Amendments to Construction Contracts Act focus on retentions money regime

The government intends to impose significant penalties for non-compliance

Amendments to Construction Contracts Act focus on retentions money regime
Matthew Lancaster

The New Zealand government has announced changes to the Construction Contracts Act that focus on the retentions money regime.

Following a review of the regime, Minister of Building and Construction Jenny Salesa said that there was “more work to be done to protect subcontractors in two particular areas—firstly, to prevent co-mingling retention money with working capital, and secondly to provide clear, regular and useful information on where and how retention money is held.”

The Construction Contracts Act has not been modified since 2017.

“Ultimately, this government is making common-sense changes to the Construction Contracts Act to give certainty to our subcontractors, who are the backbone of the building and construction sector and are essential to the COVID-19 economic recovery,” Salesa said.

She outlined the changes in a 27 May statement as follows:

  • introducing a new offence and penalties for company directors and firms who don’t comply with their responsibilities
  • strengthening how retention money is held to prevent firms from dipping in to retention money to use as working capital
  • requiring those holding retention money to issue a transparency statement stating how much is being held and where

To facilitate greater compliance with the Construction Contracts Act, the government is set to implement a new offence that carries a maximum penalty of $50,000 for company directors and $200,000 for firms.

“These changes will give subcontractors greater confidence that contractors holding retention money are looking after it. They will be able to clearly see where and how this money is being held,” Salesa said.

Escrow lawyer Matthew Lancaster of Retention Solutions stressed the importance of the retentions money regime in the construction sector’s system.

“In many cases, the retention component of a construction contract represents the entire profit margin for a party owed the monies,” he said. “The changes brought in in 2017 and the recent amendments announced by the minister emphasise that those who hold retentions must do so in a legally sound way and use administration systems that can deliver clear reporting when required.”

Lancaster offered advice on how companies can comply with the regime.

“Ensure that retention funds are properly segregated from other funds of the party holding the retentions, create a trust over the funds and pay them to the party which is owed them when they become payable,” he said. “Issues may still arise as to whether retention funds have become payable or not. However, the retention regime aims to keep those funds properly segregated and not in jeopardy if the party holding them becomes insolvent.”

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