124: Are you managing your retention money properly?

Every worker and small businessperson deserves to be paid for their work, and subcontractors need to feel confident that they will be paid what they are owed. Whether you regularly work as a head contractor, a subcontractor, or both, it is important that LBPs understand their rights and obligations under the Construction Contracts Act.

The Construction Contracts Act was strengthened in April 2023 to provide extra protection for subcontractors, if a head contractor chooses to hold retention money.   

Understanding retention money

In practice, retention money is usually withheld by a head contractor, as an assurance that the subcontractor will complete their work to the agreed standard. The subcontractor has up to 12 months after the job is finished to fix any defects in their work.  

However, if a head contractor spends the money they are retaining as retention money, and then becomes insolvent, the subcontractor could lose their money. 

The strengthening of the Construction Contracts Act is designed to make sure subcontractors still get the money they are owed in the event of an insolvency. This means both contractors and subcontractors can trust that work will be completed promptly to the terms of the contract, and everyone will be paid what they are owed when the job is finished.  

Retention money isn’t mandatory

It is not a requirement to hold retention money. Head contractors who choose to hold retention money typically hold between 2 and 10% of the contract value, for up to 12 months after the job is finished.  

This money can then be used by the head contractor to remedy defects by the subcontractor, assuming this is permitted by their contract and 10 working days’ advance notice is given in writing.  

The Construction Contracts Act does not set a minimum contract amount for retention money to apply. This means the rules and requirements apply to all retention money withheld under commercial construction contracts in Aotearoa New Zealand.  

Understanding the requirements to hold retention money

By law, the head contractors (who holds the retention money) must hold the retention money in trust. They must also provide reports to the sub-contractor, when requested.

The requirements to hold retention money include:  

• 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 
• 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. 

It is also a requirement for retention money to be paid out as soon as it is owed on completion of the contract – if payments are late, interest can be charged by the subcontractor.

Whatever you put in your contract about retention money, you can’t change your obligations under the Construction Contracts Act, even if you add terms that go against it.  

Offences and penalties have been updated

When the Construction Contracts (Retention Money) Amendment Act was passed, it also introduced offences and penalties for companies and in some cases, directors, who fail to hold retention money on trust.  

Offences have been introduced for: 

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

Ministry of Business, Innovation & Employment (MBIE) has provided information and education for LBPs to help you better understand your rights and obligations, no matter what side of the job you are on.   

Construction Contracts Act 2002 (external link)- Building Performance

Retention money resources(external link) - Building Performance

If a head contractor is not fulfilling their obligations and is in breach of the retention money regime, sub-contractors have a right to lodge a complaint with MBIE. A complaints form can be found on the website below.  

Breaches of the retention regime complaint sheet (external link)- Building Performance

Next issue: we are planning a deeper dive into the subcontractor side of the retention money regime – look out for it in the next issue!  

Quiz

1. What is retention money? 
   
   1. money that is usually withheld by a head contractor, as an assurance that the subcontractor will complete their work to the agreed standard.
   2. money kept by a contractor to cover unforeseen material costs.
   3. money held by a subcontractor in case they don’t get paid at the end of a job.  
   4. money used to build a retaining wall. 
2. Where must retention money be kept?  
   
   1. in cash in your desk drawer.
   2. in a separate bank account with prescribed ledger accounts.
   3. in your company bank account, mixed with your other assets.
   4. in your personal bank account.
3. Which of these is NOT an offence under the Construction Contracts (Retention Money) Amendment Act? 
   
   1. providing false information on retention money
   2. failure to comply with accounting, recording and reporting requirements 
   3. paying out retention money in full on the completion of a contract
   4. use of retention money for a purpose other than remedying defects in the subcontractor’s performance