Recent updates to the Construction Contracts Act legislation have changed the obligations contractors have to administer retention money for their subcontractors.
As the result of two significant and consequential construction firms being placed in liquidation without resources to pay out the retention money owed to subcontractors, the New Zealand government has tightened the obligations and procedures for contractors who hold retentions.
What is Retention Money?
Retention money is the amount of payment that’s held back to subcontractors from a payment made to them under a construction contract, as a security for their performance. There is no legal requirement to withhold funds for security, but if you do, then you must follow certain processes.
In our blog we will provide clarity for property owners, developers, contractors, and subcontractors so that everyone understands their rights, duties, and obligations and the changes to the retention money obligations in the Construction Contracts Act (CCA). These new obligations came into effect on 5 October 2023 and will apply to new commercial contracts from that date. The changes do not apply to contracts with homeowners or residential occupiers. For further reading, please see the guide for understanding Retention Money produced by the Ministry of Business, Innovation, and Employment.
Who are the New Construction Contracts Act Regulations For?
These changes affect anyone who holds retention money, including building owners, developers, contractors; contractors and subcontractors who have money withheld as security for performance; and legal, accounting, insolvency personnel.
What are the Obligations for the Parties Involved?
The CCA defines two parties involved in Retentions:
Party A is generally the main contractor or the entity that withholds the retention money.
Party B is generally the subcontractor, or the party that retention money is withheld from.
Retention Money Must be Held on Trust
If you hold retention money, it must be held in trust. The Construction Contracts Act specifies that the funds must be held as cash by the General Contractor in a registered New Zealand bank account with specified ledger amounts. These funds must not be used for working capital or regular cash flow. Additionally, the accounting for retentions must be managed separately and transparently.
The Contractor is required to provide quarterly reports to its Subcontractors, and clearly and promptly report on every transaction with their retention funds.
When is Retention Money Due?
Party A must pay out the retention when the following four conditions have been completed by Party B:
- completed the work outlined in the contract.
- performed all contractual obligations.
- fixed any notified defects in the performance of the obligations under the contract.
- remedied any defects during any defects liability period specified in the contract.
Can Retention Funds Be Applied to Repair Subcontractors’ Obligations?
If the Contractor uses funds held in trust to fix non-performance of a Subcontractor’s obligations under their contract, the General Contractor must provide 10 working days notice to the subcontractor.
Who Keeps the Interest on Retention Money?
Any interest that accrues belongs to Party A, the holder of the funds.
What Happens if Party A goes into Receivership or Liquidation?
If party A goes into receivership or liquidation, the receiver or the liquidator becomes trustee of the retention money for any party Bs. The new trustee will be responsible for collecting, managing, or disbursing the funds held in trust after deducting administration fees.
The new trustee must notify party B within ten working days of their appointment as trustee.
What are the Penalties for Failing to meet these new Standards for Retention Money?
Penalties for failing to meet the standards of the new legislation apply to the companies and can also apply to company directors for certain offences. The CCA sets out offences that include failure to keep retention money in a separate bank account and providing false and misleading information to Party B, among others.
If convicted, Party A may be subject to fines of as much as $200,000, and up to $50,000 for individual directors of the company.
Which Company Employees are Subject to Penalties for NonCompliance?
Many Retention Money matters are the responsibility of company Directors and accounting and administrative staff. However, substantial fines may be levied against contractors who use retention funds to address non-performance of a Subcontractor.
To address non performance from one or more subcontractor, you may create a form letter or notice of advice to advise the subcontractor that they are being given 10 days notice that unless they remedy the scheduled performance issues, the company will utilise the retention monies held to remedy the performance issues. For any such document, it’s best to consult with your legal counsel.
How to Manage your Retention Money and Keep Compliant
Using all in one construction accounting software like Profitz that’s built for the New Zealand market can help you track retention money and ensure you stay in compliance with the updated CCA regulations.
Your software should be able to identify the retention protection type to the contract, and even apply these types retroactively. Your software should also allow you to apply a bank account to existing contracts, use the standard retention protection type, and add new types.
Regardless of the type used, each claim and buyer created tax invoice sent to a subcontractor must contain information about the monies held in trust. And it’s important that this information can be sent to your subcontractors with the push of a button.
Further, look for simple and flexible reporting options that will allow you to meet all the record keeping and accounting requirements of the CCA act.
Find out how Profitz can help you manage every part of your New Zealand contracting business, including retention funds.
