Building and Construction Industry Security of Payment Regulation 2020

The Regulation’s primary burden falls on head contractors as defined in the Act. Clause 6(1) applies Part 2 whenever the head contractor’s main contract with the principal reaches or exceeds $20 million in value. Because value includes post-execution variations (cl 6(3)), a contractor may become subject to the regime during the life of a project. Once captured, the head contractor’s obligations extend to all subsequent subcontracts, even if those individual subcontracts are smaller.

Subcontractors entitled to retention money are the beneficiaries of the trust. They receive quarterly ledger statements (cl 16(4)) and gain statutory protection against the head contractor’s insolvency or attachment by its creditors (cl 12). The note to cl 3 emphasises that money ceases to be retention money once the head contractor becomes entitled to it, thereby terminating the trust obligation.

Approved ADIs (authorised deposit-taking institutions approved under s 87 of the Property and Stock Agents Act 2002 or by the Secretary) are affected by the notification requirements in cl 9(2) and enjoy statutory immunity under cl 15. They are not required to supervise transactions or to allow set-off against the head contractor’s other liabilities to the ADI.

The Secretary receives multiple notifications: account opening details (cl 9(3)), overdrawn account reports (cl 13), closure notices (cl 14) and the transitional 2019 financial year reports (cl 20A). Nominating authorities and adjudicators are regulated by cll 19 and 20. Adjudicators must satisfy ongoing CPD requirements published by the Secretary on 13 August 2020; failure renders them ineligible (cl 19(2)(a)), although this requirement was deferred until 1 September 2021.

Principals under main contracts valued at $20 million or more are indirectly affected because the head contractor’s compliance costs may be priced into tenders. Owners under owner-occupier construction contracts are carved out of the Act’s operation by cl 3(1A), which prescribes them for the purposes of the exempt residential construction contract definition in s 4(1) of the Act.

Head contractors bear the heaviest duties. Under cl 8(1) they must hold retention money in trust and deposit it into a compliant retention money trust account. The duty is ongoing; cl 8(2) requires deposit within five business days of the retention obligation arising. Account nomenclature, ADI notification and Secretary notification duties appear in cl 9. Strict controls on withdrawals are imposed by cl 10, while cl 16 mandates granular ledger keeping and periodic provision to subcontractors.

Rights of head contractors are limited. Clause 12(2) preserves any just claim the head contractor may have against the retention money, but the money itself is not available for its general debts (cl 12(1)). Interest follows the trust unless contractually varied (cl 11).

Subcontractors possess rights to have their retention money held in trust, to receive ledger copies at least every three months (cl 16(4)), and to the statutory protections in cl 12. They may agree in writing to alternative withdrawal arrangements or interest treatment.

Approved ADIs have the right to statutory immunity (cl 15(1)) but remain liable for their independent obligations (cl 15(2)).

Adjudicators gain a right to perform functions under the Act only if they meet the cl 19 criteria. Nominating authorities receive five-year authorisation terms (cl 20).

The Secretary holds rights to receive notifications and reports and to approve forms, CPD guidelines and additional ADIs.

Penalties are predominantly expressed as maximum penalties rather than strict liability offences. Clause 8(1) and (2), cl 9(1), (2) and (3), cl 10(1) and (2), cl 13, cl 14 and cl 16(1)–(5) each carry a maximum of 1,000 penalty units for a corporation and 200 penalty units for an individual. Clause 20A(1) and (5) carry 200 penalty units.

Clause 7 applies the executive liability regime in s 34D of the Act to offences against cll 8(1), 8(2), 10, 13, 14 and 16, exposing directors and officers to personal liability where the corporation contravenes and they knew or ought reasonably to have known of the commission.

Schedule 1 creates a penalty notice regime under s 34B of the Act. For individuals, the penalty notice amount for most Regulation offences is $2,200; for corporations it is $11,000. Clause 20A(1) carries a $4,400 penalty notice amount for both. The schedule also lists several Act offences with corresponding penalty notice amounts.

Enforcement is therefore both criminal (prosecution with maximum penalties) and administrative (penalty notices). The transitional cl 20A(5) creates a specific false-statement offence. The note to cl 3 clarifies that once money ceases to be retention money the trust obligation ends, which may affect the scope of prosecutable conduct.

The Regulation is expressly made under the Act and must be read with it. Definitions in the Act and the Interpretation Act 1987 apply (cl 3(1) note). The term “retention money” adopts the meaning in s 12A(5) of the Act, with the explanatory note clarifying its temporal limits.

Approved ADI status derives from s 87 of the Property and Stock Agents Act 2002 or Secretary approval. Recognised financial institutions are prescribed by reference to the Australian Prudential Regulation Authority Act 1998 (Cth) (cl 17). The registered company auditor requirement in cl 20A imports the Corporations Act 2001 (Cth) definition.

The Regulation repeals the 2008 Regulation (cl 21(1)) but preserves acts, matters or things having effect under it (cl 21(2)), subject to the specific carve-out for cl 16 of the repealed Regulation concerning the 2019 financial year (cl 21(3) and cl 20A).

Clause 3(1A) interacts with the exempt residential construction contract definition in s 4(1) of the Act by prescribing owner-occupier construction contracts. Clause 18 narrows the s 13(7) supporting statement obligation. Adjudicator eligibility supplements s 18 of the Act. Executive liability picks up s 34D. Penalty notices operate under s 34B.

The trust account regime sits alongside general trust law and insolvency legislation; cl 12(1) provides statutory protection from attachment that would otherwise be available to creditors under corporations or bankruptcy law.

The Regulation commenced on 1 September 2020, replacing the 2008 Regulation which would have sunset on 1 September 2021 (cl 2 note). Schedule 2, commencing 1 March 2021, inserted cl 3(1A) and repealed the former cl 4 that had dealt with owner-occupier contracts. The amendment reflects a policy decision to exempt such contracts from the Act’s operation via the exempt residential construction contract route.

Clause 20A was inserted by 2020 (714) to impose one-off transitional reporting for the 2019 financial year under the repealed Regulation’s trust account rules. This ensured continuity of oversight during the transition. The CPD requirement in cl 19 was deferred until 1 September 2021 to allow time for adjudicators to complete the Secretary’s guidelines.

These changes respond to identified weaknesses in retention money management, particularly the risk of head contractor insolvency. By mandating ring-fenced trust accounts only for contracts above $20 million, the Regulation targets systemic risk without imposing disproportionate burdens on smaller projects. The adjudicator eligibility tightening and five-year nominating authority authorisations aim to professionalise dispute resolution.

The source text contains no reported court challenges. However, the structure of the Regulation raises several points of potential contention that practitioners should monitor.

The $20 million threshold’s ability to be reached by variation (cl 6(3)) may generate disputes about the precise moment the Part 2 obligations crystallise. Clause 6(4) attempts to limit retrospective application to subcontracts entered after the threshold is met, but questions of characterisation of “value” and “variation” could still arise.

The breadth of the cl 10(1) withdrawal exceptions, particularly the reference to “the terms of the construction contract under which the money was retained”, may invite arguments about whether set-off rights or defects claims fall within permitted purposes. The prohibition on withdrawal otherwise than by cheque or electronic funds transfer (cl 10(2)) is absolute and could create practical difficulties in urgent situations.

Clause 19(2)(b)’s “reasonable person would conclude … actual or perceived conflict” test introduces a subjective element that may be litigated in applications to disqualify adjudicators. The deferral of the CPD requirement until 1 September 2021 created a transitional window during which eligibility was broader.

The interaction between cl 12 and insolvency law remains untested in the text; whether liquidators can successfully argue that cl 12(2) “just claims” allow recourse to the fund will depend on the underlying contract and general law.

The false or misleading statement offence in cl 20A(5) mirrors language used in other regulatory regimes and may generate parallel civil and criminal proceedings.

Most practitioners assume that once a trust account is opened the head contractor can freely net amounts across subcontractors. Clause 16(2) requires a separate ledger for each subcontractor for each construction contract; commingling in a single account is permitted under cl 8(3)(c) but the ledger discipline is strict. Failure to maintain the ledger triggers separate offences for each subclause of cl 16.

The five-business-day deposit rule in cl 8(2) runs from when the head contractor is “required to retain” the money, not from when it is actually withheld. Identifying that precise contractual or statutory moment is critical; many head contractors inadvertently breach by treating the date of deduction as the trigger.

Clause 13’s overdrawn account notification obligation is triggered by the head contractor “becoming aware”. In practice, awareness may occur earlier than the bank notifies the client, especially where internal reconciliations reveal a negative ledger balance before the bank statement issues. The Secretary must be told the reason for the overdraft; a bland “bank error” response is unlikely to suffice if internal records show a withdrawal in breach of cl 10.

The transitional cl 20A applies to any head contractor who operated a retention money trust account in the 2019 financial year under the repealed Regulation. Even if the contractor has since closed the account, the obligation to lodge an auditor’s report plus $1,500 fee can arise unexpectedly. The carve-out in cl 20A(4)(a) for those who already complied with cl 16 of the repealed Regulation is narrowly drafted; partial compliance will not suffice.

Many overlook that interest follows the trust unless the construction contract itself provides otherwise (cl 11(a)). A general set-off clause in the head contract may not displace the trust obligation on interest. A separate written agreement with the subcontractor is required if the contract is silent.

Nominating authorities authorised before 1 September 2020 receive an automatic five-year extension from that date (cl 20(2)). However, any withdrawal by the Minister under the Act overrides the term. There is no public register requirement in the Regulation, so tracking expiry dates requires direct inquiry.

Head contractors should implement a three-stage compliance framework.

Stage 1 – Threshold monitoring. Maintain a live register of main contract values including all variations. Once the $20 million threshold is reached or projected, designate a compliance officer responsible for Part 2 obligations on all future subcontracts. Update tender and contract templates to flag the trust account regime.

Stage 2 – Account infrastructure. Open retention money trust accounts only with approved ADIs. Use the exact nomenclature required by cl 9(1). Provide the written notification to the ADI at opening. Within 10 business days, notify the Secretary with all cl 9(3) particulars. Establish standardised ledger templates that capture the mandatory cl 16(3) fields. Decide whether to use per-subcontractor, per-contract or omnibus accounts; document the choice and ensure ledger separation in all cases.

Stage 3 – Operational controls. Deposit retention money within five business days of the contractual or statutory retention trigger. Implement dual-authority withdrawal protocols that require documented justification referencing one of the four cl 10(1) exceptions. Route all withdrawals through cheque or EFT only. Reconcile accounts at least weekly to detect overdrafts immediately; maintain a standing instruction to notify the Secretary within five business days of awareness using a templated letter containing the three mandatory particulars.

Quarterly ledger extracts must be generated automatically and sent to each subcontractor. Retain all records for at least three years post-closure. For the transitional 2019 year (if applicable), engage a registered company auditor early, prepare the approved form statement, and budget for the $1,500 fee.

Adjudicators must track and complete the Secretary’s CPD Guidelines annually. Nominating authorities should diarise their five-year authorisation expiry and maintain records demonstrating ongoing compliance with any conditions imposed by the Minister.

Legal and compliance teams should maintain a master checklist cross-referencing each clause, responsible officer, deadline and evidence of compliance. Annual internal audits should test a sample of ledgers, withdrawal authorisations and notification records. Where doubt exists about whether money has ceased to be retention money, obtain contemporaneous legal advice before any transfer out of the trust account.

By treating the trust account regime as a core financial control rather than an administrative afterthought, head contractors can avoid the 1,000-penalty-unit corporate sanctions and associated director liability. Subcontractors should request ledger copies promptly and verify that deposits match contractual retention amounts. Early engagement with the Secretary on account notifications and reporting formats reduces the risk of technical breaches.