will also consider making directors personally liable for any breach of their responsibility for the trust accounts. This will be a major deterrent and has worked reasonably successfully for the ATO.

Who will be monitoring the new cash retention trust scheme?

The Department of Fair Trading have advised that they will be looking over audit reports to ensure head contractors are holding retention money in their own accounts.

CTI Lawyer’s Support:

Our Lawyers at CTI Lawyers are able to assist you in answering any questions you may have in relation to this new cash retention trust scheme. You can contact CTI Lawyers on (02) 9744 1099 or email your enquiry to law.clerk@neca.asn.au.