Changes to the CCA's Retentions Regime

Changes to the CCA's retention regime - are you ready?

The Construction Contracts (Retention Money) Amendment Act (“Act”) comes into force on 5 October 2023. It amends the Construction Contracts Act 2002 (“CCA”) in relation to retentions and will apply to all commercial construction contracts entered into from that date. All principals and contractors in the construction industry need to understand the implications of the changes and update their practices now to ensure compliance when the new retentions regime comes into force.

The changes and what you need to do to comply

Clarification of the definition of “retention money”

Retention money is an amount held back from a payment made under a construction contract. Funds will now be considered retention money whether or not they actually been retained, and whether or not any amount has been paid to the other party.

Regulations may also be used to set a minimum amount below which funds will not become “retention money” however it is not yet known how this mechanism may be used, or what the minimum amount would be.

Funds automatically held on trust

The CCA will be amended to explicitly state that a trust is automatically created when an amount becomes “retention money”.

The funds will only cease to be trust property when they are either 1) paid to the other party, 2) used to remedy defects (after notice of the intention to use the funds for that purpose has been given), or 3) when the other party otherwise gives up its claim to the funds.

Holding of retention money

The new regime requires retention money to either be held in a bank account or be the subject of a suitable financial instrument (such as insurance or a payment bond). With respect to bank accounts, they must be used solely for the purpose of retention money, with the account holder ensuring the bank is aware that the account is a trust account for the purposes of holding retention money. Another key change is it will no longer be possible to use the retention fund as working capital.

Any interest that accrues in the bank account will belong to the party holding the retention money if the construction contract does not provide otherwise. The account holder may choose whether to have individual accounts for each subcontractor’s retention money or to have one account which holds all retention funds. If funds are mingled, the account holder must ensure that it has accounting records in the form of separate ledgers, identifying each subcontractor for whom money is held, and the construction contract to which it relates.

You can prepare for the changes by establishing separate bank accounts for retention money now and ensuring there are proper records of who that money is held on behalf of. Given the additional administrative burden imposed as a result of the changes, it may be that bonds become more readily used or preferred as a result.

Reporting on retention money

The party holding the retention money will be required to give specified information to the subcontractor both at the time retention money is held (or as soon as practicable thereafter) and at least every three months thereafter. The information that must be provided includes the most recent and total amounts withheld, the relevant construction contract, and the date of the retention.

If the money is held in a bank account, the information must also include the name of the bank and branch, the name of the account, the name of the subcontractor’s ledger (if the account has separate ledgers), and the total balance held for that subcontractor.

If retention money is held using a financial instrument, the information must include the name of the issuer, a policy number or other identifying information for the instrument, and the protected amount.

Insolvency

If the party holding the retention money is placed into receivership or liquidation, the receiver or liquidator will hold the retention money on trust and be required to deal with it in the same way as the insolvent party was required to. However, receivers and liquidators will not be liable for any unlawful or improper action taken prior to their appointment.

New penalties for non-compliance

The CCA will now include penalty provisions for non-compliance with the new retention money scheme. The penalties include a fine of up to $200,000 for failure to keep retention money as required, a fine of up to $50,000 for failure to keep proper accounting and other records of retention money, and a fine of up to $50,000 for failure to provide regular reports on retention money.

If the party holding the funds 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.

Importantly, the penalties are cumulative for each breach (as opposed to one penalty for several breaches). This could result in significant fines for both entities and individuals.

If you have questions about your rights or responsibilities under the new regime, please get in touch with one of our team.