The failure of a number of large construction companies in the past few years has prompted the Government to make further changes to the law relating to retention funds.   A MBIE (Ministry of Business Innovation and Employment) research paper from October 2014 identified that there was likely to be between $150 million and $250 million of retentions held in the New Zealand construction sector.

The Construction Contracts (Retention Money) Amendment Act 2023 was passed on 5 April 2023.  It creates new rules for holding retentions.  A 6 month window was provided to prepare for the new rules.  The new rules come into effect on 5 October 2023 and apply to every commercial construction contract entered into or renewed on or after 5 October 2023.  Commercial construction contract is defined in the Amendment Act and means a construction contract where neither party is a residential occupier. This definition means that most construction contracts will be caught by the new rules.

The Amendment Act provides for fines of up to $200,000 for a company and up to $50,000 for each director for not promptly paying retention money into a qualifying trust account.  There are also fines of up to $50,000 for not keeping the proper accounting records and for not reporting correctly to subcontractors.  Not complying with the new rules could mean a number of fines apply to the same retention.

Its going to be expensive for construction companies who do not put systems and processes in place to comply fully with the new rules.  Retentions can no longer be used as working capital or held in a main trading account.  The new rules require retentions to be held in a separate trust account and the bank must be notified that the account holds retention funds.  There are specific requirements for reporting to the subcontractor from whom the retention was deducted including reporting as soon as the retention funds are deposited into the Trust account and regular reporting (at least every 3 months) thereafter.

Construction companies should be getting ready now by putting processes in place to be able to comply with the new rules from 5 October 2023.

Retentions Limited operates a Retention Trust Account and looks after all accounting and reporting requirements to assist construction companies to comply with the new retention rules.