An idea that the most effective way to prevent the misuse of cash retentions is to require all such funds be held in a Statutory Construction Retention Bond/Trust Scheme (‘statutory scheme’), has always resonated with me.
Such a statutory scheme would operate along the same lines as the Residential Tenancies Authority does in relation to protecting the misuse by landlords of rental bonds paid by tenants when entering into accomodation leasing arrangements.
However the Building Industry Fairness (Security of Payment Act) 2017 (BIFA) does not accommodate such a statutory scheme and in the alternative, seeks to address this issue through the establishment of Project Bank Accounts.
The statutory scheme idea has been in a death spiral of committees but does it need resuscitating?
I have identified a process entailing a series of eight actions involving discussion papers, reviews, undertakings, committee deliberations and analysis over a five year period that has now all but killed a good idea.
On 21 December 2012 the Government through the QBCC released a discussion paper entitled ‘Payment dispute resolution in the Queensland building and construction industry’ which posed a number of questions for consideration by parties and stakeholders, one of which was:
“Question 12: Is security of payment an issue for retentions? If so how do you think this could be improved?”
On the same day the Government appointed then building industry expert and barrister Andrew Wallace to analyse responses to the discussion paper and undertake targeted industry consultation.
In a report dated 24 May 2013 to the Government, Mr Wallace made a number of recommendations that were the basis for the subsequent Building and Construction Industry Payments Amendment Bill 2014 (BCIPAB), but also included a recommendation (11) in relation to addressing the misuse of cash retentions, namely:
“Monies held on retention and other forms of security, should be held under a Construction Retention Bond Scheme.”
In his report Mr Wallace outlined the extent of this major industry issue and how such a statutory scheme would operate, namely:
- apply to all domestic, commercial, civil and engineering contracts in circumstances where the contract sum is $100,000 or greater.
- be administered by the Queensland Building Services Authority.
- be self-funded by the interest earned off monies held on trust for the benefit of contracted parties.
- allow for the payment of monies or the release of security held by it, by
- agreement of the parties;
- order of a Court or QCAT;
- an award of an arbitrator;
- expert determination; and
- at the direction of an adjudicator under the BCIPA.
Mr Wallace noted there was both support and opposition for the establishment of such a statutory scheme. In respect of support Mr Wallace referred to a joint submission from the Electrical Contractors Association and Master Electricians where they stated:
“In order to overcome this situation and prevent subcontractors being out of pocket for their work, ECA proposes the creation of a system whereby retention monies go to Escrow pending completion of the relevant works. This system could be created by the BCIP Act and enforced by adjudicators. The system would be similar to the process adopted by the Residential Tenancies Authority (RTA) in which the bond paid by a tenant at the start of a lease is refunded in full provided no damage or loss has been incurred by the owner. An industry or government trust style fund could be established for the building industry where these retention monies could be held pending project completion. Introducing this system would undoubtedly involve establishment costs, however, it would also create a more equitable balance between the interests of principal contractors and the subcontractors engaged on a project who are lawfully entitled to payment for the work they have performed. As is the case with landlords provided with some security for loss through the RTA, this system would also continue to protect the rights of consumers by ensuring work is performed to a certain standard in order for funds to be released.”
In a report dated September 2014, the parliamentary committee reviewing the BCIPAB recommended that the Minister implement Wallace Report Recommendation 11 concerning “the establishment of a Construction Retention Bond Scheme”.
In responding to the Committee’s recommendation the responsible Minister, the Hon Tim Mander in the second reading speech regarding BCIPAB on 10 September 2014 stated:
“With regard to recommendation 11 of the Wallace report, the department is actively monitoring the implementation of a statutory retention trust fund scheme in New South Wales. I will consider the best approach for Queensland following a review of that scheme.”
On 28 October 2014 the Government through the QBCC released a discussion paper entitled “Better Payments Outcomes” where the idea of establishing such a statutory scheme was again raised but with two notable changes, namely:
- it would only capture cash retentions in relation to contracts between builders and subcontractors and all sub-subcontracts, and
- would not be applicable in relation to the carrying out of residential building work.
In December 2015 the Government through the Department of Housing and Public Works released a discussion paper entitled ‘Security of Payment’ where an option canvassing the establishment of a ‘Retention Trust Fund Scheme’ (RTFS) was outlined.
However It should be noted that the RTFS was not a statutory scheme and would operate along the following very different lines:
“This option proposes the use of a Retention Trust Fund Scheme (RTFS) to hold subcontractors’ retention money in a secure manner. A typical construction contract includes a form of performance-based security. This security is used to pay for costs associated with: late completion of work work not complying with contractual requirements remedying defects non-completion because of the insolvency of the subcontractor. A RTFS requires a head contractor to hold retention money in an account with an authorised deposit taking institution — like a bank. Head contractors can only withdraw money from the trust account as set out in the terms of the contract, otherwise financial penalties apply. A RTFS prevents the head contractor from using retention money as cash flow. Subcontractors are beneficiaries of the trust account, and are seen as secured creditors. In the case that the head contractor/contractor becomes insolvent, the retention money is securely held in the RTFS. This means the money is secured and can’t be accessed by liquidators. This is important as often retention money represents a subcontractor’s entire profit margin of a project. A RTFS places reporting obligations on head contractors. Head contractors must report when an account is established, closed and if an account is overdrawn, and the reason why. Penalties will apply for providing false or misleading information. A RTFS requires annual audits with results reported to government. Financial institutions are obliged to report overdrawn accounts or dishonoured cheques, however, they are under no obligation to control or supervise transactions in relation to the account.”
In a report dated 6 November 2016 to the Department of Housing and Public Works Deloitte analysed a number of SOP options including a RTFS model that:
“involves implementing a requirement that head contractors for Government building and construction projects with a contract value between $1–10m (excluding infrastructure projects and residential building and construction) pay retention funds into a RTF. Broadly, a RTF is a trust account into which the head contractor pays retention funds in order to quarantine these from operating cash flow.”
On 26 October 2017 BIFA was passed which seemingly signals the death of the idea of establishing a statutory scheme because it did not embrace such an initiative.
- I have noted a recent article entitled “WA builders get $540m ‘free’ retention cash” that indicates the misuse of cash retentions is still a major industry issue.
- In the the QBCC discussion paper entitled “Better Payments Outcomes” it is stated that:
“It is typical of construction contracts to include clauses which require a form of performance-based security. This security is used to pay for costs associated with late completion of work, work not complying with contractual requirements, remedying defects and non-completion because of the insolvency of the subcontractor. The security may take a variety of forms, but most commonly for contracts between a head contractor and a subcontractor, cash retentions are used. This is because unlike the prohibitive nature of bank guarantees, which require security over an asset such as the family home, cash retention is not secured by any other asset.
Cash retentions are money’s retained as part of the progress payment up until an agreed retention value is reached. It is money earned by the subcontractor through the progressive completion of work and held by the head contractor to secure the subcontractor’s performance obligations under the construction contract.”
- I wholeheartedly agree with these views. The builder or head contractor retains these monies on behalf of the subcontractor until such time as it can be demonstrated that they have a contractual right to them.
- In these circumstances ensuring that cash retentions are totally and effectively removed from the ‘stewardship’ of the builder is very compelling.
- The RTFS option canvassed by the Department of Housing and Public Works and modeled by Deloitte bears no resemblance to the two previous proposed statutory retention schemes.
- I strongly support the establishment of a statutory retention scheme because of the fact that it will ensure cash retentions cannot be misused and that such monies will only be released by agreement between the parties or the result of a dispute resolution process such as Adjudication.
- There are many very sophisticated online finance, banking and market systems that facilitate the transferring of millions of dollars ‘in and out’ on a daily basis so I am absolutely positive a suitable online statutory retention system could be built.
- I support retention monies being held by a Government body with monies invested and interest earned. I believe the QBCC should be the Government body to administer such a statutory retention scheme.
- I am of the view that the amount earned through investing cash retentions will be well in excess of the amount necessary to recover initial system establishment costs and offset ongoing system maintenance costs.
- There will have to be appropriate modelling undertaken by experts on the costs to implement such a scheme and different scenarios applied in respect of investment outcomes to confirm my views in this regard.
- Such investment revenue could also be utilised to fund the providing of procedural assistance and advice to parties (claimants and respondents) involved in disputes over the release of cash retentions or the recovery of progress payments. This service should be independent of the Adjudication Registry but could be if deemed appropriate, a separate operational responsibility of the QBCC.
- The QBCC also has a huge new compliance and enforcement agenda across a number areas of legislative responsibility. Funding from such an investment revenue stream could support these activities.
- In my opinion the scheme should have a wide scope so that all cash retentions in relation to the carrying out of ‘construction work’ as defined under BCIPA/BIFA will be captured by enabling legislation.
- Of the approximate $46 billion of construction work carried out in Queensland each year, only residential work to the approximate value of $11 billion would be excluded. Retentions of any nature are not normally a feature of residential building contracts between builders and “mums and dads” so such an exemption would have little impact.
- The decision by the Government to confirm the role of the QBCC (Adjudication Registry) to receive all adjudication applications and appoint adjudicators to quickly decide payment disputes, including those relating to the release of cash retentions, is a very important aspect of a successful statutory retention scheme.
In summary I believe that a statutory retention scheme represents one of those very rare opportunities to:
- effectively address a major industry issue, namely the misuse of cash retentions;
- recover all system implementation costs and offset ongoing maintenance costs incurred by the QBCC through investment revenue, and
- fully fund a number of very important QBCC initiatives through the same investment revenue stream.
I call that a win, win, win outcome. RIP or back from the Dead — what do you think?
If you are interested in shaping the future of the construction industry please come along and continue the conversation on 27 September 2018. I am always open to hearing alternative opinions and have a genuine interest in building a better future for the industry.Not intended as legal advice. Read full disclaimer.