The Construction Contract (Retention Money) Amendment Act 2023: What to Expect

On 5 October 2023, the New Zealand Government rolled out new updates to the Construction Contracts Act 2002.

Known as the Construction Contracts (Retention Money) Amendment Act 2023, this legislative overhaul brings forth new measures aimed at providing greater protection over contractors’ retention money in construction contracts.

With these changes, financial processes in the construction industry are set for a shake-up.

So, let’s dive in and explore how the Amendment Act is reshaping the rules of the game. 

What is the Construction Contracts Act 2002? 

The Construction Contracts Act 2002 lays out a clear process for handling payments and disputes within construction contracts, ensuring subcontractors are safeguarded through retention money provisions. 

The Construction Contracts Act:
  • Safeguards retention money held in commercial construction contracts.
  • Promotes fairness, balance and prompt payment practices.
  • Offers a quick and cost-effective dispute resolution system.
  • Provides avenues to recover any outstanding payments. 


What contractors need to know

For contractors, the updated Construction Contracts Act brings pivotal changes that demand your attention:

1. Holding of retention money

The Amendment Act brings a notable shift in the way retention money is handled.

Where previously contractors could freely mingle retention funds with their working capital, the new regulation puts a strong end to this practice.

Contractors now need to ensure that retention funds are either securely held in a dedicated bank account or are subject to an appropriate financial instrument, such as an insurance policy or bank guarantee.

Contractors can choose whether to maintain individual accounts for each subcontractor’s retention money or to consolidate all retention funds into one account.

However, if the funds are pooled, meticulous accounting practices are required. Separate ledgers must be maintained, clearly identifying each subcontractor and the relevant construction contract.

2. Reporting on retention money

Parties holding retentions are now obligated to provide comprehensive information about the retention money to the subcontractor, including:

  • The most recent and total amounts withheld;
  • The relevant construction contract, and;
  • The date of the retention. 

This reporting is required when the retention money is initially held and then at least once every three months. Details of the account or instrument holding the money are also required to be shared.

3. Penalties for non-compliance

The consequences for non-compliance with the updated Construction Contracts Act are weighty. Companies failing to meet the new regulations risk fines of up to $200,000, while individual directors can be personally fined up to $50,000 for each breach. 

Intentionally providing false information about retention money also constitutes an offence, with fines reaching up to $50,000.

The financial consequences underscore the need for proactive measures. So, what can you do to navigate this change effectively?

How to navigate the change

Adapting to the changes brought by the Amendment Act demands more than a legal adjustment; it requires a strategic shift. In an environment where less working capital is available, maximising cash flow becomes crucial for success.

Here’s your roadmap to navigating this new era:

Utilise technology for compliance reporting

First things first, you’re going to need your compliance sorted. Relying on spreadsheets for compliance reporting will be a time-consuming and cumbersome process.

Not to mention, manual processes always run the risk of increased errors and delays, putting your compliance at risk. 

Automation is the key to streamlining these processes. By leveraging progress claims automation, you not only ensure accuracy but also save valuable time, allowing your team to focus on more strategic activities. Talk about a win-win! 

Optimise working capital

With less working capital available, the focus must shift to reducing costs and inefficiencies while at the same maximising revenue.

To achieve this, adopting a smarter work environment becomes crucial. This involves leveraging construction software to automate repetitive tasks, optimise resource allocation and provide real-time insights into project performance.

Here’s a breakdown of some key tools to consider:

Project Cost Management: With less working capital, you simply can’t afford to lose even 1% on a job. All it takes is one or two projects to go poorly, and your funds are going to be under the pump. A smart project cost management tool is going to help you monitor jobs more effectively, so you’ll always see budget creep before it blows out. Plus, it provides better tracking of variations, helping you recover extra costs beyond the contract.

Invoice Automation: When you’re trying to grow the business, you need smart software that does the time-sucking tasks for you. By automating processes such as data entry, invoice matching and approval workflows, you free up your team to focus on the big stuff! Plus, invoice automation provides real-time visibility into cash flow, allowing you to better manage working capital and improve overall financial efficiency.

Yard Management: With less financial flexibility, making informed decisions about buying assets versus hiring becomes crucial. Yard management software provides clarity around the usage and cost of your equipment. It helps determine the right model for your business — whether ownership or hiring — allowing you to strategically allocate your resources and make informed financial decisions.

Timesheet Automation: Labour costs constitute a significant portion of project expenses. With timesheet automation software, you can accurately track labour hours, eliminate discrepancies and ensure that labour costs are allocated correctly to projects. This helps prevent labour blowouts and allows for better resource planning and budget management. 


In Conclusion 

The Construction Contracts (Retention Money) Amendment Act 2023 has brought in significant changes, demanding contractors’ attention and proactive measures.

The legislation imposes strict guidelines on the holding and reporting of retention money, with hefty penalties for non-compliance. Navigating this shift requires more than legal adjustments; it necessitates a strategic overhaul.

With less financial flexibility, adopting a smarter work environment through construction software is the key to reducing costs, maximising revenue and successfully adapting to the evolving landscape.


FAQ: Updates to the Construction Contract (Retention Money) Amendment Act 2023

What is the meaning of retention money?

Retention money is the portion of payment withheld from subcontractors under a construction contract as a performance security. The rules for holding retention money are outlined in the Construction Contracts Act 2002.

How often must reports on retention money be provided, and what should they include?

Reports must be provided at the initiation of retention holding and then at least once every three months. They should include the total and most recent amounts withheld, details of the relevant construction contract, the date of retention and information about the account or financial instrument where the retention money is held.

Can retention money be used for any other purposes under the Amendment Act?

No, retention money can't be used for anything else as per the Amendment Act. It's strictly reserved for the purposes outlined in the construction contract, following the rules laid out for its use. Before dipping into the retention money, the holding party must give at least 10 working days' notice, detailing the defects it plans to remedy with the funds.

Are there specific types of financial instruments acceptable for holding retention money?

Yes, the Act allows retention money to be held in dedicated bank accounts or secured through financial instruments like insurance policies or bank guarantees. These instruments must be approved and meet criteria set out in the legislation to ensure they provide adequate security.

Who is entitled to interest earned on retention money?

Any interest earned on retention money held is property of the party holding the retention unless the construction contract specifies otherwise. 

What are the consequences for accidentally providing incorrect information about retention money?

Even accidental misinformation can lead to penalties, emphasising the importance of maintaining accurate and up-to-date records. Contractors are advised to implement checks and balances to ensure the accuracy of their reporting. You may also consider using payment claims software to help ensure compliance with the new Amendment Act. 

How can contractors ensure compliance with the new requirements for holding and reporting retention money?

Contractors should establish separate bank accounts or secure appropriate financial instruments for holding retention money, implement robust accounting systems to track and report on these funds accurately and ensure they are fully aware of their reporting obligations under the Act.

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