The Construction Contracts (Retention Money) Amendment Act 2023 comes into effect from Thursday 5 October. In this article, we look at some of the implications for construction businesses.
Like the preceding legislation (The Construction Contracts Act 2002), the Construction Contracts (Retention Money) Amendment Act contains requirements which can present significant challenges for larger head contractors to comply with in full. In particular, compliance with the Act’s complex disclosure requirements can be time-consuming.
In the face of these challenges, a pragmatic approach is therefore necessary when navigating the regime. In this article, we cover some of the key compliance challenges for head contractors with a base working knowledge of the new Act - sharing practical tips to help navigate these.
Updating your team
Most construction-specific software suppliers are still in the process of updating their software to comply with the Act. These suppliers will typically only give detailed update instructions to one person within an organisation, with an assumption that person will share the information to the rest of their company. That means it’s vital to ensure that person in your organisation is instructed to disseminate the information - including to the accounting team.
Failure to comply
A deficiency in the previous legislation was teeth to ensure compliance. Those teeth now exist in section 18D where directors can become personally liable for each offence - and there can easily be multiple offences. Each time, and for each sub-contractor, when retention money is deducted and not put into the trust account, it is a separate offence. For example, four projects with 10 subcontractors on each, multiplied by $50,000 penalty per offence, could become a $2 million penalty per director.
The Act states that only retentions from contracts entered into after 5 October 2023 will be caught by the revised rules and retentions on contracts prior to that will be caught by the old rules. Those companies that have sufficient cash available to place in trust, generally intend to apply the new rules to all retentions. That sends a clear message of assurance to their subcontractors. If a head contractor or developer only discloses and puts into the trust bank account retentions on new projects, it raises the question of whether they actually have sufficient cash to cover all retentions. Some won’t, so ask if you have retentions held against you.
The retainable amount becomes retention money when the construction contract allows Party A (head contractor or client) to withhold payment. This would usually be the due date for payment. Most subcontractor agreements provide payment 17 working days after submission of the progress claim and therefore there will be a range of different dates near the end of the month when the funds should be placed in the trust account. Fortunately, clause 18D uses the words “as soon as practicable after it becomes retention money.” This means, provided the accounting team transfer the funds as soon as possible after payment is due, you are likely to comply. Waiting until the end of the month or later, when monthly accounts are prepared, is too late and the directors would be exposed to penalties.
Most companies transfer the funds in or out of the trust account in bulk. For efficiency reasons they will continue this process. The legislation as drafted does not contemplate or specifically allow for bulk transfers and in that respect, the legislation is impractical.
Bank account requirements
The legislation is very specific about the requirements for the bank account. The bank account must be in the name of the company that deducts the retentions and not any other party. That means that for groups of companies where several deduct retentions, each one will need a separate trust account and the companies can’t pool all their funds into an account managed by one of them.
You are required to inform the bank that the account is for the purpose of holding retention money. Ensure the communication with the bank also includes any term deposits that hold trust funds and to the extent possible, the term deposit account names reflect that they are for retentions held in trust. Using term deposits allows receipt of a better interest rate.
Accounts and record keeping requirements
While the Act is highly detailed, prescriptive, and has a range of compliance challenges, fortunately account and record keeping requirements have a relative degree of flexibility. The wording in 18FC(1) says party A must keep accounting and other records of all retention money held for party B. In clause 2(b) it says, “be appropriate, having regard to the amount of retention money and the circumstances of the case…” These clauses are sufficiently general to provide you with the flexibility where the manner in which you keep the records is not pedantically in compliance with the Act.
Except where there is only a small number of retentions deducted, construction industry-specific software is needed to ensure that retentions are correctly recorded, and the monthly and quarterly reporting streamlined.
The information must be provided to the sub-contractor at the time of each additional retention and every three months.
The required information should include each amount retained, the construction contract under which it is retained and the date of its retention. This implies that, using an example of 10 progress claims for a subcontractor, each of the 10 deducted retentions should be shown at the time of the 10th deduction and in each of the subsequent 3-monthly reports. Without construction-specific software, this becomes challenging.
You must also disclose the account details for the bank account in which the retention money is held. This should show the account name, and name and branch of the bank. Disclosure of the bank account number does not appear to be a requirement.
There are other challenges: payment certificates are usually sent to the quantity surveyor for each project so if there are multiple projects, these will go to multiple people in a larger sub-contractor. Your system will need to identify a single person to send the quarterly report to.
If you need assistance with the transition to the revised regime, or your systems will not be able to efficiently cope, please contact your usual BDO advisor or a member of the BDO Construction team.