Overview
As of 1 February 2024, the third and final phase of the Western Australian government’s roll out of the new Security of Payment regime under the Building and Construction Industry (Security of Payment) Act 2021 (SOP Act) comes into effect. Phase 3 involves the implementation of the second phase of the Retention Trust Scheme and fairer contracting practices. The key changes under Phase 3 are:
- the lowering of the threshold for the Retention Trust Scheme. It now applies to construction contracts with a value of more than $20,000 (previously $1 million);
- the introduction of a right to substitute retention security for a compliant performance bond;
- offences being imposed for persons who contravene certain administrative requirements of the Retention Trust Scheme; and
- mandatory continuing professional development (CPD) for adjudicators.
What does this mean for you?
- Almost all construction contracts where the SOP Act applies and use retention monies will be required to comply with the Retention Trust Scheme (residential contracts and those directly with government will remain excluded). This means retention monies must be paid into and held in trust accounts within 10 business days of the contract being entered into or within 20 business days of the contract value exceeding $20,000. For more details on how the Retention Trust Scheme works refer to our article dated 1 February 2023 here or contact the authors of this article for more details.
- Persons who contravene the Retention Trust Scheme may be prosecuted and liable for substantial ($50,000) fines.
- Parties to construction contracts will have a right to substitute a performance bond (e.g. bank guarantee) for retention money.
- Adjudicators will be required to undertake mandatory CPD to maintain registration.
We recommend parties consider:
- the security provisions in any new contracts with a value of more than $20,000;
- whether it is simpler to require bonding; and
- their process for holding retention funds,
to ensure they comply with the new requirements.
Substitution of performance security
The most significant reform introduced under Phase 3 is a right for a party to a construction contract to which the SOP Act applies to substitute a performance bond for the release of retention money under the contract.
A party can seek the substitution of performance security and release of retention monies in a payment claim for a progress payment. This can be for the release of a portion of the retention money and can be done by substituting more than one performance bond.
A payment claim in which a claimant seeks the substitution of performance security must be accompanied by a draft of the compliant performance bond (in final form except for its execution by the authorised issuing institution) that the claimant proposes to provide in substitution for the release of the retention money. An adjudication application (or adjudication review application) that seeks the substitution of performance security proposed in a payment claim must be accompanied by a compliant performance bond executed by the authorised issuing institution that is in the same form, or substantially the same form, as the draft that accompanied the payment claim.
The determination of an adjudicator may require the substitution of performance security that is proposed in a payment claim. This reform therefore ensures that a claimant will have the ability at any time to access retention money (as a liquid asset in cash) in exchange for a compliant performance bond.
Unlike other matters that can be raised in an adjudication response, a respondent may dispute the authenticity or compliance of a performance bond whether or not the respondent disputed the matter in the payment schedule. The adjudicator must, in any determination for the substitution of performance security, satisfy themselves that the executed performance bond is authentic and compliant with the requirements of the SOP Act.
A performance bond will be compliant under the SOP Act and capable of substitution if:
- the performance bond is unconditional;
- the performance bond does not expire and is wholly irrevocable;
- the amount payable under the performance bond (or, if it is one of multiple performance bonds to be substituted, the total amount payable under those bonds) is not less than the amount of retention money to be released;
- the amount payable under the performance bond is in the same currency as the retention money to be released;
- unless the relevant contract provides otherwise, the applicable law that applies to the performance bond and the courts with jurisdiction to determine disputes relating to the performance bond are the laws and courts of WA;
- the performance bond identifies the party to the relevant contract who retains or otherwise withholds the retention money to be released as the only person who may demand and receive payment under the performance bond (unless the relevant contract or a subsequent agreement between the parties provides that another person may demand and receive payment under the bond);
- the performance bond identifies the authorised issuing institution as the institution issuing the bond (including ABN and ACN or ARBN);
- the times for release of performance security under the relevant construction contract are maintained by the performance bond;
- the credit rating of the authorised issuing institution issuing the performance bond satisfies any minimum credit rating requirement that is prescribed by the regulations; and
- the performance bond satisfies any other requirements prescribed by the regulations.
Note that a performance bond cannot be substituted for retention money where the retention money is held by a third party or the performance bond is provided by a third party.
Offence for failure to comply with SOP Act
From 1 February 2024, a party to a construction contract will commit an offence punishable by a fine of $50,000 where that party fails, without reasonable excuse, to:
- pay retention money into a trust account; or
- on being given reasonable notice, to allow a person with a beneficial interest in the retention money in the account to inspect and take copies of any accounting records or provide any other information or assistance relating to those accounting records prescribed by the regulations.
If you would like to find out more about the new Security of Payment regime in WA, please reach out to Katherine or Juliana for more information.
