Retentions to be held in trust — be careful of what you wish for!

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Building Today columnist and industry stalwart Mike Fox says few in the industry understand the unintended and potentially catastrophic financial fallout that he says will eventuate when the Construction Contracts Act retentions amendment comes into effect on April 1 next year.

Much has been written about the recent amendments to the Construction Contracts Act, but few within the industry understand the unintended and potentially catastrophic financial fallout that will eventuate when they come into effect fully on April 1, 2017.The changes to the Act are well meaning, in that they may protect genuine retention funds in the event of a financial failure by a contractor or party that is holding a retention.

High profile failures
We have all witnessed high profile failures such as the Mainzeal collapse, where receivers and liquidators used retention funds to satisfy secured creditors at the expense of the unsecured subcontractors — and it is right that this injustice is corrected.
However, many industry leaders, along with major contractors, manufacturers, suppliers, bankers, legal and accountancy firms and insurers are all very concerned with the uncertainty that surrounds this law, its implementation and the business failures it will create.  isreporting about the benefits this legislative change will provide has only added to the uncertainty, with naive reports stating that subcontractors will now be covered for payment should a contractor further up the chain fail.
These reports are far from true. In instances such as these, subcontractors may only be paid the retention amount, which is, in effect, a small part of the risk when compared to a full unpaid account resulting from a business failure.
Subcontractors also need to be aware that many of them will be caught up in the new regime, and will have to place any retentions they hold in trust for those who are contracted to them.
Subcontractors need to start preparing for this and the implications it will have on their business. The thinking that this legislation is the cure-all for dealing with errant main contractors is short sighted and misplaced.
Subcontractors could be dealing with much bigger financial issues than loss of retention money. The saying rings true — be careful of what you wish for.
The way the law is currently written, and the later interpretations of what “holding in deemed trust” actually means, will result in many parties down the retention chain having to hold about 3% of their annual turnover in cash or liquid assets.