Phase 3 of Western Australia’s Security of Payment reforms came into effect on 1 February 2024. Under the Building and Construction Industry (Security of Payment) Act 2021 (SOP Act), phase 3 implements the second phase of the Retention Trust Scheme and fairer contracting practices.
Phase 1 of the State Government’s three-year action plan commenced on 1 August 2022, with Phase 2 implementing the retention trust scheme and new Regulator powers on 1 February 2023.
The key changes in Phase 3 include:
- With a previous threshold of $1m, the Retention Trust Scheme will now apply to construction contracts with a value of more than $20,000 (excluding residential and Government contracts). Money held for the purpose of retention must be paid into and held in trust accounts either within 10 business days of the contract being entered into, or 20 business days of the contract value exceeding $20,000.
- The right to substitute retention security for a compliant performance bond (ie. a bank guarantee).
- Penalties for breaches of requirements of the Retention Trust Scheme including prosecution and fines up to $50,000 for individuals or $250,000 for corporations.
- Continuing professional development for adjudicators to maintain registration.
We summarise the key requirements post 1 February 2024 below.
Application of the Retention Trust Scheme
The Retention Trust Scheme only applies to construction contracts with a value of more than $20,000 (including GST) that require the withholding of retention money. However, there are some minor exceptions including:
- head contracts with State Government and Commonwealth principals (including departments and agencies);
- contracts with individual homeowners where the home building works are 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 separate lots of land; and
- small-scale residential contracts (e.g. works on a single dwelling or an associated structure on the same lot as an existing dwelling) irrespective of the value of the contract.
The retention money must be held on trust for the party carrying out the work or supplying the goods and services under the construction contract, however, the party that is holding the retention money is entitled to any interest earned on the retention money. The retention money must be held until it is due to be paid or otherwise applied under the terms of the contract.
There is no requirement for a party to open a special type of banking account and one account can be used for more than one construction contract. However, the retention money can’t be kept in the party’s normal banking account or used to fund their business.
The trust account must be established within 10 business days of entering into the construction contract or within 20 business days of the value of the contract exceeding the $20,000 (including GST) threshold. The trust account must be a deposit or transaction account of a recognised financial institution and must include the words ‘trust account’ in the name of the account. The other party to the construction contract must be notified in writing of the establishment of the account.
Right to substitute retention money for a performance bond
A party to a construction contract is entitled to the release of retention money under the contract by substituting a compliant performance bond. This will ensure that the party has the ability to access retention money (as a liquid asset) at any time in exchange for a compliant performance bond.
Any request to substitute the retention money for a performance bond must:
- Identify the construction contract for which the substitution is proposed;
- Indicate the amount of retention money to be released;
- State that it is a request made under the SOP Act;
- Be accompanied by a draft of the compliant performance bond; and
- Include any other information required by the regulations.
In order to be compliant, a performance bond must comply with each of the following requirements:
- It must be unconditional;
- It must not expire and must be wholly irrecovable;
- The amount payable under the performance bond must not be less than the amount of retention money to be released;
- It must be in the same currency as the retention money to be released;
- Unless the construction contract provides otherwise, the applicable law and courts that applies to the performance bond are the laws and courts of WA;
- it must identify the party to the construction contract who withholds the retention money as the only person who may demand and receive payment under the performance bond (unless the construction contract states otherwise);
- it must identify an authorised issuing institution as the institution issuing the bond (including ABN and ACN or ARBN);
- the performance bond must maintain the times for release of performance security under the construction contract;
- the credit rating of the authorised issuing institution must satisfy any minimum credit rating requirement that is prescribed by the regulations; and
- it must satisfy any other requirements prescribed by the regulations.
Breaching or failing to comply with the SOP Act
The penalties for breaching or not complying with the SOP Act are severe and include prosecution and a hefty fine, with parties to a construction contract liable for a $50,000 fine for individuals and a $250,000 fine for corporations when they fail (without reasonable excuse) to either pay retention money into a trust account, or fail to allow parties with a beneficial interest in the retention money to inspect and make copies of accounting records or provide information or assistance relating to those accounting records prescribed by the regulations.
If you have questions or would like to know more about how the Phase 3 reforms will apply to your business, please contact your local partner or Anika Reside.
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