New Retention Monies Legislation gives Better Protection

Comes into force on 5 October

The Construction Contracts (Retention Money) Amendment Act 2023 was passed on 5 April this year with the legislation coming into effect on Thursday, 5 October 2023.

If your business retains funds as part of a construction contract, or a contractor retains funds from you, you should ensure you are familiar with these upcoming changes.

The primary intention behind the amendments is to provide greater clarity and to strengthen the rules regarding retained funds under the Construction Contracts Act 2002. The government wants these changes to provide more reassurance to subcontractors that they will be paid for work completed – even if a head contractor becomes insolvent. 

Retention monies must be held separately

Previously, there was no obligation for the business retaining money to hold it in a separate account unless a trust relationship had been created.

From 5 October, all funds retained under a construction contract must be held in a separate bank account that meets specific criteria.

This bank account must be held at a New Zealand bank, with a chartered accounting or law firm, or by a trustee company; and the account provider must be told that it is an account holding funds on trust.

If you are required to retain funds, you may use that account for multiple contracts (you do not need an individual account for every contract with retained funds), but the account may not be used for any other purpose.

Reporting obligations

If you are retaining funds under a construction contract, you will also need to comply with reporting obligations on your retained funds account. If there is more than one party for whom you are holding funds, you must maintain a ledger that clearly indicates whose funds are coming in and out of the account, and report to each party individually.

On receiving funds to be retained, you must report as soon as practical to the party for whom you have retained funds. Your report must include:

•   The amount being retained

•   The date it was received

•   Details of the bank account in which the funds are being held, and

•   A statement that shows the funds in the account, including any deposits or withdrawals relevant to their retained funds.

You also must ensure that you regularly report to all parties; the Act specifies this means at least once every three months. These reports must also be produced promptly upon request from the party for whom you are retaining funds. As well, you may not charge for the administration of producing these reports.

Do note, however, that as the retention holder, you are entitled to the interest on the account; this presumably may help cover the account fees and maintenance.

Use of the funds

There must be agreement in place around when the funds are to be accessed. If there are any issues that arise during the contract that would result in the retained funds being used, before accessing the funds the holder of the retained funds must (at a minimum) provide notice of the intention to use the funds and why, and give at least 10 working days to the other party to rectify the issue.

Penalties

Significant penalties have been introduced to enforce the new legislation; failing to comply with the retained funds management regime is considered a criminal offence.

For each breach of the Act, a company can be fined up to $200,000 and each director can be fined up to $50,000.

Given that these charges are applicable per offence, there are serious financial consequences for non-compliance. The amendment also has added a fine for failure to report, or for false or inaccurate reporting (even if the funds are being held in a compliant manner), of $50,000. 

Alternatives

Given the new significant penalties and associated additional administration for retained funds, many construction contracts are being amended so that the retention holder obtains a security bond in lieu of a retention.

The NZS 3910:2013, that is commonly used by the construction industry, does not set comprehensive criteria for how a bond should be provided or released. Therefore, any contractor who prefers to avoid running a retained funds bank account by using bonds, should carefully (and urgently) review and amend their contracts to ensure they comply with this new legislation.

If you are engaged in construction contracts and would like to discuss your obligations under the new amendments, please don’t hesitate to contact us.

DISCLAIMER: All the information published is true and accurate to the best of the authors knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513