Latest retention changes arrive

The most recent changes to the Construction Contracts Amendment Act have now come into effect. After 5 October 2023, tradies need to make sure that commercial contracts entered into, or amended after 5 October, comply with the latest regulation

The new requirements state that:

• Funds must be held in trust, without mixing it with other money or assets.
• Any retention money held as cash must be held separately in a bank account with prescribed ledger amounts.
• Retention money can only be used to remedy defects in subcontractors’ work if they are given 10 working days’ notice.
• Quarterly reports must be provided to each subcontractor from whom retention money is withheld.
• Contractors must provide each subcontractor with a report after each transaction with their retention money. The report must be provided promptly and free of charge.
• Retention money must be paid when owed.

“These changes passed in the Construction Contracts (Retention Money) Amendment Act safeguard subcontractors, who are often the first to miss out in the event a construction company becomes insolvent,” said Minister for Building and Construction Megan Woods when she announced the new rules in March 2023.

“While it is not a requirement to hold retention money, many head contractors choose to withhold part of their payment to specialist tradespeople for up to 12 months. This is one way to help ensure building work is done right the first time, and acts as an insurance that the subcontractor will return if there are any defects.

“The changes made today provide important protections for subcontractors so they can be certain their payment is kept safe, can’t be used for any other purpose, and will be paid out should the head contractor’s business fail.”

Tougher punishments

Failure to comply with the new amendments could result in a fine of up to $200,000 per breach for companies, or a fine of up to $50,000 per breach for directors. There can also be a fine of up to $50,000 per instance of false information being provided to a subcontractor.

The amendment falls under the Construction Contracts Acts (2002), which was amended in 2015 to include a requirement for protecting retention money following the collapse of construction company Mainzeal, in 2013, which saw various subcontractors lose an estimated $18m.

It was further amended in 2017 to specify that retention money must be held on trust in the form of cash or liquid assets readily converted into cash, and, after a review in 2019, the current amendments were announced in 2020.

Defining commercial

Section 5 of the Act defines commercial work as “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”.

Guidance from the Registered Master Builders, developed in conjunction with specialist construction, insurance and environmental law firm Hazelton Law, states: “A commercial construction contract is any construction contract where no party is a residential occupier of the premises that are the subject of the contract. Therefore, a subcontract in the residential sector (for example, with a plumbing subcontractor) is a commercial construction contract and the retention money rules apply.”

A major win

The change was called “a major win” by Master Electricians Chief Executive Bernie McLaughlin.

“The passing of this Act is a major win for all subcontractors and one we’ve been strongly advocating for on behalf of our members for some time. We identified the need for changes to the Act to protect the future interests of all parties, and have lobbied hard with the support of Master Plumbers and the New Zealand Specialist Trade Contractors Federation.”

Master Plumbers Chief Executive Greg Wallace was equally enthusiastic about the amended Act.

“This new legislation goes a long way to addressing issues that have left our subcontractors vulnerable to being significantly out of pocket. We applaud the government for acting.”