Update to Construction Contracts Retentions Scheme
If you’re in the construction industry, chances are you’re familiar with the retentions regime prescribed by the Construction Contracts Act 2002 (CCA). If you work with retention funds, you’ve probably heard about changes coming to the retentions scheme under the Construction Contracts (Retention Money) Amendment Bill (Retentions Bill). We discuss the latest developments and proposed changes to the retentions scheme below.
It is often the head contractor that holds retention money during a project. The CCA currently requires that a party holding retention funds “…must not appropriate any retention money held on trust to a use other than to remedy defects in the performance of [the other party’s] obligations under the contract”. In other words, retention funds must only be used where (for example) a subcontractor defaults and the head contractor must address the consequences.
Retention funds are intended to be held “on trust” for the party entitled to them. Using the example above, this means that a head contractor cannot treat retention funds like their own money, because they effectively belong to the subcontractor. However, the current CCA scheme does not require retention funds to be kept “in trust” (in a separate trust account), and they “…may be commingled with other moneys”. For now, retention funds may be commingled with a head contractor’s ordinary cash flow.
The Retentions Bill was prompted by the recent failures of large contractors who used retention funds to meet cash flow and working capital needs. This not only created immense headaches for receivers and liquidators; even more concerning is the resulting chain reaction of insolvencies for subcontractors who were owed retention funds which vanished in the insolvency.
The purpose of the Retentions Bill is to provide safeguards against such outcomes, and includes changes such as:
- A requirement that retention money is held in trust in a separate bank account, named expressly for the subcontractor(s); or
- The parties enter into an enforceable compliance instrument (for example, an insurance policy or bank guarantee) in favour of subcontractors which creates an obligation to pay retention funds on completion of the work.
- A new offence for failing to place retention money in a separate trust account or entering into a compliant financial instrument, attracting a maximum fine of $200,000. Where the offending party is a company, each of the company’s directors also commit an offence and are liable to a maximum fine of $50,000 each.
The Retentions Bill passed its first reading in Parliament on 8 June 2021 and is currently in the Select Committee. The Retentions Bill will come into force six months after gaining royal assent.
Best practice has always been for head contractors to keep retention funds separate from working capital and cash flow. The Retentions Bill proposes to codify best practice, and in doing so will not only clarify the position for insolvency practitioners, but provide vital protection for subcontractors.
Please do not hesitate to contact Jessica Manson or Sam McLean of our Construction Team for any construction or insolvency-related queries.
Contact Details for Jessica
DD: +64 3 265 0318
Mobile:027 585 4533
Email: jessica.manson@saunders.co.nz
Contact Details for Sam
DD: +64 3 266 0818
Mobile: 027 629 2111
E-mail: Sam.Mclean@saunders.co.nz