Last updated: 22 September 2023
The Construction Contracts (Retention Money) Amendment Act 2023 strengthens and clarifies protection for subcontractors’ retention money.
The Construction Contracts (Retention Money) Amendment Act 2023 (the Amendment Act) will come into force on 5 October 2023. It will only apply to new commercial contracts from that date and existing commercial contracts that are renewed on, or after, that date. It does not apply to construction contracts with homeowners/residential occupiers.
The Amendment Act impacts anyone who withholds retention money as security for a subcontractor’s performance. This includes construction companies, local and central government procurement teams, liquidators and receiver companies, banks and other financial companies and legal services.
It is not a legal requirement to withhold retention money, but if someone chooses to withhold it, they must comply with the Amendment Act.
The Amendment Act builds on retention money provisions already in the Construction Contracts Act 2002. It does this by strengthening and clarifying the retentions regime, and in particular, protection for subcontractors' retention money. From 5 October 2023, the Amendment Act will become part of the Construction Contracts Act 2002.
Definition of retention money
Retention money is the amount held back to subcontractors from a payment made to them under a construction contract, as a security for their performance.
Requirements for withholding retention money
The Amendment Act will introduce new requirements for withholding retention money. These include:
- keeping retention money held on trust, without mixing it with other money or assets.
- ensuring that retention money held as cash is also held separately in a bank account with prescribed ledger accounts.
- using retention money only to rectify non-performance of subcontractors' obligations under the contracts – if retention money is used to remedy those defects, subcontractors must be given ten working days' notice.
- providing quarterly reports to each subcontractor retention money is withheld from.
- providing each subcontractor with a report after each transaction with their retention money, promptly and free of charge.
- paying out retention money when it's owed.
Definition of a trust
A trust is a financial tool that allows a person or organisation to put aside money and other assets that will later be distributed to the beneficiary named on the trust.
Parties under the retentions regime
There are two parties under the regime:
- 'Party A' – usually the main contractor ie the party who withholds retention money. Party A has several obligations to the subcontractor it holds retention money from.
- 'Party B' – usually the subcontractor ie the party retention money is withheld from.
Rights of party B
Party B is entitled to:
- receive quarterly, written reports from party A
- receive a written report promptly after each retention money transaction on a contract.
- request accounting details at any time, free of charge.
- receive interest if party A doesn't pay the retention money when its due.
- receive assurance their retention money is protected against the insolvency of party A and would be distributed by an appointed receiver or liquidator.
- request the chief executive of MBIE to enforce party A's obligation to protect the retention money and to provide accounting information or regular reports.
It's important to note that subcontractors are not bound by prohibited provisions in contracts, especially around what happens with retentions money.
Definition of prohibited provision
A prohibited provision is an unenforceable clause in a contract – in essence, you can't write clauses into a construction contract that conflict with the Construction Contracts Act 2002 or the retentions regime outlined in the Construction Contracts (Retention Money) Amendment Act 2023.
For example, subcontractors are entitled to receive retention money on completion of the work, even if the contract provides for party A to pay the retention money at a later date.
Offences and penalties
The Amendment Act introduces strict liability offences for failing to hold retention money properly. This includes penalties of up to $50,000 for a director and up to $200,000 for a company that fails to uphold their obligations, unless it is proven that all reasonable steps were taken to hold retention money.
If party A is not following the retentions regime, a subcontractor can contact MBIE to make sure the person or organisation holding retention money complies with their requirements.
Penalties will be introduced for the following offences:
|Offence||For each offence (up to)|
|Party A||Each director|
|Failing to keep retention money in a separate bank account or provide a complying instrument||$200,000||$50,000|
|Failing to use retention money only to remedy defects in the performance of obligations, or to give 10 working days' written notice||$200,000||$50,000|
|Failing to keep proper accounting and other records of retention money||$50,000|
|Failing to provide reports to party B||$50,000|
|Providing false or misleading information to party B||$50,000|
|Obstructing, hindering or resisting the chief executive of MBIE (or their delegate) in the execution of their investigation||$200,000||$50,000|
|Providing information or documents that are false or misleading to the chief executive of MBIE||$200,000||$50,000|
The Ministry of Business, Innovation and Employment's (MBIE) Chief Executive has the ability to investigate and enforce retention money offences. MBIE also has the responsibility to provide information and education to the sector on the retention money regime and monitor compliance.
Organisations looking to hold retention money have six months to ensure processes are established and standard contracts are renewed before the new offences and penalties apply.
Construction Contracts (Retention Money) Amendment Act 2023 – legislation.govt.nz
Interest earned on retention money
Interest earned on retention money held in a retention money bank account belongs to party A. If party A does not pay the retention money to party B when it is due, party A may have to pay interest to party B.
When retention money is paid out
Party A must pay out retention money when party B has:
- completed the work
- performed all its contractual obligations
- remedied any notified defects in the performance of its obligations under the contract
- remedied any defects during any defects liability period specified in the contract.
Practical completion and retention money
The date when party B (subcontractors) has completed their contractual obligations will vary according to the nature of the obligations under the contract. Some subcontractors, such as those involved in demolition, may be entitled to receive their retention money when they complete the work and leave the site. However, work done by other subcontractors may not be considered complete until the entire contract is completed by the main contractor and handed over to the client.
Receivership and liquidation
If party A goes into receivership or liquidation, the receiver or the liquidator becomes trustee of the retention money for all party Bs. The new trustee will be responsible for collecting, managing or disbursing the retention money after deducting fees related to the administration of the retention money only.
The new trustee must notify party B within ten working days of their appointment as trustee.
Previous amendments to retention money provisions
Review of retention money regime (2019)
KPMG delivered a report to help MBIE understand the implementation and effectiveness of the retention money provisions regime in the Construction Contracts Act (2002). The purpose was to understand:
- awareness of the regime in the sector
- overall compliance with the regime
- whether there has been any behaviour change as a result of the regime
- any consequences on solvent and insolvent businesses.
The report was finalised in August 2019. In summary, it found that a large portion of the sector was complying with the regime, and there was good knowledge of its requirements. There was some evidence that the regime had protected subcontractors in the event of insolvency and money had been returned to them. However, there were still some issues around compliance.
After engaging with the sector on how to improve the retention money regime, the Minister for Building and Construction announced changes to the regime in May 2020.
The Construction Contracts (Retention Money) Amendment Act 2023 introduces these changes.
Read the media release - beehive.govt.nz
Regulatory Systems (Commercial Matters) Amendment Act 2017
The Amendment Act specified that from 31 March 2017, retention money withheld under commercial construction contracts must be held on trust in the form of cash or other liquid assets readily converted into cash, unless a complying instrument is obtained (eg a bond or insurance product).
The retention money requirements only applied to contracts entered into, or renewed, on or after 31 March 2017.
The provisions were designed to better protect retention money owed to contractors and subcontractors in the event of a business failure. They ensured retention money withheld under construction contracts was responsibly managed.
MBIE has published guidance to help people who withhold retention money comply with the strengthened retention regime.
This guidance is for:
- property owners, developers, contractors and anyone who withholds retention money
- contractors and subcontractors who have retention money withheld from them as a security for performance
- legal, accounting and insolvency professionals.
The guidance includes:
- how to comply with the Amendment Act
- roles and responsibilities of MBIE, people who withhold retention money, people who have retention money withheld from them, insolvency practitioners, and others
- how people who withhold retention money can meet reporting requirements to the people they withhold retention money from
- what happens to retention money held in the event of insolvency or receivership
- information on the consequences of non-compliance or misrepresentation
- definitions and explanations of key terms and concepts.
On 25 August 2023, MBIE held a webinar for main contractors, sub-contractors, clients, and payment certifiers (Quantity Surveyors and Engineers to Contract) to explain what the changes in the Amendment Act mean for these groups.
More information on construction contracts - mbie.govt.nz