By Jonathan Aquilina - March 2017
You may be aware of the new statutory regime for construction contract retentions which comes into force at the end of this month. Essentially the new law imposes a trust regime around retention funds. We highlight some key information on the law change below.
The Construction Contracts Amendment Act 2015 (“CCAA”) introduces amendments to the Construction Contracts Act 2002, with effect from 31 March 2017. The retention money requirements only apply to commercial construction contracts entered into, or renewed, on or after 31 March 2017.
The new retentions regime applies to all retention funds held in relation to head contractors and sub-contractors (at this stage MBIE does not propose to set a de minimis threshold for the level of retention). So a contractor will benefit from the protections of the new regime where it is a head contractor, but it will also be subject to the new regime in relation to how it deals with sub-contractor retentions. It is not permitted to contract out of the new regime.
Central to the new retentions regime is the concept of a “trust” arrangement:
The CCAA has rules around investment of retention money and accounting for interest. Any investments must be subject to the Trustee Act 1956. Any interest earned on invested retention money belongs to the retention holder, to offset the administration costs of the new regime. Interest must be paid on late payments of retentions at the rate agreed under the contract. If a rate has not been agreed, the default rate of interest specified in regulations will apply (currently the regulations have not been developed).
A retention holder must account for any difference between retention money withheld and paid out. Contracts should outline the procedures for the retention holder to lawfully use/deduct (or “appropriate” – the language used in the CCAA) the retention money.
Retention holders assume all the statutory and implied duties, obligations and liabilities of a trustee, including those under the Trustee Act 1956, in accounting for and managing retention money – including director liabilities. At its most extreme, a breach of trust may be a criminal offence.
The parties to a construction contract are prohibited from:
The methods of accounting for retention money are set out in the CCAA. The government has taken a reasonably light touch approach; the CCAA requires the holder of retention funds to keep “proper accounting records” of all retention money held that:
The feedback from MBIE is that it expects industry participants to “develop reporting methods that best suit the accounting systems they have in place” – so the government is not being overly prescriptive as to how compliance should be achieved.