The Construction Contracts Amendment Act 2015 introduces significant and important new rules governing holding and payment of retentions into the Construction Contracts Act 2002 from 31 March 2017.
Retentions are defined as an amount withheld by a party to construction contract (party A) from an amount payable to another party to the contract (party B) as security for the performance of party B’s obligations under the contract.
Presently, retention money is an asset of the party that is holding it, and if that party goes broke, the money is distributed to secured and preferential creditors (ie banks, staff, IRD etc) with any residual monies (seldom any) divided among unsecured creditors including the contractors and subcontractors who had actually earned that money.
From 31 March 2017, retention monies held by one party to a commercial construction (which by definition includes all subcontracts irrespective of whether they relate to residential building projects) above a certain value and entered into or renewed on or after that date, must be held on trust, either in cash or liquid assets that may readily be converted to cash, for the subcontractor or contractor from whom the retention was withheld.
In the event of an insolvency, these assets will be trust money to pay out the retentions or fix any defects relating to a specific retention in respect of which the asset is held. These assets rank ahead of all other parties in a liquidation including secured creditors.
The retention regime is being introduced largely in response to the Mainzeal collapse in 2013 (which left a trail of unpaid subcontractor creditors) with the intention of protecting subcontractors from the potential insolvency of a head contractor holding retention monies under a commercial construction contract and using those funds as a source of working capital.
When Mainzeal collapsed, it had $11.3M owing to it in retentions yet it was holding back $18.3M in retentions from its subcontractors. Plainly those subcontractors would likely never get paid the monies they had earned.
The Mainzeal collapse highlighted the scale of abuse of the current retentions regime and the risk to subcontractors of losing retention monies when the head contractor/employer uses those monies as working capital and subsequently goes broke.
Sadly, there are some patently obvious difficulties and challenges with the new retentions regime, namely:
To redress the shocking abuse of the retentions regime exposed by the Mainzeal collapse, BuildSafe established a Retention Trust Fund escrow service whereby retentions are held by BuildSafe in separate trust accounts for each contractor on any project.
The cost to use the service is minimal at a mere $100 to establish a trust account for each contractor and $25 per transaction into or out of that account. In the overall scheme of things, the cost of using the BuildSafe Retention Trust Fund is nothing compared to the likely compliance costs where retention money is co-mingled and/or held in liquid assets, or the financial hardship that the loss of retentions would cause following insolvency of an employer or head contractor.
BuildSafe has provided a highly credible, trustworthy and independent security of payment escrow service and building contracts to the industry since 2009, reducing the financial risk of building projects for contractors and owners alike.
We say the proper solution to meeting the new retention rules is for each contractor’s retention monies to be held in a separate independent trust account where they fall outside the insolvent account and clearly and indisputably remain the property of the contractor.