Changes to the Construction Contract Act

Changes to the Construction Contract Act

By: MBC Law
March 24, 2017

If you are a contractor or sub-contractor, new changes to the law could affect you. As of 31 March 2017, retention money withheld under commercial construction contracts must be held on trust in the form of cash or other liquid assets readily converted into cash, unless a financial instrument is purchased. Financial instruments can be insurance or a payment bond. The regime does not apply to contracts with homeowners and will only apply to contracts that are entered into or renewed after 31 March 2017.

The legislation aims to protect sub-contractors whose pay is withheld until the head contractor receives payment for the completed work. Prior to the legislation change, sub-contractors may have found themselves liable or holding the debt if the head contractor was liquidated. The new trust requirement will provide greater certainty of payment for contractors and sub-contractors and ensures that they money held in retention is properly managed.

Construction Contract Act 2002

Under the new legislation, contractors will be required to:

  • Accurately keep and record accounting record of all retention money
  • Make accounting records available to subcontractors at all reasonable times and without cost
  • Pay retention money to subcontractors

Should there be a delay in payment, contractors will be liable for the interest on the retention money.

In the event of insolvency, retention money will be protected. Retention money is not available for the payment of debts.

Should a developer choose to obtain a financial instrument, they will face strict requirements to ensure repayment of retention money:

  • Financial instrument providers are limited to registered banks and licensed insurers
  • Financial instruments are issued in favour of the sub-contractors.
  • Records of financial instruments are required to be kept and made available to subcontractors without cost.

How must retention money be accounted for to meet the trust requirement?

Proper methods of accounting for retention money are now required and these records must be readily available if requested. Parties holding retention money must keep proper accounts that comply with the generally accepted accounting principles and be auditable.

As with any legal matter, we recommend you talk with your lawyer to discuss how these matters affect you.