Retention Trust Funds in NSW Construction

What it is

The retention money trust account scheme in NSW forces head contractors on large head contracts to ring fence subcontractor retentions in a dedicated trust account rather than mixing them with general business funds. The scheme started under the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 and carries through into the consolidated Building and Construction Industry Security of Payment Regulation 2020.

The purpose is simple. Before the scheme retention money sat on a head contractor''s balance sheet and disappeared when the head contractor collapsed. Subbies became unsecured creditors. Now retention sits in a trust, beyond the reach of the head contractor''s general creditors.

When the trust account requirement applies

The trigger is the value of the head contract, not the value of the subcontract or the project as a whole.

The $20 million threshold

A head contractor must establish and maintain a retention money trust account where the head contract is worth $20 million or more and retention is held under any subcontract entered into under that head contract. The threshold has been in place since 1 May 2015.

Variations that push a contract over the line

If the head contract starts below $20 million and a later variation pushes it over the threshold the trust account requirement applies only to subcontracts entered into after the date of the variation. Earlier subcontracts stay outside the scheme.

Residential context

Most residential head contracts in NSW sit below the threshold. Detached housing is well clear. Volume builders running town houses or low rise apartment projects can move above it. Class 2 multi unit residential work above the threshold is squarely inside the scheme.

How the trust account works

The mechanics are tightly defined.

Approved deposit taking institution

The trust account must be held with an authorised deposit taking institution under the Banking Act 1959 (Cth). The account must be in the name of the head contractor and identified as a retention money trust account on the bank''s records.

Notification

The head contractor must notify the Chief Executive of the relevant NSW department when a retention money trust account is opened. The notification keeps a record that allows regulators to follow up if the head contractor enters insolvency.

Restrictions on withdrawal

A head contractor cannot withdraw from the trust account except in line with the subcontract terms. Withdrawing to rectify defects is allowed where the contract permits it. Withdrawing to fund unrelated business expenses is not. Breach is an offence with monetary penalties attached.

Interest

Interest earned on retention monies belongs to the head contractor under the current scheme, although the head contractor remains liable to return the principal to the subbie at the relevant release points.

What subbies can do if the head contractor defaults

The trust account becomes critical at the point of default. If the head contractor stops paying or enters administration the subbie does not need to fight through the creditors queue for retention. Trust money is not part of the head contractor''s general assets.

In practice the subbie applies to the administrator or liquidator for release of retention held on its behalf. Security of Payment Act adjudication remains available for any disputed amounts. Where the trust account does not contain sufficient funds, because the head contractor failed to deposit retentions properly, the subbie can pursue the directors personally for breach of statutory duty.

Practical points for NSW head contractors

Set up the trust account as soon as a head contract crosses the threshold. Do not wait until the first subbie retention is held. Keep retention by subbie in a sub ledger so balances can be reconciled to the bank statement at any time. Diary the release dates inside the trust workflow so payments out are timely and properly recorded. Notify the Chief Executive at the point of account opening rather than weeks after.

What this does not cover

The NSW scheme is not a project trust account. It only deals with retention money. Progress payments to subbies are not required to sit in trust. That is a difference from the QLD project trust account regime under the Building Industry Fairness (Security of Payment) Act 2017, which trusts both progress payments and retentions on eligible contracts. NSW has signalled appetite for a broader trust framework but as at 2026 the retention trust scheme remains the operative regime at the $20 million mark.