Ensuring timely payment for work has been a longstanding issue in the construction industry. The industry is inherently cashflow dependant, interruptions to payments to subcontractors invariably lead to disputes and delays, can jeopardise construction projects and destroy businesses and livelihoods. We have seen widespread issues caused by labour cost increases and supply chain issues, and insolvencies in the industry have had far reaching consequences for owners, suppliers, and subcontractors.
Security of Payment Laws - Stage 3 reforms
The WA government passed legislation aimed at improving payment security in the form of the Building and Construction Industry (Security of Payment) Act 2021.
The Act provides new payment rights and means for contractors to recover payments by way of rapid adjudication. As at 1 February 2024, the Stage 3 reforms have come into effect. They include expanding the introduction of a Retention Trust Scheme, provisions ensuring parties comply with the scheme and introduce new requirements for adjudicators of payment disputes.
Retention Trust Scheme
A Retention Trust Scheme requires retention money withheld under eligible construction contracts to be held in a retention money trust account with a recognised financial institution. This is designed to safeguard subcontractors and suppliers' interests by holding retention funds in trust until they are due for release.
From 1 February 2024, all new construction contracts over $20,000 (including GST) that require the holding of retention monies will be required to hold the funds in a retention trust account. The Act defines retention money broadly, to include money withheld from payments made as performance security, and money paid upfront by or on behalf of one party to the other party to the contract to be retained as performance security. The account must be established within 10 business days after the parties entered into the construction contract (or within 20 business days after the current value of the contract exceeds the relevant Phase 1 or Phase 2 threshold). The trustee may only withdraw the retention money from the trust account to the extent they have a contractual right to do so.
The reforms are not retrospective and apply to new contracts entered into after the commencement of the phases under the Act. They do not apply to contracts entered into before the commencement.
There are exceptions to the Retention Trust Scheme under the Act, which include head contracts directly with State Government or Commonwealth principals (including departments and agencies), contracts directly with individual homeowners for home building works valued at $500,000 (including GST) or more (unless the contract is for a residential development business or for works on two or more dwellings on different lots of land) and small scale-residential contracts as defined in the Act.
Benefits
The benefits of a retention trust scheme are numerous, and include:
1. Security: Providing subcontractors and suppliers with greater security against non-payment or insolvency of higher-tier contractors or project owners. Funds are protected from being used for other purposes or becoming subject to creditors' claims in the event of financial difficulties faced by the contracting party.
2. Improving cash flow: by ensuring timely release of retention funds. Instead of waiting until the end of the project or longer periods for release of retentions, subcontractors can access their funds as soon as they become due under the terms of the trust scheme.
3. Reducing the risk of disputes: related to the release of retention funds. Since the funds are held in trust and governed by specific trust agreements, the conditions for release are clearly defined and enforced. This transparency and accountability minimise the likelihood of disputes and delays in releasing retention amounts.
4. Enhancing project efficiency: By streamlining the process of releasing retention funds, retention trust schemes contribute to overall project efficiency, as subcontractors and suppliers can focus on their work without concerns about delayed payments or disputes over retention amounts.
5. Risk management: Retention trust schemes also offer benefits for contractors and project managers by reducing the risk of subcontractor insolvencies and, it is anticipated, reducing disputes over retention funds associated with subcontractor default or non-performance. This ensures continuity of construction without disruptions caused by subcontractor financial issues.
The introduction of a Retention Trust Scheme is a broadly welcome development and is a piece of the puzzle required to alleviate some of the widespread issues facing the industry. The industry and community have been given several years to prepare for these stage 3 changes and in that time the issues facing the industry and the housing sector as a key part of that industry, have only become more acute. It remains to be seen whether these long-anticipated reforms will have the anticipated benefits described above, and whether there are negative impacts such as upward pricing pressure.
Subcontractors and owners should be aware of the implications of the scheme, and how it affects construction projects. They should seek legal advice on how best to prepare their business processes and contract documentation. The construction team at HHG Legal Group are well equipped to assist.
The information provided in this article serves as a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable legal team for any specific inquiries or advice relevant to your circumstances
