We have recently been asked by an existing client to provide advice on whether they are meeting the requirements of the Construction Contracts Act 2002 (Act) in relation to how retention money is being withheld.

By way of a reminder, on 5 October 2023, the Construction Contracts (Retention Money) Amendment Act 2023 (Amendment Act) came into force. This introduced changes to the Act’s retention regime. All commercial construction contracts entered into after 5 October 2023 and all current contracts renewed after this date are subject to the amendments. In this article we summarise the key requirements and what you need to be aware of to ensure you are compliant.

Retention money automatically held on trust

The Act makes it clear that retention money is held on trust as trust property. This trust arises automatically once the amount becomes retention money (this is regardless of whether this money has been deducted or not).

How retention money is to be held

Retention money must be held in a registered New Zealand bank account until it ceases to be trust property. You will also need to inform the bank that the account is being used to hold retention money on trust in accordance with the Act.

If retention money is not being held in a bank account, then you may hold a complying instrument (for example, a bond) in place of an equivalent amount to the retention sum.

You must report on retention money

Under section 18FD of the Act, the party withholding retentions (Party A) must provide to the other party (Party B) with the following information:

• each amount retained
• the construction contract under which it is retained
• the date of its retention
• the total amount of retention money held under each construction contract between the parties
• the account details for the bank account in which the retention money is held
• if a compliant instrument is used instead of a bank account, the instrument details for each complying instrument
• a statement that the party for whom retentions are being held on trust may inspect the accounts and records
• any other information specified in regulations

This information must be provided as soon as practicable after an amount becomes retention money and at least once every 3 months until the retention money trust ends. A failure to provide that information is an offence under the Act and if found guilty, Party A is liable to a fine of NZ$50,000 for each offence.

It is also very important to keep accounting records of all retention money held and the details of payments into and out of that account. These requirements are set out in the Act. If a Party A fails to keep the required accounting records or does not on request by Party B make those records available for inspection, Party A can face fines of up to $50,000 for each offence.

If you need advice or have any questions in relation to retentions, please get in touch with Victoria Bortsova, Solicitor, or Stuart Robertson, Partner, of our Major Projects and Construction team.