Construction projects are the backbone of any thriving economy, providing infrastructural development and employment opportunities. Behind the scenes of the excitement of any new project, the industry faces challenges related to payment delays, liquidations and disputes. The ‘trust’ model within the New Zealand construction industry has led to financial stress for all tradespeople who play a vital role – whether they’re contractors or subcontractors.
There has been a significant step forward with the enactment of the Construction Contracts (Retention Money) Amendment Act 2023. This transformative piece of legislation promises to reshape the way retentions are managed, ensuring fairness, security, and efficiency for all parties involved.
In this blog, we shed light on the challenges faced by both service providers and their customers within the construction industry, how the Amendment Act will alleviate these issues, and how IPromise can support all parties to improve communication and guarantee secure payments upon completion of the project.
The Unfortunate Reality
Before the Amendment, the Construction Contracts Act of 2002 permitted retention money to be kept in cash or easily convertible assets, meaning it didn’t have to be deposited in a separate trust account or kept apart from everyday funds.
Under this system, subcontractors faced the risk of not getting their retention money if the entity holding it went bankrupt and the subcontractor’s money was stored in a working capital account rather than a distinct / separate trust account.
For many tradies, delayed payments and the non-payment of retention money have unfortunately been the norm rather than an exception. Despite their hard work, expertise, and dedication, they often find themselves waiting for weeks or even months to get paid for the services they provide. This delay not only affects their cash flow but also hampers their ability to sustain their businesses, invest in new equipment, or even pay their own bills and employees.
In recent years, we’ve seen too many projects come to a standstill as businesses pull out under the financial stress of the trust model in New Zealand. The ‘she’ll be right’ mentality no longer works in these financially tough times.
What’s changed with the Amendment?
The Construction Contracts (Retention Money) Amendment Act 2023 marks a significant milestone in the New Zealand construction industry. By addressing payment delays and enhancing transparency, the Act paves the way for a more efficient, equitable, and vibrant construction sector. As stakeholders adapt to these new regulations, the industry is expected to witness enhanced productivity, reduced disputes, secured payments, and a heightened sense of trust and cooperation. Ultimately, the Act’s implementation signifies a positive step toward a brighter future for construction professionals and a more robust economy for New Zealand.
There are some specific conditions which need to be met under the Construction Contracts (Retention Money) Amendment Act 2023 to keep things fair for all. Any commercial construction contracts with retentions entered into from 5 October 2023 will need to consider the following key points from the Act:
Reduced Retention Money Period
One of the pivotal changes introduced by the Act is the reduction of the retention money period. Previously, retention money could be held by the payer for an extended period, often causing financial strain on contractors and subcontractors. The new legislation mandates a shorter retention period, providing quicker access to funds after the completion of specific project milestones.
Strengthened Security for Retention Money
The Act emphasises the need for robust security mechanisms to protect retention money. It outlines stringent requirements for holding retention funds in an independent trust account, ensuring that these funds are safeguarded and readily accessible when due.
Adjudication Process Simplification
To streamline dispute resolution processes, the Act introduces simplified adjudication procedures. This enables swift resolution of payment disputes, reducing the time and resources traditionally expended in legal battles. Adjudication empowers parties to resolve issues promptly, fostering a more collaborative construction environment.
Transparency and Accountability
Transparency is a cornerstone of the new legislation. Contractors and subcontractors are entitled to receive clear and detailed reports, ensuring they have a comprehensive understanding of retentions and payment entitlements. This transparency cultivates trust among project stakeholders and promotes fair business practices.
Penalties for Non-Compliance
The Act imposes penalties between $200,000 – $500,000 on parties failing to comply with the new requirements. These penalties act as deterrents, encouraging adherence to the new regulations and ensuring that all stakeholders participate in a fair and just payment process.
For further information and support on the Amendment Act, see Tradie Law’s blog post Retention Money Revolution.
How can IPromise Help?
Managing cash flow is crucial for building contractors to ensure the smooth operation and growth of their businesses, and keep them out of the red. While the amendments to the Act are great and will give contractors some clear boundaries to work within, managing the changes required (such as setting up a Trust Account to hold Retentions) may be costly, confusing and just plain hard work for many. So much so, that construction firms are already considering not holding Retentions at their own expense.
IPromise has teamed up with Ford Sumner Lawyers and Tradie Law to provide a simple, usable, and importantly affordable, solution to enable construction firms to continue to hold retentions.
Addressing the issue of delayed payments requires a joint effort from all parties involved. Clients and contractors must establish clear payment terms from the beginning of a project. Embracing digital invoicing and payment systems can expedite the payment process, making it more efficient and transparent. This is where IPromise can help.
When you choose to work with IPromise, you’ll see improved communication between client, contractor, and subcontractors through our secure technology, as well as guaranteed secure payments upon completion of the project.
With IPromise, your customer’s payment is held in a secure BNZ Trust Account (escrow account). We offer the perfect solution to secure retention funds for both parties, eliminating the risk of subcontractors not receiving payments owed. Our technology along with the new Construction Contracts (Retention Money) Amendment Act 2023 will provide better cash flow, and fairness for all.
Make sure you’re fully informed and avoid being caught out. Keep Tradie Law’s useful Fact Sheet on hand for dealing with Construction Contracts (Retention Money) Amendment Act 2023t. Engage with IPromise and Tradie Law to ensure your business continues to thrive.