Proposed changes to the Construction Contracts Act 2002 aim to provide more protection for subcontractors
Retentions regime shake up to provide subcontractors with greater security in the event of business failure
The Construction Contracts Amendment Act 2015 introduced significant changes to the Construction Contracts Act 2002 (CCA), most notably by introducing the retentions regime, which aimed to put in place new requirements for protecting contractor retention money.
Under the present regime, retention money withheld under commercial construction contracts must be held on trust in the form of cash or other liquid assets that are readily convertible into cash, unless a complying instrument is obtained (e.g. a bond or insurance product). The party holding the retention money must keep proper accounting records demonstrating compliance with the retentions regime, and these records must be made available for inspection on request of the party for whose benefit the retentions are held. The retention money may not be appropriated for any purpose other than to remedy defects in performance by the contractor.
Since coming into effect the retentions regime has been the subject of industry criticism, in particular it has been observed:
- the regime only applies to commercial rather than residential contracts and therefore is too narrow in its application;
- while retentions must be held on trust, there is no requirement for money to be paid into a separate trust account, it may be comingled with other moneys which undermines the aims of the regime; and
- the CCA makes no provision for penalties for directors or contractors who do not comply with their obligations under the regime, rendering the regime “toothless”.
These criticisms prompted a Government review of the regime which has led to the announcement of the proposed changes to the CCA. The changes focus on two particular areas – preventing comingling of retention money with working capital, and secondly, providing clear information on where and how retention money is held. In particular the proposed changes include:
- introducing a new offence and penalties for company directors (fines of up to $50,000) and firms (fines of up to $200,000) who don’t comply with their responsibilities;
- strengthening how retention money is held to prevent firms from dipping in to retention money to use as working capital; and
- requiring those holding retention money to issue a transparency statement stating how much is being held and where.
Often it is small to medium sized subcontractors who are hardest hit when large construction firms fail. It is hoped the proposed changes will not only improve compliance with the CCA retentions regime, but also share risk more fairly between clients, head contractors and subcontractors, resulting in greater protection to the smaller subcontractors that are typically most vulnerable.
It is not yet clear when these proposed changes will come into force or how far reaching their effects will be. While subcontractors are likely to be afforded more protection as a result of the changes, it remains to be seen how readily parties will be penalised for failures to comply.
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If you have any questions about the retentions regime or the CCA, please contact our specialist Construction Team.