The issue of retentions has been a very topical and hot subject since the Mainzeal collapse in February 2013.
Subcontractors lost in excess of $18 million when Mainzeal folded in retention money alone as well as, of course, lost payments from work in progress.
As a result of that, and after a significant amount of lobbying to the then Minister for Building and Construction Maurice Williamson, he agreed to investigate and asked the Ministry of Business, Innovation and Employment (MBIE) to do so on his behalf.
Subcontractors were concerned that their retention money was unsecured, and because these were unprotected they were lost when Mainzeal went into liquidation.
This scenario is potentially evident whenever a head contractor goes into receivership as retention funds are usually unsecured and, essentially, form part of the working capital of the business.
As a principle, the Registered Master Builders Association (RMBA) believes every contractor is entitled to get paid for their work and whatever is due to them. After all, our members are caught by these sorts of problems as well, should the company they are contracted to go out of business.
Throughout the latter half of 2013, the MBIE held a series of industry workshops to understand the problem and develop options to address them, if any.
The Specialist Trades Federation was seeking either bonds in lieu of retentions, or all retention funds being held in trust accounts. It argued that it is inappropriate that these funds are used as working capital, and that they should be protected.
The Government is most concerned about the sector being undercapitalised, and using, as an example, retention funds as working capital — and it wants to do something about it.
The Registered Master Builders Association (RMBA) also held a series of workshops with members in Wellington, Auckland and Christchurch to develop a position paper.
This was presented to senior MBIE officials in early 2014, and can be found in the members section of the RMBA web site.
More recently the MBIE has held a further workshop and presented a series of options to address the loss of retention monies. It identified a range of possible market-driven and legislative solutions that it presented for discussion.
Depending on the outcome, there was a possibility that a Supplementary Order Paper (SOP) could be passed on the back of the Construction Contracts Act, the review of which is due back in Parliament later this year.
The RMBA’s concern was that while, in principal, retention funds should not be used as working capital (thus exposing them in the case of failure, as in the case of Mainzeal), an immediate move to either compulsory bonding or trust accounts for retentions will potentially have a crippling impact on the construction sector’s capacity and capability.
This is because few companies within the entire supply chain (including subcontractors and sub subcontractors) would have sufficient capital to operate at their current levels (as retentions will be passed down through the supply chain).
Furthermore, retention losses are part of a wider security of payment issue that has been left unaddressed since the early 2000s when the Construction Contracts Act was first passed.
Other impacts of trust accounts include delays in payments, increased costs (both the cost of administering the trust accounts and the cost of capital) and, thus, increased construction costs.
The cost of the cure may be worse than the problem, and the unknown impact on the structure of our companies could be devastating.
It’s time for cool heads, and to not overreact. Rather than have legislation imposed upon the sector insisting on trust accounts (for example, the Labour Party has a SOP to that effect), a more managed and staged introduction of good practices is required.
Time is needed for the sector to adjust, and a light-handed level of Government intervention is best in this instance.
To that end it was agreed at the last MBIE workshop to explore further a number of options, one of which is to “deem” retention funds as if held in trust. A discussion document will be prepared by the MBIE and circulated for comment.