The Government is promising better protection for sub-contractors’ retention payments through a Supplementary Order Paper (SOP) to be introduced to the Construction Contracts Amendment Bill when Parliament reconvenes after the election.
Drafting instructions for the SOP have been issued. Much will depend on how well it is drafted as this is a difficult area to legislate and there will not be the usual opportunity for public submissions.
Retentions are payments held back by the developer from the head contractor or by the head contractor from sub-contractors, traditionally as a security for performance. But the money is commonly used as working capital in the meantime, and generally falls to the liquidator in the event of insolvency, meaning contractors and sub-contractors are left partly unpaid for work they have completed.
These problems were thrown into sharp focus by the collapse of Mainzeal, creating pressure for reform to protect sub-contractors in particular.
The Government’s proposal will:
- impose an obligation on the retention-holder to treat the retentions as if they were held in trust, with penalties imposed if they are used for other purposes
- clarify that the ‘pay when paid’ ban in the Construction Contracts Act also applies to retentions, and
- provide for a default rate of interest to be set by regulation and applied to late payment of retentions.
Building and Construction Minister Nick Smith says the Government decided against requiring that retention funds be put into a separate bank account or a lawyer’s trust fund, as sought by some in the industry, because the compliance costs would be too high. However, 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.
These are difficult issues. Presumably attempts will be made to address them in the drafting of the SOP but we question whether they are inherent in the chosen model. We await the SOP with interest.
For a fuller discussion of the matters involved, refer to the article John McKay wrote for Infrastructure magazine.