Changes to retention money requirements

Codewords 114: August 2023

These changes are prescribed in the Construction Contracts (Retentions Money) Amendment Act 2023 (the Amendment Act) which was passed on 5 April 2023.

The Amendment Act aims to strengthen and clarify protection for subcontractors’ retention money and make it easier for subcontractors to access retention money without a court order, in the event of a company’s insolvency.

The Amendment Act builds on retention money provisions already in the Construction Contracts Act 2002. The provisions in the Construction Contracts Act were put in place to protect retention money owed to subcontractors in the event of a business failure, and to ensure retention money withheld under construction contracts was responsibly managed.

Key changes to retention money provisions

Many head contractors are already doing the right thing and are holding retention money aside appropriately. For these people, there will be very little change.

The changes will safeguard subcontractors’ retention money by:

• clarifying that retention money is automatically held on trust by the head contractor once the contract allows it to be withheld from the subcontractor
• removing the ability to mix retention money with other money and assets
• requiring that retention money held as cash, also be held separately in a bank account with prescribed ledger accounts.

Compliance with retention money provisions

The Ministry of Business, Innovation and Employment (MBIE) now has the responsibility to provide information, education and guidance to the sector on the retention money regime. This allows MBIE to help businesses, companies and subcontractors understand what they are responsible for, and how to comply with the retention money provisions. 

The Amendment Act introduces new offences and penalties and gives the Chief Executive of MBIE the power to investigate retention money offences and enforce penalties. There are new offences and penalties of up to $200,000 for companies and, in some cases, directors who fail to meet the new requirements, including:

• failure to comply with accounting, recording and reporting requirements
• use of retention money for a purpose other than remedying defects in the subcontractor’s performance
• failure to provide regular information to the subcontractor on retention money.

Date to start complying with the changes

The changes in the Amendment Act come into force on 5 October 2023. This gives time for head contractors looking to hold retention money, to ensure processes are established and standard contracts are renewed.

Where to find further information

To read more about the Construction Contracts Act 2002 and the Amendment Act, visit the MBIE website and the Building Performance websites:

Understanding the Construction Contracts Act(external link) — mbie.govt.nz

Construction Contracts Act 2002(external link) — building.govt.nz

Quiz

1. When do the changes come into force?
   

   1. The Amendment Act came into force on 5 April 2023

   2. The Amendment Act comes into force on 5 October 2023.

   3. The Amendment Act comes into force on 1 January 2024.

2. The changes in the Amendment Act protect subcontractors’ retention money by:
   

   1. Clarifying that retention money is automatically held on trust by the head contractor once the contract allows it to be withheld from the subcontractor.

   2. Removing the ability to mix retention money with other money and assets.

   3. Requiring that retention money held as cash also be held separately in a bank account with prescribed ledger accounts.

   4. All the above.

3. If you are a head contractor and you fail to meet the new requirements under the Amendment Act, can you be fined?
   

   1. Yes, you can be fined up to $200,000.

   2. No, the penalties do not apply to head contractors.