The protection of retentions has been an issue in the construction industry for years, not just in New Zealand but globally. Amendments to the Construction Contracts Act a few years back put obligations on head contractors to protect those retentions by holding them “on trust” as cash or other liquid asset or using a financial instrument such as a bond. They must also report to subcontractors when asked. However, compliance with and enforcement of these changes has not been very good, as cases such as the collapse of EBERT Construction have highlighted.
The Government has now proposed further amendments, which passed their first reading in early June, to attempt to solve some of these issues. These changes include removing the ability to co-mingle retention money with other money and assets; introducing regular reporting requirements; adding the need for contractors to confirm with the subcontractor the amount and location of the retention money being held; and harsher penalties for those who fail to comply with the retentions regime.
Retention money will have to be held either in a specific retentions bank account, that they can’t dip into for other reasons, or be covered by an insurance or payment bond. Main contractors won’t be able to rely on their accounts receivable balance as a form of liquid asset to cover their retentions obligations. They must also regularly report (every three months) to the sub-contractor about their retentions, including where and how they are held. There will be substantial fines for the company and individual directors for failure to keep retention money as required, keep proper records or provide regular reports.
Retention Bonds for Sub-contractors
An alternative to allowing your main contractor to withhold retentions from you is to give them a bond instead. With a bond you pay a fee to the surety (an insurance or bond company) and if there is a problem down the track the main contractor can call on this bond to resolve the issue. The benefit for subbies is improved cashflow, because the money that would otherwise have been retained by the main contractor is now in your bank account rather than theirs. It means you, not the main contractor, are earning interest on your money too. This can mean that even after paying the bond fee you still come out ahead.
Bonds are not insurance, so if a bond is called up the provider will look to recover their cost from you. They will require some form of guarantee or security, in the same way that a bank or any other creditor would.
Having a relationship with a bond surety has other advantages as well. For example, being pre-approved to provide bonds gives a positive signal to customers of your credibility and stability as a partner. If you have met the bond surety’s stringent criteria then you are a safer choice than a contractor who has not.
In a nutshell
The Government is (again) looking to strengthen legal protections for subcontractors retentions. Offering a bond in lieu of retentions is a safe way to satisfy your defects liability obligations, while at the same time ensuring your money is in your bank account and not someone else’s!