- School Boards of Trustees are often involved in construction and maintenance projects that oblige them to enter into Construction Contracts as Principal. Some projects can be complex and involve significant sums.
- These contracts often involve holding back retentions to ensure the completion of works. Major changes in how these retentions have to be dealt with will apply to Boards carrying out this role. Boards must hold retentions on trust in a specific account or otherwise comply with the changes to the Act.
- The Government has introduced new legislation to strengthen and clarify the existing retention money scheme in the Construction Contracts Act 2002 (CCA). This comes into force on 5 October 2023, and contains penalties and enforcement powers.
Construction Contracts (Retention Money) Amendment Act 2023
What are the current requirements?
- The CCA currently requires any party to a construction contract (party A) who is withholding retention money from the other party to the construction contract (party B), to hold that retention money on trust for the benefit of party B. The retention money may be held in cash, “other liquid assets that are readily converted into cash”, or a financial instrument such as insurance or a payment bond.
- Funds can be mixed and trust not created automatically.
- Can request information regarding funds held but hard to enforce.
What is changing?
Funds deemed to be held on trust
- The CCA amended to explicitly state that a trust is created automatically; there is no need for any explicit intention of party A to hold the money on trust.
- Trust is created when the amount becomes retention money, whether or not set aside or calculated.
How retention money must be held
- Retention money will be required to either be held in a bank account or be the subject of a suitable financial instrument such as insurance or a payment bond.
Can be used to remedy defects only following 10 working days’ notice in writing giving opportunity to fix defects.
It will no longer be permissible to use “other liquid assets”, such as accounts receivable.
New requirements for third party or bank accounts, including:
- the account must be established and used solely for the purpose of retention money (so it cannot be used as working capital for party A);
- party A must ensure that the bank is aware that the account is a trust account.
Any interest that accrues in the account will belong to party A.
- Party A may choose whether to have individual accounts for each subcontractor’s retention money or to have one account which holds all subcontractors’ funds. If funds are mingled, then party A must ensure that it has accounting records in the form of separate ledgers, identifying each party B for whom money is held, and the construction contract to which it relates.
- Where Crown is holding retentions, must hold as required by the Public Finance Act 1989.
Regular reports on retention money
Party A will be required to give specified information to party B at the time that retention money is held (or as soon as practicable) and then at least every three months thereafter. This information must include:
- the most recent amount withheld, the relevant construction contract, and the date of the retention;
- the total amount of retention money held by party A for party B;
- if held in a bank account, the name of the bank and branch, the name of the account, the name of party B’s ledger (if the account has separate ledgers), and the total balance held for party B; and
- if using a financial instrument, the name of the issuer, sufficient information to identify the instrument (such as a policy number), and the protected amount.
The effect of a receivership or liquidation
If party A is placed into either receivership or liquidation, the receiver or liquidator will hold the retention money on trust as trustee under the Act, and must deal with it in the same way as party A was required to do so. Reasonable fees and costs may be met from the retention money account. Receivers and liquidators will not be liable for any unlawful or improper action taken prior to their appointment.
Failure to comply
For the first time, the CCA will include penalty provisions for entities who do not comply with the retention money scheme. These penalties include:
- for failure to keep retention money as required, a fine of up to $200,000;
- for failure to keep proper accounting and other records of retention money, a fine of up to $50,000; and
- for failure to provide regular reports on retention money, a fine of up to $50,000.
If party A is a company, each director can also be personally liable for failure to keep retention money as required, with a fine of up to $50,000 for each director. There is the potential for multiple fines.
The Act will be administered by the Ministry of Business, Innovation and Employment. The chief executive of the Ministry has the powers to administer and enforce the regime (similar to the Building Act 2004 powers) including the ability to require information and apply for search warrants and there are offences for hindering and failing to comply.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.