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Upcoming changes to retention money

Based on feedback from the sector, changes to the retention money regime are under way to ensure more protection for subcontractors, improve compliance and ensure requirements for the retention money regime are met

In 2019, the Ministry of Business, Innovation and Employment (MBIE) commissioned KPMG to undertake an implementation review of the retention money regime under the Construction Contracts Act 2002 (CCA), to assess its early impacts and the industry’s response to the retention money regime.

The CCA regulates payments, retention money and disputes under construction contracts. Amendments to the CCA, effective from 31 March 2017, required retention money in commercial construction contracts to be held on trust in the form of cash or other liquid assets readily convertible to cash, unless a complying financial instrument is used to protect payment. The amendments also introduced requirements in relation to the keeping of, and access to, financial and accounting records relating to retention money.

However, retentions continued to be one of the most contentious subjects in commercial construction, especially in 2019, when a number of high-profile companies left subcontractors out of pocket when put into liquidation, despite these changes.

Given that from a subcontractor’s perspective, withheld retentions can represent all of the profit they stand to make from a job, getting retentions right is important for subcontractors, many of whom are builders and landscapers.

Revealing review

The fact that retentions are still problematic is reflected in the review, which sought to determine:

  • The sector’s awareness of the regime.

  • The attitude to, and extent of, compliance, as well as how businesses are choosing to comply.

  • What, if any, early signs there are of behaviour changes in the sector.

  • The intended and unintended consequences of the legislation on solvent and insolvent firms.

Key findings included:

  1. Evidence indicates that, despite a number of participants indicating they believed firms were not complying with the Retention Regime, a large portion of the sector is complying. KPMG was unable to gather significant evidence of widespread non-compliance.

  2. In some cases, and for a large dollar value of retention payables captured by the trust requirements, the Retention Regime has provided protection to subcontractors in the event of insolvency. This has resulted in returns to subcontractors, which previously would unlikely have been available for distribution.

  3. In other insolvency cases where non-compliance has been identified, subcontractors have not been protected.

  4. The Court’s decision relating to Ebert Construction Limited (in receivership and liquidation) has highlighted a number of issues with the Retention Regime, some of which may be addressed over time through case law (noting that this is at the expense of creditors). One of the key issues highlighted is that the Act does not provide appropriate mechanisms to administer the retention account on insolvency.

  5. Compliance with the Retention Regime was aided by good corporate governance practice, as well as by banks encouraging compliance.

  6. A lack of available capital or complying financial instruments appear to be the main reasons why businesses are not compliant with the Retention Regime. Some non-compliance was also attributed to inadequate accounting and financial processes, leading to the retention account not being fully funded.

  7. While there has been a funding and administration cost for complying with the Retention Regime, KPMG is not aware of any cases where these costs have been included in tender prices.

  8. Some market participants indicated that they co-mingle retention monies with other monies. While this is allowed under the legislation, it creates a greater risk that funds will not be identifiable and clearly on trust in the event of insolvency.

  9. Under the Retention Regime, payees have the right to inspect accounting records of payers to confirm compliance. However, subcontractors rarely exercise their inspection rights, or otherwise request confirmation of compliance, and, when responses were provided by payers, these were varied.

Overall, the report’s findings raised some concerns around the lack of penalties, the co-mingling of retentions money with other funds and the need for greater clarity of requirements for holding money on trust under the Construction Contracts Act 2002. It also made clear that there are some issues with non-compliance and opportunities to further protect retention money owed to subcontractors.

The full review is available under ‘News and Updates’ on

Implementing change

After engaging with the sector on how to improve the retention money regime, the Minister for Building and Construction Jenny Salesa announced changes to the regime in May 2020.

Changes to the regime will clarify and strengthen existing legislative requirements, protecting small and medium subcontractors. The changes include:

  • Introducing a new offence and penalties for company directors (up to $50,000) and firms (up to $200,000) who don’t comply with their responsibilities.

  • Strengthening how retention money is held to prevent firms from dipping into retention money to use as working capital.

  • Requiring those holding retention money to issue a transparency statement stating how much is being held and where.

The changes to the retention money regime support the objectives outlined in the Construction Sector Accord, a shared commitment between government and industry to transform the construction sector. Under the Accord, there is an expectation that all members comply with the retention money regime, hold retention money separately and proactively share information on their accounts with subcontractors.


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