A recent change to the new rules governing the management of retention payments held by main contractors could save the construction sector a whopping amount in finance costs.
Insurance Business spoke to Dean Finlay,
CBL Insurance director of international business, who said the amount could be as much as $20 million.
He explained that amendments to the Construction Contracts Amendment Act provide construction firms with the option of purchasing a retention bond to cover money owed rather than ring-fencing the equivalent amount in cash or liquid assets. Prior to the amendments, the act would have required retentions for all new projects starting after April 01 this year to be held on trust.
Finlay said that in line with these revisions CBL Insurance has created a specific retention bond, which complies with the new regulations.
“It will be available to approved construction firms,” he said.
He pointed out that what is important and positive in terms of the change to the act is that it will provide financial security to subcontractors which have retentions held by principal contractors while they are completing projects.
“Now, in the event that a principal contractor becomes insolvent or breaches the contract with the subcontractor, the subcontractor has some protection in that it’s able to call against a bond or trust account to recover the money it’s duly owed,” he said.
Finlay elaborated that this initiative comes from Government as the previous regime left subcontractors holding too much risk.
“It’s difficult for individual subcontractors to stand up and demand some protection from the principal contractor so this provides the framework as to how retention money is managed,” he said.
Finlay explained that MBIE’s advice to the government was that the cost to companies of raising money to match the amount of retentions they held would be up to $20 million, which would’ve resulted in lower margins for builders and developers, potentially making some projects unviable, and resulting in higher costs for purchasers.
He added that often a subcontractor’s entire profit margin is tied up in retentions.
“Under the old act, if the developer or main contractor collapsed, the subcontractor’s business could very easily have followed suit,” he said.
Finlay underscored that the act only applies to projects that commenced after April, 2017.
“Not many projects have started since the beginning of April, but the interest and requirement to comply will only grow from here onwards,” he noted.
Already NZ Strong has signed up and paid its bond fee for 12 months and the word from subcontractors is that they are relieved to have this reprieve in place.
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