The Commerce Select Committee and the Ministry of Business, Innovation and Employment (MBIE) have recently made important announcements on the new regime for retention monies under the Construction Contracts Act.
The new regime, which applies from 31 March 2017, requires participants in the construction industry to hold all retention money on trust. The retention money must be held in the form of cash or other liquid assets that are readily converted into cash. There are also accounting and reporting requirements to meet in relation to the retention money held on trust and restrictions on the use of retention money.
The Commerce Select Committee recently released its report on the Regulatory Systems (Commercial Matters) Bill, which proposes two important amendments to the regime.
First, the Bill clarifies that the retention regime does not apply to construction contracts entered into before 31 March 2017 (unless the contract is renewed for a further term after 31 March 2017 or the parties agree that the regime applies). This is a key clarification, as it gives the construction industry time to progressively build up the capital necessary to meet the requirements of the new regime. The Committee acknowledged the need to pass the Bill prior to 31 March 2017. This will be a relief to many, as it had been unclear whether this amendment would be passed before the regime came into effect.
Second, the Committee has proposed a further change to make it clear that parties can use insurance, a bank bond or guarantee or similar to meet the requirements of the regime, rather than holding on trust cash or a liquid equivalent. This amendment provides welcome flexibility and answers a question that some industry participants had raised. However, many participants may not have ready access to these facilities and the cost of them may be higher than the net cost of holding cash (after taking into account the benefit of the returns a party may receive from investing any funds held on trust).
MBIE has subsequently advised that no regulations are proposed to provide guidance as to how the new regime will work. This announcement is also significant, as the regulations could have addressed several important aspects of the new regime. For example, MBIE's consultation on possible regulations in 2016 had indicated that regulations might prescribe a minimum amount of retention money to which the trust obligation would apply. However, in the absence of any regulations, there is no threshold and the regime will apply to all retentions under commercial construction contracts – irrespective of the value of the contract or the retentions held. That means the regime will essentially apply to all construction contracts, except for those between a contractor and a residential occupier (i.e. owner occupier) of premises.
It also means there is no guidance on accounting issues, including on what constitutes a "liquid asset". Some in the industry had hoped that the regulations might clarify whether accounts receivable – such as the retentions held against a party by those further up the contracting chain – would constitute a liquid asset that could be held in trust. For example, some contractors may hold in trust the accounts receivable in relation to the retentions held against them (e.g. by the principal/employer) and then only hold in cash the net amount (over and above what has been retained against them) they hold against subcontractors. In the absence of the regulations describing what constitutes a liquid asset, the industry may have to make some difficult decisions about the type of assets they must hold in trust.
Overall, the new retention regime raises important issues for the construction industry. While the Bill will help resolve a couple of the issues, a number are left unresolved.
Please contact our team if you would like advice on the new regime and how to deal with it.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.