Construction industry: Retention monies
At a time when the construction industry is under unprecedented financial strain, and experiencing the lion’s share of business failures, the important second phase of the Retention Trust Scheme has come into effect.
Contractors and sub-contractors in the construction industry can be hit particularly hard with problems and delays in getting invoices paid. Sub-contractors may have had to spend considerable sums of money on materials and labour to complete a project, and delays in payments from clients can put their whole business at risk.
The relatively new Building and Construction Industry (Security of Payment) Act 2021 (WA) introduced, amongst other useful provisions, the Retention Trust Scheme to better protect retention money in the event of financial difficulty or dispute on a construction project. It provides more protection from the risks of not being paid.
The scheme applies whenever retention money is withheld under a construction contract with a value above a certain financial threshold:
Phase 1 : 1 Feb 2023 to 31 Jan 2024 – $1 million or more (incl. GST)
Phase 2 : 1 Feb 2024 onwards – $20,000 or more (incl. GST)
The scheme only applies to new construction contracts entered into after these dates; the phase thresholds are not retrospective. There are some minor exceptions to the application of the scheme, including small scale residential contracts.
Under the scheme, the retention money withheld under a contract is taken to be held on trust for the benefit of the party who provided the money.
The “trustee” of the retention money is required to place the retention money in a separate retention money trust account, with a bank or other financial institution. That account must comply with certain minimum requirements, be established within 10 business days after the construction contract is entered into and the beneficiary (the sub-contractor) notified of the particulars.
The trustee must keep proper accounting records of the retention money held under the scheme, which the beneficiary is entitled to inspect and take copies of.
Most importantly, the trustee may only withdraw the retention money from the trust account to the extent they have a contractual entitlement to do so. The trustee should not at any time keep the retention money in their normal banking account – or use the money to pay other debts, or otherwise fund their business.
Key point: Contractors can benefit from having their retentions held on trust but must also ensure compliance by holding sub-contractors’ retentions on trust.
March 2024