New Legislation: Retention Money and Subcontractors
Legislation has recently been passed that will strengthen the protection subcontractors have that they will receive retention money owed to them should the head contractor become insolvent. Retention money relates to money owed to a subcontractor that is retained by a head contractor, usually a percentage of the contract value, to ensure work is completed as per the contract. This retention would then be paid out on completion of the work or warranty period.
Minister for Building and Construction Megan Woods stated that the Construction Contracts (Retention Money) Amendment Act 2023 (Act), will “provide important protections for subcontractors so they can be certain their payment is kept safe, can’t be used for any other purpose, and will be paid out should the head contractor’s business fail.”
Under the Act, retention money will be required to be held on trust by the head contractor, and must be held separate from other money or assets; and hence not available for use as working capital. The head contractor must keep accounting and other records (as specified in the Act) of all retention money held for each party. This information must be made available for them to inspect and be provided as a report at least once every 3 months.
The Act also introduces penalties for non-compliance with fines for each offence of up to $50,000 for directors and up to $200,000 for companies. The Ministry of Business, Innovation and Employment, which will monitor and enforce compliance, will have the power to obtain information and apply for search warrants to carry out its function.
The new requirements come into force from 5 October 2023, and will apply to new commercial construction contracts entered into, or contracts renewed, after the Act commences.