As the Scaffolding, Access, and Rigging Association of New Zealand, we recognize the pivotal role of retention money in construction contracts. The Construction Contracts Act 2002, commonly referred to as "the Act," introduces a mechanism where one party (party A) withholds a portion of the payment due to another party (party B) as a form of security. This measure ensures that party B fulfills their contractual obligations and delivers work of the expected quality. In most scenarios, this applies to head contractors (party A) and subcontractors (party B). These withheld funds, known as retention money, are eventually released after the specified liability period.
New Legislation: The Construction Contracts (Retention Money) Amendment Act 2023 Starting from October 5, 2023, the Construction Contracts (Retention Money) Amendment Act 2023 ("the Amendment Act") will come into effect. This amendment strengthens the existing retention money regime and clarifies protections in place for subcontractors' retention money. It's important to note that the Amendment Act is applicable only to commercial contracts established or renewed after this date and does not cover contracts involving homeowners or residential occupiers.
Managing Retention Funds: Key Changes Introduced by the Amendment Act The Amendment Act introduces significant changes regarding how retention funds are managed:
Trust Accounts: As of October 5, 2023, all retention money must be held in trust for the benefit of the subcontractor from whom it was withheld. This trust status ensures that retention money remains separate from the contractor's assets and is safeguarded in case of contractor liquidation. Retention funds can be held in cash, other readily convertible assets, or financial instruments such as insurance or payment bonds.
Separate Bank Accounts: Contractors are now required to establish separate bank accounts for retention monies. These accounts must comply with specific criteria:
The account holder must be the head contractor acting as the trustee of the retention money.
The account should serve the sole purpose of holding retention money in trust.
The head contractor must inform the bank that the account is designated for holding retention funds in accordance with the Act.
Additionally, organizations such as law firms, trustee companies, or alternative solutions like iPromise can also hold retentions in trust accounts on behalf of both head contractors and subcontractors.
Ceasing Trust Status: Retention money ceases to be trust property in limited circumstances, including payment to the subcontractor, written abandonment of the claim by the subcontractor, or its use to rectify defects in subcontractor performance under the construction contract, provided that contract provisions and notice requirements are met.
Non-availability for Other Purposes: Retention money held in trust cannot be used to pay other debts of the head contractor to creditors, except for the subcontractor from whom the money was withheld. It is also not subject to attachment or execution by any court process for the benefit of creditors, except for the subcontractor.
Accounting and Records: Robust accounting records are mandatory for all retention money transactions, including receipts, holdings, and disbursements. These records should be readily verifiable and made available for subcontractor inspection without charge.
Reporting Requirements: Head contractors (typically party A) are obligated to report on retention monies every three months until the trust arrangement concludes. This report should include comprehensive details such as the amount retained, the associated construction contract, dates of retention, total retention amount, bank account details, details of complying instruments, and notice of subcontractor inspection rights.
Penalties: The Amendment Act introduces increased penalties for non-compliance, including fines not exceeding $200,000 for companies and $50,000 for directors. The Act's broad definition of "director" ensures accountability across various roles within a company.
Conclusion: The Construction Contracts (Retention Money) Amendment Act 2023 strengthens the protections for subcontractors and imposes obligations on head contractors to ensure fair and transparent management of retention funds. These changes aim to prevent the misuse of retention funds, facilitate cash flow, and ultimately improve the construction industry's financial stability. By implementing these regulations, we strive to avoid the issues that have adversely affected subcontractors in past construction company liquidations, such as Ebert Construction Ltd and Mainzeal. In summary, subcontractors now have stronger mechanisms, provided by the Amendment Act, to protect, account for, and utilize their retentions for their intended purpose.
Government agency commitments on special conditions in contracts.
Special conditions in contracts are often used to modify and manage project risk. However, the practice of heavily amending standard contracts with special conditions can defeat the purpose of standardised contracts. Following the Accord’s review of how special conditions are being used by the public sector, Accord Agencies made a number of commitments to improve their contract practices to achieve greater standardisation and consistency. Agencies are participating in a process to update, agree and use All-of-Government special conditions for the New Zealand Standard 3910:2013 Conditions of Contract for Building and Civil Engineering Construction (NZS 3910) and the ACENZ Conditions of Contract for Consultancy Services (CCCS) contract templates.
Accord Agencies have made good progress since the start of this year and are now on track to meeting the majority of their commitments to improve their use of special conditions in NZS 3910 and CCCS contract templates. The Accord has published a full update on its website.
Due by 30 December 2023
Chief Executives commit to agencies working together to develop an All of Government approach to special conditions for NZS 3910 following the release of the full update in mid-2023.
