Upcoming changes to retention money regime

Based on feedback from a limited consultation with the sector, changes to the retention money regime are underway to ensure more protection for subcontractors, improve compliance and ensure requirements for the retention money regime are met

In 2019, the Ministry of Business, Innovation and Employment (MBIE) commissioned KPMG to undertake an implementation review of the retention money regime under the Construction Contracts Act 2002 (CCA), to assess its early impacts and the industry’s response to the retention money regime.

The CCA regulates payments, retention money and disputes under construction contracts. Amendments to the CCA, effective from 31 March 2017, required retention money in commercial construction contracts to be held on trust in the form of cash or other liquid assets readily convertible to cash, unless a complying financial instrument is used to protect payment. The amendments also introduced requirements in relation to the keeping of, and access to, financial and accounting records relating to retention money.

However, retentions continued to be one of the most contentious subjects in commercial construction, especially in 2019, when a number of high-profile companies left subcontractors out of pocket when put into liquidation, despite these changes.

Given that from a subcontractor’s perspective, withheld retentions can represent all of the profit they stand to make from a job, getting retentions right is important for subcontractors, many of whom are builders.

Revealing review

The fact that retentions are still problematic is reflected in the review, which sought to determine:

• The sector’s awareness of the regime.
• The attitude to, and extent of, compliance, as well as how businesses are choosing to comply.
• What, if any, early signs there are of behaviour changes in the sector.
• The intended and unintended consequences of the legislation on solvent and insolvent firms.

Overall, the report’s findings raised some concerns around the lack of penalties, the co-mingling of retentions money with other funds and the need for greater clarity of requirements for holding money on trust under the Construction Contracts Act 2002. It also made clear that there are some issues with non-compliance and opportunities to further protect retention money owed to subcontractors.

The full review is available under ‘News and Updates’ on building.govt.nz.

Implementing change

After engaging with stakeholders in the sector on how to improve the retention money regime, the Minister for Building and Construction Jenny Salesa announced changes to the regime in May 2020.

Changes to the regime will clarify and strengthen existing legislative requirements, protecting small and medium subcontractors. The changes include:

• Penalties: Introducing a new offence and penalties for company directors (up to $50,000) and firms (up to $200,000) who don’t comply with their responsibilities.
• Trust requirements: Strengthening how retention money is held to prevent firms from dipping into retention money to use as working capital.
• Transparency: Requiring those holding retention money to issue a “transparency statement” stating how much is being held and where.

The timing and detail of these changes will be announced in due course.

The changes to the retention money regime support the objectives outlined in the Construction Sector Accord, a shared commitment between government and industry to transform the construction sector. Under the Accord, there is an expectation that all accord members comply with the retention money regime, hold retention money separately and proactively share information on their accounts with subcontractors.