Changes to the Retention Money Regime for Construction Contracts

6 September 2021

If passed, the new Construction Contracts (Retention Money) Amendment Bill will change the way contractors hold retention money for subcontractors.

The Bill, which was introduced in Parliament on 1 June 2021, is designed to change the retention money regime in the Construction Contracts Act 2002 to provide greater protection for subcontractors in the construction industry.

Generally, when a subcontractor provides services to a contractor the construction contract allows the contractor to withhold part of the payment to the subcontractor, usually between 2% and 10%, in order to remedy any defects that might happen in the subcontractor’s work (Retention Money). If there are no defects, the contractor will release the Retention Money to the subcontractor.

Under the current regime, Retention Money can still be mingled with working capital, which can result in subcontractors missing out on money owed to them if the contractor goes into liquidation. This happened in the liquidation of Mainzeal Property and Construction Ltd in 2013.

Parliament attempted to address this issue by passing the Construction Contracts Amendment Act 2015, but subsequent cases in the High Court found significant gaps in the legislation. The Bill attempts to fill these gaps by putting in place clear rules around how retention money is to be held.

Key changes

The Bill proposes that Contractors must:

  1. Place Retention Money on trust as soon as possible and keep it separate from other money or assets; and
  2. Hold Retention Money in a trust account in a registered bank in New Zealand or in the form of complying instruments (such as an insurance policy or a guarantee).

Other changes

The Bill would require contractors to give certain information to subcontractors about Retention Money held by the contractor at least every three months, such as the most recent amount withheld.

The Bill would introduce a fine of up to $200,000 for contractors who fail to comply with these requirements. If the contractor is a company, each of its directors also commits an offence and is liable for a fine of up to $50,000.

In the event that a contractor becomes insolvent and a receiver or liquidator is appointed, the receiver or liquidator will become trustee of the Retention Money for the purpose of collecting and distributing it. The receiver or liquidator is entitled to be paid reasonable fees and costs out of the Retention Money for doing this.

Bill progress

Public submissions on the bill closed on 23 July 2021 and the select committee are expected to report in November 2021. Contractors will need to ensure they are prepared for the changes before the Bill is passed into law as failure to comply could result in significant fines.

If you would like more information on this topic, our Corporate Commercial team are here to help.

Chris Steenstra and Dan Moore are part of our Corporate & Commercial team at Norris Ward McKinnon.