Progress on amendments to clarify the requirements for retention money

Posted: 7 March 2017

Building Controls Update 211
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On 3 March 2017, Parliament’s Commerce Committee reported back on the Regulatory Systems (Commercial Matters) Amendment Bill (the RSB) that will clarify requirements for protecting retention money in construction contracts.

New requirements for protecting retention money come into effect on 31 March 2017, and are set out in the Construction Contracts Amendment Act 2015 (CCAA). The CCAA’s retention money provisions are designed to ensure payment of retention money to subcontractors, even in the event of insolvency.

The RSB proposes that these provisions will only apply to contracts entered into, or renewed, on or after 31 March 2017.

The Commerce Committee has recommended an alternative option for protecting money, other than holding cash or liquid assets on trust. If the RSB passes, developers and head contractors who choose to withhold retention money would have two options:

  • holding retention money on trust in the form of cash or other liquid assets readily converted into cash (as currently required by the CCAA) – the default option
  • obtaining a financial instrument, such as insurance or a payment bond, to provide third-party protection of retention money. There would be strict requirements on the financial instruments to ensure repayment of retention money.

Subcontractors would benefit from the option relating to financial instruments, and would be able to claim directly from a registered bank or licensed insurer if the head contractor fails to pay retention money when it is due. Developers and head contractors would benefit because they would not need to hold retention money on trust.

These proposed amendments reflect the original intent of the CCAA. They address concerns that were raised by the construction industry during extensive engagement during 2016.

As part of that engagement, the Ministry of Business, Innovation and Employment consulted on what, if any, regulations should be made under the retention money provisions of the CCAA. The CCAA contains the power to make regulations setting a minimum amount of retention money that the provisions will apply to, and setting methods of accounting for retention money (additional to those currently set out in the CCAA).

No regulations are currently proposed. The retention money provisions will apply regardless of the amount of money involved to ensure payment for small subcontractors is protected.

Construction Contracts Act 2002 has further information, including details on the proposed financial instruments.

Information relating to the proposed amendments in the RSB can be found on the Parliament website

This information is published by the Ministry of Business, Innovation and Employment’s Chief Executive. It is a general guide only and, if used, does not relieve any person of the obligation to consider any matter to which the information relates according to the circumstances of the particular case. Expert advice may be required in specific circumstances. Where this information relates to assisting people: