Subcontractors owed money are to get better protection for payment for work done in changes to the Construction Contracts Act approved by Government, Building and Construction Minister Dr Nick Smith says.
“It is unfair that electricians, plumbers, painters, plasterers, tilers and other subcontractors can miss out on being paid when contractors or developers use retentions money inappropriately. We are going to change the law and require retentions to be held in trust to help ensure contractors and their subcontractors get paid for the work they do,” Dr Smith says.
Retentions are payments withheld by the developer and main contractor from subcontractors so as to ensure any faults or repairs to work done can subsequently be put right. An issue arises when the developer or main contractor puts this money at risk by using it as working capital or for another project which then fails, leaving the subcontractor unpaid.
The law change will mean the developer or main contractor has a fiduciary duty to the subcontractors to hold the money in trust. The issue was highlighted with the collapse of Mainzeal where about $18 million of subcontractors’ retention money was lost for many small subcontracting businesses.
The Government has given drafting instructions for a supplementary order paper to the Construction Contracts Amendment Bill currently before Parliament. The changes will impose a trust obligation on retention moneys, prevent the money from being used for other purposes, and impose penalties where the funds for purposes not related to the specific project.
It will also provide for a default rate of interest prescribed in regulations to be applied to late payment of retention payments and clarify that the ban on ‘pay when paid’ also applies to retentions. The amendments will be introduced to the existing Construction Contracts Amendment Bill currently before Parliament.
“We have not opted for a model of requiring retention funds to be put into a separate bank account or lawyer’s trust fund as some have advocated because the compliance cost is too high. Putting a trust obligation into the law makes plain these moneys are not to be used inappropriately and should take priority over other creditors in the event of liquidation,” Dr Smith says.
“The proposals have been developed in consultation with the construction sector including subcontractors, who wish to have a flexible approach to compliance that would work across the sector.
“These changes will provide improved certainty and stability in the construction sector without excessive compliance costs. It ensures that in building contracts, the risks are carried by the developer and the principal contractor rather than by subcontractors who are less well-informed of the viability of a particular development.
“New Zealand is on the brink of the largest construction boom in 40 years according to the latest National Construction Pipeline Report, with construction activity set to grow to $32 billion per annum. This law change is about ensuring the billions held in retentions is responsibly managed.
“The changes will be welcomed by thousands of mum and dad subbie businesses and their employees across New Zealand, as it gives them greater security that they will get paid for the work they do,” Dr Smith concluded.
Subbies are usually small businesses and are at the mercy of main contractors who sometimes use retentions from one job to finance the next.
This measure lowers the risks for the subbies.