NSW Government releases final version of the Building and Construction Industry Security of Payment Regulation 2020

The NSW Government has released the final version of the Building and Construction Industry Security of Payment Regulation 2020 (Regulation), which commenced on 1 September 2020 (except for Schedule 2, which will commence on 1 March 2021).

The Regulation repeals the Building and Construction Industry Security of Payment Regulation 2008 (Repealed Regulation), which was otherwise set to lapse on 1 September 2021.

The purpose of the Regulation is to set out the administrative functions supporting the Building and Construction Industry Security of Payment Act 1999 (the Act).

The Regulation contains a number of provisions changed from the Repealed Regulation, which are intended to:

• Provide greater protections for retention money by:

• introducing record-keeping obligations for retention money trust accounts; and
• introducing new penalties for breaches of record-keeping obligations;

• Reduce regulatory requirements and improve administrative efficiency by removing reporting requirements; and
• Clarify requirements for adjudicator eligibility, to improve consistency of outcomes for parties to a dispute.

These amendments also aim to implement the recommendations of independent reviews relating to the sector, such as the Independent Inquiry into Construction Industry Insolvency (the Collins Inquiry) in 2012 and the Review of Security of Payment Laws by John Murray AM (the Murray Review) in 2017.

The final form of the Regulation differs from the draft version that was released for public consultation in July (Consultation Draft) (see our previous article on the Consultation Draft here). Notably, the Consultation Draft proposed to lower the threshold value for projects to which this requirement applies from $20 million to $10 million. This proposal was made to align with recommendations in both the Collins Inquiry and the Murray Review. The final version of the Regulation has not adopted this proposed change, and has retained the current threshold of $20 million.

Trust Accounts

A new requirement has been introduced in the Regulation for head contractors to deposit retention amounts into the retention trust accounts as soon as possible and no later than 5 business days after receiving the money.

The Regulation has also introduced a new permitted reason for a head contractor to withdraw retention money from a trust account, which is for the purpose of payment of the adjudicated amount that the head contractor is required to pay under the Act.

Additionally, the Regulation removes the current requirement for head contractors to submit annual reports on the retention money trust accounts to NSW Fair Trading, with the aim of reducing costs and administrative burden on head contractors.

Head contractors will be required to keep a separate ledger for each subcontractor in their trust account records, and to provide a copy of the ledger to the subcontractor at least once every three months (unless otherwise agreed in writing with the subcontractor, provided it is at least once every 6 months).

The Regulation introduces new penalties for some provisions and increases penalties for others (such as introducing a maximum of 1,000 penalty units for a corporation for breach of the requirement to hold retention money in trust). These penalties have been introduced to ensure compliance and improve accountability.

Adjudicator eligibility

The Murray Review recommended that adjudicators should meet minimum eligibility requirements for skills and experience. The Proposed Regulation addresses this by requiring adjudicators to have the following qualifications and experience:

• A degree or diploma in architecture, building surveying, quantity surveying, building and construction, construction management, project management, engineering or law conferred by an Australian or foreign university or tertiary institution; and at least 5 years’ experience in the administration and management of construction contracts or in the resolution of disputes in connection with construction contracts; or
• At least 10 years’ experience in the management of construction contracts or in the resolution of disputes in connection with construction contracts.

The Regulation also requires eligible adjudicators to complete continued professional development (CPD), which will become mandatory from 1 September 2021. Additionally, eligible adjudicators must not have an actual or perceived conflict of interest (as would be concluded by a reasonable person).

Exempt residential construction contracts

Under the Repealed Regulation, owner occupier construction contracts were exempt from the Act. Under the Regulation they will continue to be exempt, until Schedule 2 of the Regulation comes into effect on 1 March 2021. From 1 March 2021, owner occupier contracts will come within the definition of “exempt residential construction contracts”, which have different requirements in relation to the due date for payment of progress payments, but are not otherwise exempt from the Act. This change was not flagged in the Consultation Draft.

Practical implications

The NSW Government has retreated from moves to lower the threshold value for retention trust accounts, possibly on the basis that it would increase the administrative burden on head contractors who use retention monies for security under construction contracts.

Whilst the reporting requirements in respect of retention monies have been reduced, head contractors should ensure that their practices are compliant with the changes in the Regulation, particularly given the increased penalties for non-compliance.

This is a positive outcome for head contractors, as the reduced threshold value for retention trust accounts as proposed in the Consultation Draft has not been adopted, but some of the other changes aimed at reducing the administrative burden and costs of retention trust accounts have been adopted.

The introduction of minimum eligibility requirements for adjudicators as proposed in the Consultation Draft is another positive step, which will hopefully improve the quality of adjudication determinations made under the Act.

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