Changes to retention money requirements

The retention provisions in the Construction Contracts Act 2002 were put in place to protect retention money owed to subcontractors in the event of a business failure, and to ensure retention money withheld under construction contracts is responsibly managed.

On 30 March 2023, the Construction Contracts (Retentions Money) Amendment Act 2023 was passed by Parliament. The changes in the Amendment Act aim to strengthen and clarify protection for subcontractors’ retention money and make it easier for subcontractors to access retention money without a court order, in the event of a company’s insolvency.

Key changes to the retention money provisions in the Construction Contracts Act

Many head contractors are already doing the right thing and are holding retention money aside appropriately. For these people, there will be very little change. 

The changes will safeguard subcontractors’ retention money by:

• clarifying that retention money is automatically held on trust by the head contractor once the contract allows it to be withheld from the subcontractor
• removing the ability to mix retention money with other money and assets
• requiring that retention money held as cash must also be held separately in a bank account with prescribed ledger accounts.

Compliance with the retention money provisions

The Ministry of Business, Innovation and Employment (MBIE) now has the responsibility to provide information and education to the sector on the retention money regime. This allows MBIE to help businesses, companies and subcontractors understand what they are responsible for and how to comply with the new provisions. 

MBIE will also monitor compliance and have new investigation and enforcement powers.

New offences and penalties of up to $200,000 have been introduced for companies and, in some cases, directors, who fail to meet the new requirements, including:

• failure to comply with accounting, recording and reporting requirements
• use of retention money for a purpose other than remedying defects in the subcontractor’s performance
• failure to provide regular information to the subcontractor on retention money.

Date changes must be complied by

The new retention money requirements come into force on 5 October 2023. This gives head contractors looking to hold retention money, six months to ensure processes are established and standard contracts are renewed, before the new offences and penalties apply.

Where to find further information

To read more about the Construction Contracts Act 2002 and the recent retention money changes, visit the MBIE website and the Building Performance website:

Understanding the Construction Contracts Act – mbie.govt.nz

Construction Contracts Act 2002

Resources

MBIE will provide resources, including guidance information for businesses and subcontractors, over the coming months.