The Government is making three design changes to the retentions regime arising out of the feedback from the review last year.
The reforms will be implemented through amendments to the Construction Contracts Act 2002 (CCA). The Bill is yet to be drafted, and we have not been given an indicative timeline for when the legislation will be progressed or when the new law will come into effect.
- A new offence will be created under which a failure to comply with retentions obligations will attract maximum penalties of $200,000 for firms and $50,000 for company directors.
- Clarification on where and how retentions payments are to be held to ensure that they are not co-mingled with other monies and drawn down as working capital.
- An obligation to issue regular “transparency reports” so that payees can be satisfied that the retentions holder is complying with the responsibilities imposed in the CCA. The onus is currently on the payee to request to see the documentation to ensure that appropriate arrangements are in place and that their rights are protected.
A necessary intervention and much needed
Chapman Tripp has written extensively about the retentions scheme since it was first mooted, often raising red flags around what we saw as design defects.
In 2014, when then Construction Minister Nick Smith decided against requiring that retention funds be put into a separate bank account or a lawyer’s trust fund because the compliance costs would be too high, we noted that “in the absence of this segregation, it is difficult to see how the retention monies can be identified among the other funds held in a contractor’s bank account, and how those funds are to be adequately protected if the contractor becomes insolvent”.
In 2017, when the scheme was about to come into effect, we noted the surprise decision “not to produce timely regulations” and said this would increase “the uncertainty around the new regime’s implementation”.
And in 2018 when the first dispute went to court, we said: “Either we await the accumulation of case law to inject some much needed clarity into this regime, which will be a slow and expensive process, or the Government appoints an expert panel to review it and recommend improvements”.
We are pleased this has now happened and that the Government is following through with remedial action.
The information below provides our detailed analysis of what is proposed, and identifies some of the items still on the “to do” list.
Issue: Retention money does not need to be paid into a separate trust account and may be commingled with other moneys.
Proposed solution: New rules over how retention money must be held so that it cannot be commingled with, or used as, working capital.
Our comment: It is hoped the finer details of this change will strike a better balance between regulating retention money against misuse and the cost of compliance.
Issue: Payees have difficulty tracing and identifying the money owed to them. The onus is also on them to request confirmation that their retention money is being held on trust and that appropriate accounting records are being kept.
Proposed solution: Payers must issue transparency reports to payees stating how much retention money is being held and where such retention money is being held.
Our comment: We expect this change will be welcomed by payees, especially as the review found that payees were reluctant to assert their right to request documentation as they didn’t want to damage their relationship with the client (contractor or principal as the case may be).
Issue: Lack of any enforcement mechanisms or sanctions.
Proposed solution: A new offence has been created with maximum fines of $50,000 for company directors and $200,000 for firms.
Our comment: If the experience of the Health and Safety at Work Act is replicated here, we expect the new penalties will encourage greater compliance. The greater liability may also lead to a wider adoption in the market of alternative price structuring and bonding to avoid the withholding of retentions.
As always, much will depend on how the policy detail is refined and how the legislation is drafted. We also don’t know whether the Government will run two rounds of consultation – the first on an exposure draft bill and the second on the Bill proper when it goes to select committee. We will continue to track developments closely, and will be happy to assist with any submissions.