Retentions. If you can’t avoid them, make sure you get them
Have retentions held from you? Read this.
I attended Geoff Hardy’s builder breakfast recently on the topic of retentions. Consensus was, they are a good thing to avoid (retentions, not the breakfasts), but in many commercial situations you can’t avoid them. Apart from having to wait months to earn your profit in the job in some case many sub-contractors are left with retentions unpaid when the main contractor goes under. This is caused by the retentions not being held in trust and are used to pay others (which is illegal).
Despite directors and senior management breaking the law in this matter, MBIE seem reluctant to bring criminal charges against head contractors. Perhaps because intent is difficult to prove. So what can you do as a sub-contractor to protect your self?
Number one is to negotiate NOT to have retentions held in the first place. You may need to provide a performance bond to the project owner, or head contractor, but this is better for your cash flow. Bonds are in effect an insurance policy, however in New Zealand the specialist performance bond market is quite small and often are difficult for smaller builders to access.
If this is not an option in your situation the MINIMUM you should do is demand to see the head contractor’s accounting records and evidence of the separate bank account where your retentions are being held in trust. Retentions monies are required to be accounted for separately and not mixed with other income. A head contractor is not required to use an independent trustee (I would suggest they should be required to), but they do need to use a separate bank account. Ask to see this as evidence your money (and it is your money) is securely tucked away.
Should you hold retentions back from your sub-contractors to help balance the cash needs of your business? It’s tempting, but if you are a small-ish business, you will need to provide the same trust management process that the bigger companies are required to do. That’s quite a bit more administration for you. For the smaller amount of monies involved here, you are probably better off NOT holding retentions and manage via longer terms of payment.
Another tip – Always use a CCA payment claim when claiming retentions. It puts a time limit on when they are to be paid.
For expert help with managing retentions I suggest to contact Geoff Hardy at Martelli McKegg Lawyers. He is a construction law specialist. https://www.martellimckegg.co.nz/our-team/geoff-hardy.aspx