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.

As a result, we are changing the law and requiring retentions to be held in trust to help ensure contractors and their subcontractors get paid for the work they carry out. 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 introduced a supplementary order paper to the Construction Contracts Amendment Bill currently before parliament. The changes will impose a trust obligation on retention monies, prevent the money from being used for other purposes, and impose penalties in instances where the funds have been used 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. 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 it plain that these monies are not to be used inappropriately and should take priority over other creditors in the event of liquidation.

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 of $100 billion over the next three years. This law change is about ensuring the funds held in retentions are 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.

The government has also introduced new consumer protections that require builders to have written contracts, provide information on their relevant skills, experience and qualifications, and disclose their insurance and warranty cover from the start of this year.

These new requirements are about improving how building work is contracted in New Zealand. They ensure increased professionalism, open disclosure and clear expectations about what work is to be done, at what price and in what timeframe.

The new requirements, which apply to building work over a minimum price of $30,000 are:

• A written contract (with specific clauses around warranties, dispute resolution, remedies). 
• A checklist for consumers with tips on engaging builders and managing the project.
• Mandatory disclosure of information by building contractors (business information, key contacts and their role and qualifications, insurance cover held, warranties offered).

The building and construction sector is growing strongly and in good heart. The risk in these good times is that we let standards of work and contract management slip. These measures are about ensuring we raise the bar on the commercial disciplines in the sector and that we keep our eye on effectively managing risk.

- Hon. Dr Nick Smith, Member of Parliament, Nelson