Retention regime amendments reported back to Parliament
The Construction Contracts Amendment Act 2015 introduced the current retentions regime. Unfortunately, this first version featured a number of shortcomings. It did not accurately reflect the accounting or the record keeping systems operated by the construction sector. Compliance has also been optional due to a no penalty regime and minimal enforcement.
Earlier this year, a Bill to amend the existing Act was introduced and referred to the Transport and Infrastructure Select Committee. They have now reported back with their proposed amendments; fortunately these are significant and address most of the shortcomings which were previously identified.
The Act uses the phrases Party A and Party B. If Party A is the building owner, Party B is the head contractor. If Party A is the head contractor, Party B is the subcontractor.
The proposed amendments fall under five key categories.
Separate bank accounts
Previously, retention monies held could be intermingled with other assets and the main requirement was that they had to be liquid. The Bill now clarifies that unless a complying instrument (special insurance policy) is held, the funds must be held in a properly labelled bank account with a registered New Zealand bank, and must be held on Trust separately from the contractors’ other money and assets.
Whilst most head contractors have set up separate bank accounts, many have not. Once the Bill is passed, those that have not previously had separate bank accounts will need to comply and we expect few will not have the cash resources to comply.
What do the construction sector retentions regime amendments mean for your business?
There was previously uncertainty as to when an amount became retention money. The Bill clarifies that money is retention money when the construction contract allows Party A to withhold payment of an amount from Party B, and further clarifies that this is whether or not:
- The money has been set aside,
- The amount has been calculated,
- A record has been prepared,
- or any amount has been paid to Party B.
These were all issues in the Ebert Construction case.
There is also greater clarity on when retention money ceases to be held in Trust and how retention money can be used. If retention money is to be used to remedy defects, written notice must be given to Party B at least 10 working days before Party A uses those retention monies to remedy defects. This is to give Party B the opportunity to correct the defect themselves before the retention money is used.
Offences and penalties
The revised Bill makes it abundantly clear that retention money is Trust property, held on Trust, and that all the rules of common law and equity relating to Trusts apply to the Trust.
A further amendment to the Bill removes the ambiguity relating to offences and each specific breach is a separate offence.
In practice, that means that if there is a breach, there are likely to be multiple breaches and multiple penalties. The Party A who should withhold the retentions and put them in Trust commits an offence and on conviction is liable to a fine not exceeding $200,000 for each offence. Further, each of its directors also commits an offence and is liable to a fine not exceeding $50,000 for each offence.
The definition of a director is wider than those simply registered as directors at the Companies Office. The definition is now the same as in the Financial Markets Conduct Act and the word “duties” replaces the word “functions.” Therefore, some senior staff who are not directors could also be caught.
Record keeping and reporting
References to financial statements in the first version of the Bill have been removed and replaced with references to separate ledger records. This better aligns with how construction companies operate their records of retentions.
The revised Bill clarifies that the reporting to those that have retentions deducted from them (Party B) is to be at least every 3 months and is only in relation to the records relating to that party rather than all parties. The information that must be provided now includes each amount retained, the construction contract under which it is retained, the date of its retention and the total amount of retention held for that party under each construction contract between them.
This will require software providers to generate further reporting. For those parties that do not use software specific to the NZ construction industry, and who have multiple retentions are likely to have challenges and will need to improve their record keeping and develop new reporting.
Receiverships and liquidation
The original Act lacked clear guidance on how retentions should be dealt with under a receivership or liquidation, and receivers and liquidators had to go to the court for instructions, including getting permission to deduct their fees. Fortunately, those major shortcomings were considered in the draft Bill and have been further improved in the most recent version.
Pleasingly, the construction sector now looks to be getting the clearly structured retentions regime it deserves – however many in the sector will likely feel frustrated with the journey. The importance of the submission process and sector participants having an active voice was again highlighted. The submissions made in relation to the draft Bill identified most of the shortcomings and the committee have undertaken a substantial rewrite, producing a much better Bill which strengthens the protection of subcontractors and removes significant ambiguities.
Dates for the Bill to return to Parliament are yet to be communicated. In the interim, it is important to familiarise yourself with the proposal changes and ensure your organisation has the systems and processes to comply.
If you require further information about the proposed Bill and its enhancements, please contact a member of the BDO Construction Sector Team or your usual BDO Advisor.