CCAA update

Retention money provisions will apply regardless of the amount of money involved, meaning all subcontractors are covered

The Construction Contracts Act 2002, which covers both commercial and residential construction contracts, provides a process for dealing with payments and disputes under a construction contract.

In December 2015, the Construction Contracts Amendment Act 2015 was passed, amending the Act in three areas with different implementation dates:

• Removing the differences between residential and commercial contracts (in place since 1 December 2015).
• Design, engineering and quantity surveying work now covered by the Act (has been in place since 1 September 2016).
• Retention money withheld under commercial construction contracts must be held on trust (due to be implemented on 31 March 2017).

In February 2017, shortly before the third stage was due to come into force, Parliament’s commerce committee proposed two changes which require further amendment to CCAA:

1) That the retention money provisions will only apply to contracts entered into, or renewed, on or after 31 March 2017.

2) That the CCAA include an alternative option for protecting money. The option proposed was obtaining a financial instrument, such as insurance or a payment bond, to provide third-party protection of retention money. There would be strict requirements on the financial instruments to ensure repayment of retention money.

If the amendments are not approved by 31 March 2017, only the existing CCAA provision regarding retention money – that it be held on trust in the form of cash or other liquid assets readily converted into cash – will come into force.

If the amendments are approved, payers, such as developers and head contractors, who choose to withhold retention money will have a second option – to obtain a financial instrument such as insurance or a payment bond, to provide third-party protection of retention money.

There would be strict requirements on the financial instruments allowed to ensure repayment of retention money. These include:

• Financial instrument providers would be limited to registered banks and licensed insurers.
• Financial instruments would be required to be issued in favour of subcontractors and allow them to directly enforce the ‘promise to pay’ against the provider.
• Records of financial instruments would be required to be kept and made available to subcontractors at all reasonable times and without cost.

Subcontractors would benefit from the option relating to financial instruments, as they would be able to claim directly from a registered bank or licensed insurer if the head contractor fails to pay retention money when it is due.

Developers and head contractors would benefit because they would not need to hold retention money on trust.

What is a commercial contract?

A commercial construction contract means “a contract for carrying out construction work in which none of the parties is a residential occupier of the premises that are the subject of the contract”. In other words, all subcontracts are commercial.

According to New Zealand Certified Builders chief executive Grant Florence, retentions are used regularly in commercial construction contracts and, while allowable, seldom in residential construction contracts. He says some high-end, architectural builds might use retentions.

Why retention money provisions have changed

Retention money is an amount withheld by a party to a construction contract (the payer) from an amount payable to another of the contract’s parties (the payee) as performance security, which can be used to pay for any remedial action that may need to be done as a result of faulty work.

Under the old law, retention payments were not required to be set aside and were put at risk by being used as working capital. In the event of a company going bust, subcontractors often lost the retention owed to them.

The CCAA definition of a commercial contract means all contracts are covered except where one of the parties is a residential occupier of the premises that are the subject of the contract. In other words, all subcontracts are commercial and will be covered by the retention provisions.

No threshold amount proposed

During 2016, MBIE consulted the construction industry on what, if any, regulations should be made under the retention money provisions of the CCAA. The CCAA contains the power to make regulations setting a threshold amount of retention money that the provisions will apply to, and setting methods of accounting for retention money (additional to those set out in the CCAA).

No regulations are currently proposed. The retention money provisions will apply regardless of the amount of money involved to ensure payment for small subcontractors is protected.

The methods of accounting for retention money will be those set out in the CCAA.

MBIE expects industry participants to develop reporting methods that best suit the accounting systems they have in place.

Amendments explained

The changes are the result of a comprehensive review of the Construction Contracts Act 2002.

The amendments ensure the Act provides:

• A fair, balanced and appropriate payment regime.
• Access to fast and cost-effective dispute resolution.
• Cost-effective and timely enforcement of rights and obligations.
• Better certainty of payment of retention money held under construction contracts.

Further information on the Amendment Act and retentions is available on the MBIE website www.business.govt.nz