Retention payments under construction contracts are shortly going to be required to be held on trust until they are paid.
The Government announced this week that the Construction Contracts Amendment Bill currently before Parliament will be amended to:
- Impose a trust obligation on retention money;
- Prevent the money from being used for other purposes;
- Impose penalties where the money is used for other purposes;
- Provide for a default interest rate for late payment of retentions; and
- Confirm that the prohibition on "pay when paid" clauses applies to retentions.
A copy of the announcement can be accessed here.
We are watching for the supplementary order paper to be released for the detail on exactly how this will work and when this will take effect. The Construction Contracts Amendment Bill is currently drafted to take effect from 1 November 2014, but we don't yet know whether that date will apply to these changes.
However, given the long term nature of many projects, these changes are likely to impact on many projects being priced now. We recommend that:
- Property owners undertaking a construction project should consider this change now for the effect on their cash flow of having to fund and set aside retention payments; and
- Head contractors pricing a construction project should consider this change now for the effect on their cash flow funding.
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