To provide an update on our last article, the Construction Contracts (Retention Money) Amendment Bill received royal assent in April 2023 (now known as the Construction Contracts (Retention Money) Amendment Act 2023 (Act)) and will come into effect on 5 October 2023. The Act seeks to clarify how retention money is managed under the current retention money regime set out in the Construction Contracts Act 2022.
What is Retention Money
Retention money is a portion of the agreed contract price that is deliberately withheld for a certain period to ensure that a contractor rectifies any defects that might become apparent after the work has been completed. This essentially acts as a bond to ensure that work will meet the required standards. Once this period has passed and there are no defects, the retention money will be released to the contractor.
Why the Need for an Amendment
Over the years, growing concerns have been raised in relation to the misuse of retention money. Under our current regime, retention money is often intertwined with working capital, which consequently creates a high risk to contractors missing out on payment if the principal goes into liquidation. Given the current volatility of the construction industry, stricter regulations around the governance of retention money is a necessary action to take.
Key Changes to the Regime
- Retention money will be deemed to be held on trust: Any retention money held after 5 October 2023 will automatically be considered to be held on trust. This means that the funds will be considered separate to a principal’s working capital, ultimately providing protection to contractors in the event of the principal going into liquidation.
- How retention money must be held: Retention money will be required to be held in a compliant bank account in accordance with the Act.
- Penalties for non-compliance: The Act introduces new penalties for failure to comply with the regime. These penalties include:
- A fine not exceeding $200,000 for failure to keep retention money as required. Where a principal is a company, directors may in addition be fined up to $50,000 each.
- A fine not exceeding $50,000 for failure to keep proper accounting and other records of retention money.
- In the case of an individual, a fine not exceeding $50,000 for intentional failure to report on retention money. Where the principal is a company, they may be liable for a fine not exceeding $200,000.
The 5 October 2023 is fast approaching. The Act brings about significant changes to how retention money is managed and will apply to all commercial construction contracts entered into or amended on or after this date. Principals will need to ensure that their retention money processes comply with the Act, otherwise they may face significant fines.
If you would like further information, or assistance with reviewing and updating your retention money processes, please get in touch with us.
Angela Scarlett and Danielle Robinson are part of our Corporate & Commercial team at Norris Ward McKinnon.
