Construction businesses: Are you ready for changes to the Retention Money regime?

The Bill passed its third reading on 28 March 2023, with Royal Assent, which will formally bring the Bill into law on 5 April 2023, and is effective from early October 2023. The changes to the retention money regime will apply to new commercial construction contracts and existing contracts if they are amended after the law comes into effect.

The regime was initially introduced in 2017 and after the failure of Mainzeal in 2013, where subcontractors were owed $18 million in retentions. Its aim was to provide greater financial security for subcontractors in the industry, especially in the event of an insolvency. 

Mainzeal’s collapse highlighted the use of retentions as working capital, so in an insolvency, the contractor or subcontractor was simply an unsecured creditor for retentions.

In 2019, MBIE commissioned a review of the retentions regime and found large portions of the construction sector were compliant, and more subcontractors had received funds in an insolvency.

However, the review also revealed the regime did not provide appropriate mechanisms to administer the retention account in the event of an insolvency. 

Funds must be held in a separate trust account

All entities who hold retention funds (Party A), for contracts with another party (Party B), must deposit retention money into a bank account complying with the Bill as soon as practicable after it becomes retention money.  This means you cannot use the retention funds as part of your general bank account to fund your working capital. 

This bank account needs to comply with the requirements set out in the Bill, which state the account must be:

• with a NZ registered bank
• held in the name of Party A in their capacity as trustee of retention moneys
• used solely for the purpose of holding retention money and any interest earned on retention money.

The bank also needs to be advised Party A’s account will be used to hold retention money on trust under the Construction Contracts Act (CCA).

The Bill sets out that Party A can use the trust account of certain third parties such as a lawyer or a chartered accountant, but Party A must inform the accountholder the money to be held in the third-party trust account is retention money held on trust. 

If you are currently using a complying instrument to hold your retentions, you can continue to do so as long as it is the equivalent to the amount required to be retained.

New reporting and notification requirements

Reporting requirements

The Bill has also set out some prescribed reporting requirements for Party A who must report on the following:

• For each amount retained, the construction contract under which it is retained and date of retention
• The total amount of retention money held by Party A for Party B for each construction contract between them
• Account details for any bank account in which retention money is held or instrument details if complying via financial instrument
• A statement that Party B may inspect accounts and records relating to retention moneys held for Party B.

Party A must provide this report to each Party B:

• as soon as practicable after an amount becomes retention money (we anticipate that this would be monthly)
• at least every three months until the retention money trust ends. 

Notification requirements

Party A may use the retention funds for remedying defects of Party B’s work, provided use of money for that purpose is permitted by the contract and prior to using the retention money, Party A must give at least 10 working days’ notice to Party B. 

Provision of new offences and penalties

The Bill has provided additional clarity around the penalties for non-compliance with the regime and creates new offences for Party A and directors of Party A.

The offences relate to non-compliance with:

• holding the funds in a bank account that complies with the Act (or a complying instrument) 
• the requirements around using the retention funds to remedy defects
• the requirements for reporting to party B about retentions.

If Party A is found to be non-compliant, there are fines of $200,000 for each offence relating to holding and using the retentions moneys for Party A and (if Party A is a body corporate) $50,000 for each offence for directors of Party A. 

However, a defence is available if Party A is able to prove they took all reasonable steps to ensure compliance, or for a director, they took all reasonable steps to ensure Party A complied. 
Where the offence relates to a failure to comply with reporting requirements to Party B, Party A can be liable for a fine of $50,000 for each offence.

What next?

If you’re currently withholding retentions, you should be reviewing your processes to ensure they will be compliant with the new regime when it comes into force. 

If you are a subcontractor, the new law should provide you with greater clarity around your retentions with contractors.