Construction Contracts update

Design, engineering and quantity surveying work now included under scope of the Act

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 last year, the Construction Contracts Amendment Act 2015 was passed, amending the Act in three areas in a staged process:

• Removing the differences between residential and commercial contracts (changed 1 Dec 2015).
• Design, engineering and quantity surveying work to be included in the Act (from 1 September 2016).
• Retention money withheld under commercial construction contracts must be held on trust (from 31 March 2017).

1) Removing the differences between residential and commercial contracts

From 1 December 2015, parties to residential construction contracts have full access to the Act’s dispute resolution and payment regimes. This builds on the changes to the Building Act 2004 that came into effect on
1 January 2015, requiring residential building work over $30,000 in value to be covered by written contracts. Contractors continue to be unable to obtain charging orders against residential occupiers.

2) Design, engineering and quantity surveying work included in the Act

From 1 September 2016, the scope of the Construction Contracts Act 2002 is widened to include construction-related services, such as work done by architects, engineers and quantity surveyors. These professions will now be able to access the payment and dispute resolution processes in the Act. Meanwhile, their clients will have greater means to hold architects, engineers and quantity surveyors to account for their work.

Before the Act was introduced in 2002, professional organisations for engineers and architects successfully lobbied to be excluded on the basis that the relationship between clients and consultants differed from the relationship between clients and contractors.

However, MBIE has decided that the difference no longer justifies excluding consultants from the scope of the Act, despite receiving opposing submissions from organisations such as the New Zealand Institute of Architects (NZIA) and the Institution of Professional Engineers New Zealand. Previously, consultancy contracts governed relationships between consultants and clients.

Including construction-related services in CCA will be beneficial for consumers who have a dispute involving building contractors and designers, engineers or quantity surveyors, as they will not need to initiate different dispute resolution processes against each party. This should reduce costs and increase consistency of outcomes.

3) Retention money withheld under commercial construction contracts must be held on trust

The new law requires that retention money for commercial contracts be held on trust, protecting it in the event of a business failure.

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

From 31 March 2017, this trust obligation will apply to all retention money over a yet-to-be-determined minimum amount that will be prescribed in regulations. This will drive better business practices without excessive compliance costs.

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. They are used regularly in commercial construction contracts and, while allowable, seldom in residential construction contracts.

The Amendment Act makes the trust requirement clear for parties to commercial construction contracts – the payer will be required to hold retention money on trust in the form of cash or other liquid assets, such as accounts receivable.

Payers will have to ensure they pay the full amount of retentions when they are due under the contract, or else they could be found in breach of the trust.

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.

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