Construction Contracts Amendment Bill

I move, That the Construction Contracts Amendment Bill be now read a third time. The building and construction sector is a significant sector of the New Zealand economy. It contributes about $16 billion per year to GDP and employs over 200,000 people. It is central to the rebuild of Canterbury and to resolving some of the housing and infrastructure challenges for Auckland.

The industry needs the very best of construction law that will work for massive, multibillion-dollar projects like the Waterview tunnel down to smaller projects like home alterations. This task of ensuring our construction law is fit for purpose is even more important now than ever, given the massive building programme projected over the next few years. It is during such boom times that there is a risk of commercial and building practices getting sloppy.

I must reflect briefly on the history of New Zealand construction law. Prior to the fourth Labour Government we had the Wages Protection and Contractors’ Liens Act, which enabled a builder or subcontractor to register their interest in a property and ensure payment against the title of the land. The Minister who was then responsible, Geoffrey Palmer, argued that there was no such need for special legislation in the sector and that the law of contract was sufficient. The problem with this academic approach was that the management of risk in the sector favoured property developers and main contractors at the expense of the thousands of small businesses that did the bulk of the actual construction work. If a project was successful, all was well—everyone got paid and the developer took their profit. If the project went badly, the developer went broke and the contractors and their subbies did not receive payment. The practice developed for the worse in the 1990s with the evolution of “pay when paid” contracts, creating a precarious stack of cards and excessively risky developments.

It became increasingly apparent that this laissez-faire approach was not working, and in 2001 I tabled a member’s bill for a Construction Contracts Act. The Government of the day, led by Minister Laila Harré, thought likewise, and so the 2002 Act came into existence. The Act has worked well. It has provided an effective payment dispute resolution process and knocked on the head those particularly obnoxious contractual arrangements of “pay when paid”.

This bill arises from necessary improvements to that law. The most significant of the changes are in respect of retentions. These will be welcomed by the tens of thousands of mum and dad businesses involving plumbers, painters, electricians, tilers, plasterers, and many other trades. The retentions are sums where the principal or main contractor retains a portion, often 10 percent, to ensure that the work is of standard. The first change in this bill is that it makes plain that the prohibition on the “pay when paid” provisions applies equally to those retentions. The second change arises from the way some contractors misused these retentions as working capital for the next project. This puts the subbies’ money at risk, in a way in which they had no control or ability to minimise that risk.

The failure of Mainzeal, where $18 million of retentions was lost for mum and dad subcontractors, well illustrates the need for law change. The losses were of such a scale that they caused huge pain for hundreds of small and medium sized businesses across New Zealand, and also resulted in some of those businesses failing as a consequence of those payments not being made. The bill significantly changes the law on how retentions must be managed. The significance of requiring they be held on trust is that they will be treated preferentially in any business failure, akin to wages and tax. This is appropriate. The balance we have attempted to strike in this law is maximising the security of these payments for subbies while minimising the extra compliance costs that go with these provisions.

It is important for the record that I set out how these new provisions will work. Retentions are to be held on trust. Payers can hold those retentions in liquid assets such as accounts receivable, but if they do not get paid they are still obligated to meet those payments. The trust ends when the retentions are either paid out in full or used to fix defective work. These new retention provisions will affect about $200 million a year of funds that are held and are a significant refinement in the way our construction law works.

The Construction Contracts Act will also be amended to remove the distinction between residential construction contracts and commercial contracts, so that parties to either kind of contract have full and equal access to provisions under the Act. These follow on from regulatory changes we made on 1 January requiring written contracts in the residential construction sector. This is a substantial change that more than doubles the scope of the Construction Contracts Act, from about $6 billion per year to $16 billion per year.

Thirdly, the scope of the Act will be widened to include construction-related services, such as the work that is done by architects, by engineers, and by quantity surveyors. Parties to contracts for the performance of these services will be able to access the payment and dispute resolution processes in the Act. This amendment will be of particular benefit to consumers to help them hold architects, engineers, and quantity surveyors to account for their work. It will also benefit those designers and quantity surveyors, enabling them to use the payment provisions of the Act to ensure they are properly paid for their services in a timely manner.

These amendments will come into force on 1 September 2016, to give these professions enough time to adapt to this new construction law. I would like to thank those building and construction sector representatives who gave their time to participate in the working groups and reference groups to assist my ministry with the review of the Construction Contracts Act and in developing the amendments to regulate retentions. I also want to acknowledge the work of the Commerce Committee. Can I also thank the team in the ministry, the Parliamentary Counsel Office, and all those who have worked on this bill. This will make for a more robust and a more commercially disciplined construction sector, and, as I said at the beginning, at a time when there is a record level of construction, this bill is to be welcomed by the House.

The Labour Party will support this bill and, I have to say, we support its aims and objectives in terms of ensuring that the construction sector is processing its affairs faster, it is more cost-effective, it is more efficient, and those subcontractors, especially, are protected. But I do say in passing that if you look at the history of this legislation, it is interesting.

As it proceeded before the Commerce Committee, we had, of course, the Mainzeal collapse. I think the Minister holding this portfolio at the time was one Maurice Williamson. We know with the Mainzeal collapse that hundreds of people—hundreds of subcontractors—lost money and that millions and millions of dollars went down the toilet. One—the Rt Hon Jenny Shipley, of course, who vacated her seat on the board of Mainzeal just prior to that collapse—is still chairman, I believe, of Genesis Energy, which is one of our leading State-owned enterprises. She has, to date, supplied no explanation as to what her role was or what her accountability should have been in respect of that.

Hundreds of subbies lost work and lost their livelihoods. Millions of dollars was put at stake and lost. Tools were tied up and people were aggrieved. I remember a quote from Maurice Williamson, because Maurice Williamson brought some kind of Cabinet review to the House and, basically, on the issue of retentions, he said there was no problem and no need to do anything. In fact, officials told us that in respect of the wider issues that the Minister has now included in the bill, all of those things were out of scope.

And then an interesting thing happened. The Labour Party went out with a discussion document—an option modelled on the New South Wales example—which was very similar, I have to say, to what the Minister has put in. I think he is 90 percent right. I think it could still have been improved, but I support where he has gone with it. But we went out and we proposed a number of solutions on the back of the Mainzeal collapse. In essence, we proposed a construction trust, similar to New South Wales, which had had an inquiry, and the construction trust, essentially, was a drop-box where moneys would flow into the holding pen, if you like, that was the trust. It is extremely cost-effective, and the moneys would be paid out under whatever the contractual arrangements between the lead contractor and the subcontractors that they had put in place were. There would be no interference in any of those issues and no interference with timing. If there was a dispute, the trust would say to the two parties: “Go away and sort it out and tell us who to pay.”

But in the event of a Mainzeal-type collapse, it became very important that those moneys would be quarantined off. That proposal at the time by I think it was by Nick Smith or Maurice Williamson—I cannot recall who was actually in the chair—was pooh-poohed: “No, no, unnecessary. Rubbish. There’s no problem to be solved.” Again, there was total inactivity after the Mainzeal collapse. I see the Minister has had a road to Damascus experience because he now acknowledges the pain and suffering and economic hurt that occurred through that collapse. At the time, it was sort of: “Well, you know, these things happen. Commercial risk is commercial risk.” And then, after we had gone out and consulted with the building sector and we firmed up these proposals, hey presto, officials came to the committee and said: “Ah, the Ministers have now got this on their radar screen.”

I find it interesting that at the same time as we are looking at quality work and we are talking about retaining and improving the building sector—and my comments do not relate in whole to all builders and all subcontractors and all practitioners within that sector; they pertain to the small minority of cowboys who exist. At a time when we have just had questions today—and we know that some builders have done extremely shonky work in respect of the Earthquake Commission repairs. We know that that has happened. There has been a lot of pain and suffering for earthquake victims in Canterbury who thought the nightmare was over. At the same time as that is happening—and we are talking about quality work and raising standards—the Government’s so-called loopy rules taskforce is proposing that we turn the clock back and that builders self-certify.

I remember when I was the Minister for Building and Construction and we introduced the licensing building practitioners proposals. I will be the first to admit they were not a silver bullet, but it was people like the Registered Master Builders and the Certified Builders Association and others that wanted licensing regimes in place because those organisations—eminent as they are—wanted the cowboys out of the system because they gave the good folks and the good practitioners a bad name. It was all about lifting standards, proving that you could do what you said you could do, and standing by your work. One of the deficiencies we found in all that process was the good old building inspector. There were some good building inspectors, and some who specialised in what they call the drive-by inspection—but the last line of defence, of course, was the building inspector and those other, independent parties that would certify that work had been done correctly.

And for the homeowner, off the back of the leaky building crisis that Ms Bennett is quoted as saying is all over, it is all done and dusted—you know, moved on to the next phase. Well, for many thousands of people, they have not moved on, they cannot move on, and it is still a crisis for them. We are talking about turning the clock back and getting rid of certain checks and balances, under the guise of getting rid of “loopy rules”. Well, there used to be a day—and I know many fine builders who would stand by their work, regardless of whether there was a contract or not. They would be around in 20 years to put some oil on the hinges of your kitchen if they squeaked, because it was done on a handshake and they were quality practitioners and they stood by their work.

Sadly, when the Government, under Nick Smith and Lockwood Smith at the time, deregulated the building industry in the 1990s, anybody could strap on a tool belt—I know what Nick Smith will do. He will get up and seek leave to table a Hansard quote from George Hawkins. Well, learn by your mistakes, Minister, learn by your mistakes. When they deregulated the building industry, anybody, God help us—even my good self, and I would be lucky to be able to build you a dog house, let alone a house—could strap on a tool belt, call themselves a builder, and go around and claim to be able to build your home. And off the back of that, with other systemic failures—you know, the free market. I am a free-marketeer, but I think there should be checks and balances in place. Nick Smith, of course, says, you know, that anything goes. That was his position in the 1990s; now he has changed it, of course.

But as we talk about quality in this bill—we support many of the aspects, most of the aspects—we would have done a few things differently in this bill. The loopy rules committee talks about turning the clock back and self-certification, as if we can get rid of a bit of paperwork—and the question then is, who watches the watchers? Who then ensures that the standards that are being self-certified are up to scratch, or have we learnt nothing from our history in respect of leaky buildings?

Well, it is obvious that the Government has, because it has come a gutser over the Earthquake Commission repairs. We were told by Minister Brownlee that with the Earthquake Commission repairs there would be the highest-quality standard, monitors in place, and no need for any competitive tension and that we do not need two companies; just Fletcher’s would be OK. Why? Mr Brownlee said that having one company, a monopoly, allegedly kept the price down—I do not know how that works under School Certificate economics; I thought that was the competition party over there. No competitive tensions, and the highest-quality standards would be maintained, and then, hey presto, what happens? We have what we have today, which is a whole series of building failures—and not only building failures, but other failures.

Yet again, we have good, solid, professional building practitioners who stand by their work. When they make a mistake, they stand up and say: “We’ll go and fix it.” But, oh no, they are dragged down into the political swamp and the economic mire through the shonky work of others. The Government’s framework is simply: “Oh well, Fletcher’s or the subcontractor will pay. We’ll wash our hands of it.” Well, we were given assurances in respect of that work. Those assurances have never come to pass.

So I say to the Minister that we support this legislation. We support its intent. We are glad that he has piggybacked on the back of our policy and that we could put some steel in the political spine in respect of his following our policy. We would have done it differently but, you know, we got there first. We actually propelled the Minister to take an interest in some of these issues because he did not want to be seen to be tail-end Charlie.

That aside, we think that this bill will strengthen the industry, but we just wonder. On the one hand, as the Government passes this bill, on the other it proposes to loosen rules, turn the clock back, and get rid of checks and balances in other areas of the industry. Again, it would be good if the Minister could have provided some sort of explanation on behalf of his former leader, the Rt Hon Jenny Shipley, as to her role and responsibility for Mainzeal, as she purports to lead and chair Genesis Energy. We support the bill, but we do support it with some reservations.

It is with pleasure that I rise to support the Construction Contracts Amendment Bill in its third reading. I have to say that I am not completely sure what things are like on “Planet Labour”, but here in the real world we actually do expect that people who perform works are capable of doing them and doing them properly. But for any people out there watching this, if they do not like the history they have been living and they would like to see it revised somewhat, they could do no better than listen to a speech from the member Clayton Cosgrove, who has just resumed his seat.

But it is indeed a pleasure to stand in support of this bill, a bill that will make some really serious and important changes to the management of our construction contracts. It will remove some of the distinctions that have been there in the past between residential and commercial builds. It will increase the scope to include some more of the professions that are involved in construction services and, importantly, because we acknowledge—as the members opposite have acknowledged as well—that in the past there have been situations where smaller contracting companies, in particular, have borne the brunt of, if not some bad practices, certainly some bad fortune when principal contractors, for instance, have found themselves in insolvency issues. Those smaller contractors have been seriously disadvantaged and have not been paid, particularly, some of the retention moneys that have been held on their behalf for the work they have done.

Just before I cover those points, it is worth reminding ourselves just how important it is to New Zealand that we address this because, if we look at it, the building and construction sector is going through a boom that the country has not seen for perhaps as long as 40 years. If we look at what it contributes to our economy, it is about 6.6 percent of gross domestic product. The building and construction sector employs about 9 percent of our total workforce, or around 213,000 people. The National Construction Pipeline report is forecasting that over the next 6 years we will see a total of $200 billion worth of activity in this sector, and that that will peak in about a year’s time at an all-time high of $36 billion. So the scale of this industry is so important to New Zealand that it is important and critical, you could argue, that we take these measures—measures that, as I have said, will remove some of the distinctions that have been in place in the past that do not serve us well. So, for instance, most of the distinctions between the treatment of residential and commercial contracts will be removed and the parties to both kinds of those contracts will have full and equal access to the processes under the Act.

Secondly, the scope of the Act will be extended to apply to design, engineering, and quantity surveying work. So architects, engineers, and quantity surveyors will have access to the payment and dispute resolution processes, which is good for those professions, but, equally, consumers will benefit because that will help to hold members of those professions to account for the quality of that work.

We are a sensible Government. We understand that changes like this can have significant impacts. Those professions will have until the beginning of September next year to adapt to the new regulatory environment, and they will actually benefit into the future from that. But I would like to focus on the area of retentions because it is truly an extraordinarily important part of this. The key thing we are going to do is to prevent retention money from being used by the principal contractor, either as working capital or to offset debts elsewhere, including paying retention payments to other subcontractors. So the requirement is that the retention payments will be held in trust. There is a clarification that will ensure that the “pay when paid” provision, or exclusion, will also apply to retention payments. It will ensure that the retention money held in that trust is not only properly accounted for but it cannot be used for any other purpose, including that it cannot be taken under a court order for a retention payment for another contractor.

The member opposite had proposed that we use separate trusts for each of these subcontractors. All that would do is pile on compliance costs and complexity. We have come up with a very elegant way of dealing with this under a single trust structure, but making sure that the obligations are well managed and well monitored. This will help to remove some of the poor behaviours and poor outcomes that we have seen. It will give everyone confidence in the system. I commend this bill to the House.

This bill fixes an injustice in our laws in relation to the way contractors and subcontractors are treated in the construction industry. Labour supports this bill.

I want, first, to make a couple of comments about some of the boasting that we heard from the Minister for Building and Housing in his initial contribution. He is very fond of conjuring up in his crystal ball the vast number of buildings that are going to be built. He likes to say that we are in the midst of this incredible boom—more building than ever before. But what he omits to say, actually, is that his signal achievement as Minister is that he has increased the build rate in the last few years—what is it—two, three, four times off the lowest base in living memory. His benchmark, his comparator, for the increase in the build rate is the depths of the global financial crisis. That is his great achievement. When he loves to talk about this huge building boom that he is claiming credit for, what he omits to say is that under his watch, in Auckland, we are in the middle of a housing crisis and the Productivity Commission says that we currently have a shortfall of some 32,000 homes built since National has been in Government. When the Minister talks about the great building boom, as he did in his remarks, he fails to point out that actually we are still building 2,500 fewer dwellings than we need, just to keep up with population growth.

💬 Hon Dr Nick Smith: Not true.

That is absolutely the truth. The Minister says it is not true, but it is absolutely the truth. When you look at the statistics, and when you look at the work of the Productivity Commission, the Auckland Council, and anybody else who cares to look at this, it is clear—it is very clear—that the shortage of houses in Auckland is getting worse every week, and it has been getting worse every week since Nick Smith became the Minister.

💬 Mr DEPUTY SPEAKER: You have made your rebuttal. Now move on to the bill, please.

The construction industry is very important. The Minister himself pointed out that it has something like 200,000 employees. It is responsible for something like 6 to 7 percent of the country’s GDP. But the problem with the construction industry is that it is plagued by a boom-and-bust cycle that guts it regularly of its skilled workers. When the industry takes a hit, as it does from time to time, firms like Mainzeal go under, taking with them hundreds and hundreds of contractors. This bill fixes part of the problem, which is the law that puts subcontractors at risk. The bill fixes that, and that is great.

I am going to talk some more about how Clayton Cosgrove basically cut the lunch of the Minister in actually providing the most important feature of this bill. It came out of Clayton Cosgrove’s issues paper, after the collapse of Mainzeal, and it came out of his Supplementary Order Paper 439. Nick Smith salvaged some integrity and credibility for this bill by basically picking up Clayton Cosgrove’s good work. The issue of retentions was, I think, really well illustrated by the Mainzeal collapse. Mainzeal went into receivership owing nearly $100 million—having $95 million in assets, and owing $100 million.

I want to quote one small-business owner who was badly affected, who is typical of hundreds of others—an electrical contractor and small-business owner, Dave Burt. He was out of pocket to the tune of $25,000 because the retentions that Mainzeal held for that subcontractor were not protected. They had no legal protection. Dave Burt was left $25,000 out of pocket. This is not to mention the hundreds of contractors who lost their tools. In the Mainzeal collapse their tools of trade were locked behind security guards and locked gates, and they could not get them. I want to pay credit to the work that Clayton Cosgrove did in addressing that.

It is ironic, as Clayton Cosgrove said, that at the very time that Nick Smith brings a construction contracts bill to this House that sets out to reduce the vulnerability of subcontractors in the industry to losing those retentions, National is displaying once again the schizophrenic view that it has about deregulation in the building industry, having been responsible for this ideological burp to deregulate the building industry in the early 1990s, and having put the country through a $22 billion disaster that Paula Bennett now thinks we have all moved on from—$22 billion is the dollar value of the losses faced by tens of thousands of New Zealand homeowners because of the National Government’s leaky homes disaster, and now Paula Bennett thinks we have all moved on.

Well, we have not and, as Clayton Cosgrove pointed out, the Government has come a cropper in Christchurch with the appalling quality of Earthquake Commission repairs, and what we see in Auckland now, according to Auckland Council’s most senior building inspector, is an epidemic of shoddy work. The Auckland Council has just revealed the other day that it has set up a special investigations unit to crack down on cowboy builders because there are so many of them. It has set up a special complaints and investigations unit.

What people in the construction industry are saying is that there are two people who are responsible for this at the moment. One of them is Maurice Williamson, who watered down the requirements of the licensed building practitioners scheme. He was so desperate to get builders registered with the licensed building practitioners scheme that the standards, the quality standards for training and certification, have been made so low that the licensed building practitioners, or LBP, scheme is almost meaningless. So that was a giant missed opportunity to actually raise the standards of quality and of training. The other Minister who is responsible for this is the Minister who has spoken in this debate, the Hon Nick Smith. The most senior people in the construction industry have pointed out to me that in their official task force on this, they recommended to the Government that the Government make a top priority of investing in quality and training in the construction industry. That Minister has, basically, parked it. He has told the construction industry that it is not a priority for him. He has put it to one side, he does not care about it, and the most senior and influential people in the construction industry are appalled by Nick Smith’s attitude.

So he comes to this House with what is, in itself, a very good bill—it fixes a longstanding injustice—and that is the failure to protect retentions for subcontractors in the construction industry, but at the same time, this Minister does nothing to protect the quality of work in the construction industry. This, alongside the boom-and-bust cycle, is what puts the very same subcontractors at risk, and, believe me, in Christchurch with the Earthquake Commission repairs and in Auckland with this epidemic of shoddy cowboy building material, we are going to see more and more firms at risk of going under because of the instability caused by this Government’s failure to actually address the underlying structural causes of the boom-and-bust cycle. That is at the heart of this issue. This Government has done nothing to address it.

Retentions are incredibly important, and there are thousands of subcontractors at work in this industry who are reliant on having guaranteed access to those retentions. The fact is that this bill basically requires them to be held in trust, not in a trust account. It was Clayton Cosgrove’s original proposal that the retentions be held in a trust account, and, as we have heard, the Minister felt that this would create too much in the way of compliance costs. Well, we will see. We will see whether or not a statutory obligation to hold these funds in trust provides sufficient protection. Maybe the Government is right; maybe it is not. But the important principle is that those retentions will be held. They will be legally protected. The companies will not be able to use them for cash flow, and it is our sincere wish on this side of the House that that is going to provide a lot more financial security for subcontractors.

Thank you for the opportunity to stand and support the Construction Contracts Amendments Bill. I totally disagree with the previous speaker, Phil Twyford, who said that this bill does not do anything. I think this bill is a very good bill brought by the Minister for Building and Housing, and one of the things that this bill makes sure is that the retention money of the subbies is protected. That is a big concern for those subbies who really work hard and their retention money is never paid to them, and it is a big challenge for the Government to make sure their rights are protected. This bill will also stop the contractors using that retention money as capital for their other projects. Sometimes they go bust in new projects and this retention money is never paid back to the subbies.

We are going through a construction boom, whether it is in Auckland or in Christchurch, and we are making sure that the quality and the productivity are held at the highest level. This is very important because, as our Minister the Hon Simon Bridges mentioned, in west Auckland the tunnelling project is one of the biggest projects in the history of New Zealand. It is progressing very well and the people who are working on such projects, which are going to contribute to this economy, should be paid on time. With these words, I commend this bill to the House.

I rise to speak on the third reading of the Construction Contracts Amendment Bill. I am very pleased to say that this is one example during my time here in this Parliament where I have seen submissions to the select committee; persistence on the part of the affected people, who were showing up and submitting and calling for change because there was a problem that needed to be dealt with; the role of Opposition parties as well, of course, championing the issue; and a number of other circumstances, and all of those factors have actually contributed to an improvement to the law. It is going to make a real difference in the lives of many independent business owners who work as subbies out there, working on the ground helping construct our buildings, whether they be residential, commercial, or industrial.

I just want to go through the history of this bill, because we have heard different sides of it from different people in this House. In 2009 the Government undertook a review of the Building Act and in 2010 that led to a review of the Construction Contracts Act itself. There were five areas that were identified as needing change, but only three of them actually came forward in the initial bill that was put to the House. So there were two areas identified during the review that were not dealt with in the legislation when it came to the House in its first reading, and they were the areas of security of payment and retentions. We all knew this was a significant issue—certainly people in the industry knew it was a significant issue—and yet the Government was choosing not to deal with it when it went to amend the Construction Contracts Act, probably putting it in the too-hard basket or, potentially, because Government members have some constituents or big donors who are principal contractors who would not like the law to be changed to actually level the playing field for subcontractors.

Finally, the Government introduced a bill in 2013—so that is 2½ years ago. It did not deal with the issue of retentions or security of payment, but then in February 2013 we had the Mainzeal collapse, which many people have referred to today, and of course it eventuated that when Mainzeal went into receivership it owed over $18 million to subcontractors for work that had been undertaken and it was never going to be able to pay. That money was completely unsecured, so we had guys out there who were doing their best, who were not even able to access their tools on the day. The tools sometimes got locked on to sites because the receivers were locking the subcontractors out. They lost $18 million collectively and that money was not secured at all. That was twice the amount that Mainzeal owed to the Bank of New Zealand. It owed $9.3 million and, of course, that money was secured.

So the Mainzeal collapse demonstrated just how much the law was failing the subbies. It was allowing principal contractors to use money that, technically, did not belong to them as cash flow for other projects rather than going to the bank, and that was irresponsible and really immoral.

The problem with Mainzeal was so huge that it was impossible for the Government to completely ignore it, and when the bill came to the Commerce Committee in July 2013, which was more than 2 years ago, although we had politicians saying they were very sympathetic to the subcontractor situation and they wanted to do something about it, ultimately it was out of the scope of the bill, which was actually going to amend the Construction Contracts Act. But during the submissions process we heard from a huge number of submitters, and more than a dozen of them were specifically focused on this problem of retentions and the lack of security of payment. We heard from the Building Disputes Tribunal, the Building Industry Federation, the Construction Strategy Group, the New Zealand Contractors Federation, the Law Society, the Specialist Trade Contractors Federation, Steel Construction New Zealand, Master Plumbers, Gasfitters and Drainlayers, the Electrical Contractors Association, and on and on and on. We heard over and over again that this was a major problem that was costing potentially tens of millions of dollars to subcontractors—money that legally should have been theirs but was being spent by principals and was not able to be recovered. It was completely unsecured and not protected by the law.

So they were saying “We have this huge problem.”, and they were begging us to solve it. Unfortunately—or fortunately, as the case may be—the Minister at the time, Maurice Williamson, was not interested in dealing with this problem in this legislation. So the bill came back to the House with Supplementary Order Papers from the Government in March 2014—that is over 18 months ago now—there was no indication that the issue of retentions or security of payment was going to be dealt with.

There was an issue of BuildLaw put out by the Building Disputes Tribunal that noted that this major problem was not being dealt with in the legislation. It noted that the Labour Party MP Clayton Cosgrove had put forward Supplementary Order Paper 439, modelled on some legislation in New South Wales, I believe, which deemed that for the purposes of commercial and industrial buildings, at least, the retentions should be held in trust. But the Government criticised Clayton Cosgrove’s Supplementary Order Paper and the BuildLaw issue. There were a couple of problems with the Supplementary Order Paper. First, it was requiring that a separate trust account be set up, which the industry thought was going to create a lot of compliance costs; and, secondly, and probably more problematically, it applied only to commercial and industrial projects, not to residential. We saw the research from the Building Research Association of New Zealand during the select committee submissions, and it demonstrated that a majority of the payments that were being withheld—payments that subcontractors were not able to access—were actually on residential projects.

I spoke in depth with the New Zealand Contractors Federation, and it really needs to be congratulated on all the work it did on it. We worked together and proposed a Supplementary Order Paper. It was very, very simple—it worked with the existing language in the existing bill, and it deemed that retentions must be held in trust. It did not require that a particular trust account be set up, but it did allow for the protection of that money through the legislation, and it would have applied to all contracts, whether they be commercial, industrial, or residential. BuildLaw and the Building Disputes Tribunal applauded me for that Supplementary Order Paper 446, although I could not have done it without listening to the expertise of the guys who really knew what was going on on the ground. They were the ones who really worked to propose that elegant solution, which, finally, is going to be included in the legislation that is going to be passed today.

The Green Party is very happy to see that this problem is finally going to be dealt with. But it took a lot. It took members of the industry coming to the select committee. It took Mainzeal collapsing and leaving debts of $18 million to subcontractors. It took a lot of persistence on the part of the affected people. It took Opposition parties effectively coming up with alternative solutions and putting pressure on the Government in the House.

I tabled my Supplementary Order Paper 446 in May of 2014. We questioned the Minister in May of 2014, and, finally—because the previous Minister, Maurice Williamson, ended up resigning in May 2014 and we got a new Minister for Building and Housing, Nick Smith—Nick Smith actually listened to the affected people in the industry in a way it seems that Maurice Williamson was unwilling to do. So I think we do have to thank circumstances—that the Government’s Supplementary Order Papers that were introduced in March 2014 were withdrawn and do not exist in legislation today. Instead, we have Government Supplementary Order Papers that are very closely related to the one I tabled in May 2014 finally being introduced 18 months after the bill was supposed to go through the Committee of the whole House, in a whole other Parliament. The Government tabled its Supplementary Order Paper 106 in September of this year. It deems that the retentions should be held in trust. There is a lot more detail in it because the officials have worked it out.

So, finally, we are going to see an improved bill. Let us see: if this started in 2009, we are looking at a 7-year process to see what is right and moral, which is protection for subcontractors’ money that belongs to them and should not be spent by principals as cash flow in other projects. They are finally going to get protection in the law today. I am very proud, as an Opposition member, to see this bill pass. When you are in Opposition, it is very hard to see what good you are doing, but I do feel that this is one of the biggest wins that I have had since I have been in Parliament. So thank you. The Green Party will be supporting this bill.

I am pleased to rise on behalf of New Zealand First and take this call on the third reading of the Construction Contracts Amendment Bill. New Zealanders cannot afford to have another Mainzeal-type collapse. The severity of such collapses of companies has shocked this nation. The biggest losers here were in fact the subbies: the plasterers, the painters, the bricklayers, the drainlayers, the plumbers, and the electricians. In 2013 we saw that this actually affected over 486 workers, and, indeed, it sent shock waves through the subbies and the industry.

This bill will ensure that there is an appropriate market-driven disputes service. All parties need a clear route to an appropriate, market-driven resolution process. Parties involved can be assured of a faster, more efficient, more effective, and more cost-effective process without additional compliance costs.

New Zealand First supported this bill’s referral to the select committee and its second reading. The addition of Supplementary Order Paper 106, in the name of Minister Smith, amends provisions in the Construction Contracts Act 2002, the principal Act. It makes provision in the Act “for retentions (being money withheld by one party to a construction contract from money payable to another party to the contract as security for the performance of obligations under the contract) to be held on trust.”

Retentions have been an issue, and this was commented on by the Commerce Committee. During the second reading speech I quoted from its comments, and I will do that again today: “We were concerned to hear that many head contractors may be misusing retentions as working capital, delaying payment, or holding retention amounts disproportionate to the contract prices. This behaviour undermines the sector’s growth and productivity. While it is outside the scope of this bill we are encouraged to hear the Ministry of Business, Innovation and Employment is giving priority to addressing these issues. We urge the ministry to continue to work with industry players and look forward to policy solutions in legislation in early 2014.”

I also commented on the debate pack prepared by the Parliamentary Library, and specifically the legal commentary, which, again, I will quote from: “It has been a long-established practice in New Zealand and internationally for retentions to be held under construction contracts to ensure that if there are defective works the head contractor, or principal, is able to recover the cost of fixing these defects. In the wake of the Mainzeal collapse subcontractors’ retentions were unsecured debts in Mainzeal’s liquidation, and amendments were seen as necessary to protect payment of retentions to subcontractors and head contractors.”

I will say it again: what these two commentaries told me is that the biggest losers were, again, the subbies—the plasterers, the painters, the bricklayers, the drainlayers, the plumbers, and the electricians. Where has their protection been over the last 2 years? It is the subbies who have been shafted and left out of pocket, all because developers and contractors withheld the retention money and moved it off to other projects. This placed even further risks on that money, because they actually turned round and used it as working capital. As I mentioned earlier, the millions of dollars lost in the collapse of Mainzeal and the subcontractors having no legal protection whatsoever—well, that kind of sucked, for them.

We have seen with the Canterbury rebuild that homeowners have had two options available to them: one, to go through the Earthquake Commission and use the Government contractors; or, two, to opt out, do their own research, and select a private contractor or company. There are, however, areas in this bill that still do not address some issues, and I can see these will cause some problems in the future, such as this bill not addressing the substandard work that has been carried out. In fact, it has left some homeowners now unable to seek a remedy from the contractors or companies because they have disappeared. They are struck off the New Zealand Companies Register, but then the next day, like a pop-up shop, they come along again as a new company, with a new name, and they open for business, subjecting more homeowners to be left with no apparent way to take legal action, because not only the contractors but also the companies have avoided responsibility.

I, for one, will be watching for this, and I hope that future amendments to the Construction Contracts Act will take place over time. I recognise it has taken over 2 years since this bill was first read in June 2013, and I know that all good things take time. New Zealand First supports this bill.

Well, not all good things take time, because I will not take much on this one.

Listening to some of the contributions today, you would think that this problem arose only in the Mainzeal collapse. Actually, it has been around for ever, and even when I first started practising law in 1981—yes, I know; I was probably about 6 at the time—this was an area that has been a constant problem whenever it comes to the building industry. It is always because money gets tight. Whenever there are any tough issues around funding—and developers and builders often have real problems getting funding through traditional sources like banks, so they used to end up in solicitors’ nominee companies. Then they went to other contributory mortgage forms and mezzanine financing. A lot of those outfits actually went broke during the global financial crisis in 2008 to 2009, and so what happened was an awful lot of financing went.

It also means that during those tough times, people who have signed up to lease buildings or to buy buildings find ways of getting out of doing that, or suddenly decide that they do not want to continue or they want a smaller area. So it is a tough time, and the people who suffer the most are the subcontractors, or—as has been referred to today, colloquially—the subbies. These people are the people who have the least ability to be able to get back their money, and no matter what you say and put in contracts—and I certainly have, over the years, put things in contracts—the trouble is that as soon as you have to go back to that contract, as soon as you look at it, it is all over, Rover. Essentially, you are there because something is not working properly.

And it is all very well to moan and complain about the fact that companies go into liquidation, but they pop up again, and the people pop up again in them. We do now have mechanisms to stop people constantly becoming company directors after they have been in charge of companies that have gone into liquidation and left debts like this, but I would say it is a tough job to make significant changes in this area and actually not put a lot of regulation around it. I think the Minister for Building and Housing has done a really good job, with the Commerce Committee, in trying to have quicker adjudication of issues and to deal with some of the most outstanding of the issues.

It is always going to be difficult in building. There is never quite enough money for what people want. Far too much time is spent. It is very expensive. It is a difficult game, and certainly any developer will say to you that if you really have been a developer, you have probably been bankrupt at least once. That is what happens. It is the nature of it, but we can do things to improve the situation, particularly for the subcontractors, the tradespeople who have no other mechanism of getting paid. This is a good bill, which we should all be supporting.

💬 Mr DEPUTY SPEAKER: I call Denise Roche—a 5-minute call.

I rise to take a short call for the Greens on the Construction Contracts Amendment Bill. I am going to talk, as well, about retentions and retention payments.

I want to just make a few notes. One is that this bill, when it was introduced on 29 January 2013 by the then Minister for Building and Construction then, Maurice Williamson, it had nothing in it about retention payments. It has been made a much better bill as a result of the process that it has gone through over the last 2½ years. Just to recap, a retention payment is the portion of the contract price that is withheld by the principal contractor and not paid until after the construction work is checked and found to be up to scratch. It is actually used to pay off the subcontractors once that work has been checked.

However, what we have learnt, and what the Commerce Committee heard as well during the process of this bill, is that over time it had become common practice in many instances for the late payment of retentions or for those principal contractors to retain that retention payment and use it as cash flow for other projects. Certainly, I think this is what happened with Mainzeal and what it did, so that when it went bust in February 2013 there was no money there to pay the subcontractors, who had already been doing work on their projects, so they could not be paid. As other people have said, it was a total of $18 million that was owed to subcontractors who had already undertaken work for Mainzeal.

In my community on Waiheke Island, one of our largest-ever projects that we have ever had was the construction of our library by the Auckland Council. It was being constructed by Mainzeal. But all the subcontractors there were local people. They were the local plumbers, the local bricklayers, the local—just the locals. They were locked out the day Mainzeal went bust, and they could not even get to their tools. It was a shocking, shocking example of a company that basically left a whole bunch of other people in the lurch, and it certainly had a huge impact on my community.

But back to this bill. The original purpose of the bill, according to the Bills Digest, was basically to enact the findings of reviews of the Construction Contracts Act that had happened in 2010. There were about four different things that this bill set out to do originally. Those were to remove the distinction and treatment between residential and commercial contracts, to extend the Act to include contracts for design, engineering, and quantity surveying, to remove the distinction between enforcement of payment determinations and of those relating to rights and obligations, and to make the enforcement process more efficient. But it really took the Mainzeal collapse to get the whole issue of retention payments addressed eventually.

It has been an interesting progression. The bill was introduced in January 2013. The first reading was on 11 June 2013, and the submissions closed about a month later. The select committee report came back to the House in December 2013, but the second reading was not until March 2014. It was around that time that the Minister in charge of the bill actually changed. So it was not until 18 months later that the Committee of the whole House actually heard and considered the bill.

I have to acknowledge the Supplementary Order Paper 446 put forward by my colleague Julie Anne Genter at the time, which has now actually been adopted by this Government and will be part of this final bill when it is enacted. So it took a change of Minister to actually get a piece of legislation that does address some of the issues that were actually highlighted during the submission process. I think that is a real tribute to those who submitted and to the tenacity of the people who were affected by the Mainzeal collapse, who very clearly stated their case. It shifted the Minister to a position where we now have a bill that is actually a lot more fit for purpose. We will be supporting the bill.

It is a pleasure to speak to the third reading of the Construction Contracts Amendment Bill. I would like to pick up on one point that the Hon Judith Collins made, and it is a point that I do agree with her on, in that the global financial crisis did bring about a significant number of closures of building companies. The most notable of those has been mentioned numerous times during this debate—that being Mainzeal. That closure, of course, put everyone under a nervous setting, especially subcontractors to building companies, who had their incomes put at risk. This is how this piece of legislation came about.

It has been mentioned by Labour’s two previous speakers, Clayton Cosgrove and Phil Twyford, that Labour will be supporting this bill, but it has been an interesting road. If I could take members of the House back to 29 January 2013, when this piece of legislation was first introduced, at a time when I think the concern around the collapse of building companies was at its height—and I would remind people of the date today, 20 October 2015.

In his opening address to this third reading, the Minister who is in charge of this bill, Nick Smith, talked about the significance of the sector, which is correct, and how important this is going to be going forward because of the housing issues that we have in Auckland and the reconstruction of residential and commercial Christchurch. But I think the time frame that you have got there—2½ years to take forward this measure for what the Government says is a significant sector in our economy—is laughable. On 29 January 2013 I am sure the Government arrived to Parliament full of gusto, saying: “This is an issue right here, right now. We’re going to take care of that.” But it has taken it 2½ years to actually deal with this piece of legislation, when we get to the third reading. That does not say to me that the Government has taken seriously its responsibility to make sure our subcontractors or our subbies—builders, chippies, and sparkies—are being taken seriously.

I do take offence at a comment made by Brett Hudson earlier in this debate, who said: “Which world do you live in?”. Well, in the real world that we live in, we are speaking to our local subbies, we are speaking to our local chippies and sparkies, and they live in a real world where for 2½ years, after being promised protection from this Government, it has taken it that long to get to this stage when, actually, this legislation will come into force under law. I do recall a breakfast that some local Labour MPs held with our local subcontractors, some chippies—one way to get them to a meeting is to offer them breakfast, so we did that. But they told us how concerned they were that it was taking so long to bring in this measure.

Funnily enough, also, this issue died for about a year until, roughly, about 11 days before the election, when all of a sudden, out of the blue, the Minister put out a press release saying: “We’re going to take action on retentions.” Absolutely and utterly cynical. If this Government were serious and was in the real world about protecting those subcontractors, who feared for their incomes for them and their families and the future of their businesses, then it would have dealt with this before the last election. But, no, it went on the back-burner, down the Order Paper. It was not the significant enough sector or issue that the Minister said it was today for it to go up the Order Paper and for the Government to take swift action. It was not significant enough, so we had to wait another year and a month to get to this stage, when we get to a third reading. Finally, this piece of legislation, which has had a bit of crunching from around this side of the House to help the Government finally get to a position on retentions, gets to its third reading.

I would like to acknowledge Clayton Cosgrove for his work with the industry, and Julie Anne Genter, and I mention her work with the industry, to get the Government to finally come to some kind of position on retentions. It has taken far too long. This was an issue of significance back in 2013, at the beginning of that year, when the Government came and said: “We’re going to sort this out.” But I think that if they look at this seriously, those in the industry—those subbies, those builders, those chippies, those sparkies—will not be impressed with the time that it has taken this Government, because they do live in the real world, and in their real world it took the Government far too long to deal with this.

I am very pleased to rise and speak on this Construction Contracts Amendment Bill in its third reading. I want to just reply to a few of the thoughts that have been put up by the previous speaker, Kris Faafoi, and others. But first and foremost I want to acknowledge the Minister in charge of the bill, Nick Smith, who has guided this through, and, of course, the work of Melissa Lee in the Commerce Committee, on which I am pleased to sit.

This is a bill that has been, I think, rightly looked at carefully and cautiously. I think that when it comes to areas such as the construction industry, it is important to get things right first up, be that in building a house or, analogously, here when it comes to legislation. We heard in the last speaker’s dissertation, if you will, concerns about it taking so long to address this issue of retentions. Fundamentally, we as a Government and as a committee wanted to make sure that we got this right. We wanted it based on good evidence, and we wanted it based on consultation. I know there has been a lot of consultation by the Minister and officials, and discussions—including by me—with builders in the electorates. That has been relatively important. I think that in this bill we do have a comprehensive response to this.

We have also, in a way, set it up more around the trust system—retentions within trusts rather than bonds. I just wanted to mention that briefly. I do not want to go into all the differences, but, suffice to say, trying to work retentions in a bond structure is not going to work as effectively as that of a trust. There have also been suggestions that we are not implementing this quickly enough. When it comes to any legislation, it is important that those in the industry have time to understand what is going on and to implement the correct procedures.

Importantly in this legislation, we are also bringing together residential and commercial contracts. That is quite a fundamental change there. Residential contracts and commercial contracts are not going to be treated differently; they are going to be treated the same. I think it is quite important, particularly for those in residential contracts, to have the time to understand this legislation, because one of the concerns that has come forward is about ambushing claims. Again, I do not want to go into it in depth, but the long and the short of it is that someone who knows the legislation inside and out could easily pull the wool over the eyes of someone who does not. The time frames in the bill around claims are incredibly tight as to when responses are due and so forth. We have to be very cautious there.

I think, again, that this is an important bill. I am very pleased to say that I come from a family of builders. My father, in fact, is even in the gallery today, just by sheer and utter coincidence. He is a chippy from way back. Fortunately, his skills rubbed off on to my brother. I can maybe wave a hammer occasionally, but I would definitely trust him more. But I have, actually, a family with that background. Although I have not discussed this bill at length with my father, which is probably remiss—

💬 Scott Simpson: Make amends.

—that is right, I have to; I will propose a notice of motion tomorrow—I think it is important to recognise that we as a Government continue to try to improve the sector. I am very pleased to commend this bill to the House.

I am pleased to take a call in the third reading of the Construction Contracts Amendment Bill. This bill has been extensively debated in the House, and Labour supports it. Its real intent was to speed up resolving disputes in construction contracts cases, and it was all about greater accountability. It also extended the scope of this area to include things like design, engineering, and quantity surveying. On the face of it, it was a pretty sensible updating of a piece of legislation.

When we went into the select committee process, it became apparent very quickly that there was something rather substantial missing from this piece of legislation. Many of the submitters talked about the lack of protection for subcontractors when the main construction company got into trouble. This went on and on and on, and, as other speakers before me have mentioned, the context around this piece of legislation was really important because it was first introduced into the House on 29 January 2013, and the Mainzeal collapse happened on 5 February 2013, which was just a few days later. When the bill made it to the Commerce Committee at the beginning of June 2013, that was the issue on everybody’s mind, and that was the issue that people wanted to discuss—and discuss very seriously.

You would think that between 29 January and 1 June there could have been some thinking done by the then Minister, Maurice Williamson, on this issue. You would think that there would have been some serious thinking done around: “Let’s have another look at that bill that we have just sent off to select committee. Have we missed something? Is there something else that we could be doing? Let’s get officials working on that.” Well, that did not happen. Instead, when it got reported back on 11 December—another 6 months later, more or less—there was nothing in it on retentions.

I want to draw the House’s attention to the report that came back from the select committee, just briefly, which did have a section in it headed “Retentions”, and that was clearly because the Opposition members—and I really do want to acknowledge my colleague Clayton Cosgrove, who did most of the heavy lifting on this issue, and also Julie Anne Genter from the Greens. There was concern after concern after concern brought out. This was recognised in the report, which said: “We are aware of growing concern in the sector relating to retentions.” It went on about what retentions were all about, and about what the actual issue was. But it said that “… this issue was outside the scope of this bill we are encouraged to hear the Ministry of Business, Innovation and Employment is giving priority to addressing these issues. We urge the Ministry to continue to work with industry players … Labour members especially note that the Minister has changed his position from one of stating that there was no issue around security of payment and retentions to one of now actively exploring remedies around these two issues.”

The fact is that in that period, which was quite a considerable period of time, there had been no work done. Meanwhile, the Specialist Trade Contractors Federation was clamouring for these changes, saying that it was now 12 months since Mainzeal had collapsed, leading to $70 million in losses, and at least $20 million of those losses hitting countless small businesses was due to the retentions issue. The chief executive of the New Zealand Contractors Federation also said that his group was looking at challenging legal rulings that backed the liquidator’s powers to claw back payments.

I would draw your attention to the fact that one of Mainzeal’s directors was Dame Jenny Shipley. All of those directors are now, more than 2 years later—nearly 3 years later—facing legal action as a result of what went on, and yet this Government sat on its hands. The current Minister for Building and Housing, Nick Smith, did eventually see the light—Clayton Cosgrove described it as a road to Damascus experience. He did actually see the light and did finally put a Supplementary Order Paper forward at the Committee of the whole House.

In the meantime, what Labour had done was to put our own Supplementary Order Paper out into the public, and Clayton Cosgrove went around the country meeting with subcontractors. Kris Faafoi just referred to one of the breakfast meetings he attended. I attended a breakfast meeting. There was a campaign that Labour ran around this because we knew—we could see what was happening—there was a glaring gap. So how is it that that Government did not do anything about it? Why did it sit on its hands? Why did it take it so long to actually wake up to what was right in front of its face?

Now we have got another loopy piece of—well, it has not turned into legislation yet. But we have now got this new Rules Reduction Taskforce, which is proposing loopy rules such as builders signing off their own work. That is from this Government task force. So, on the one hand the Government takes so long to work out that it has to protect the subcontractors who are actually doing the work on these construction sites, and it reluctantly put forward a key part of this legislation; on the other hand, it is undertaking another piece of work that actually looks as if it is loosening up all the rules. It is disjointed, it is not joined up, and it is madness, to be honest.

Labour did most of the heavy work on this piece of legislation.

💬 Hon Dr Nick Smith: Rubbish.

Labour did most of the work in bringing forward the important issues in this piece of legislation. “Rubbish” says the apprentice of Dame Jenny Shipley, who is currently facing legal action over the Mainzeal collapse. Labour pointed these things out and brought them to the attention of the Government over and over again, and it was only at the Committee of the whole House, when there was no ability to actually have any real scrutiny of the substantial Supplementary Order Paper that appeared before us—no ability to have proper scrutiny of it—that the Government finally woke up to what had been under its nose all the time.

In the meantime, $20 million was held up for these subcontractors, many of whom had probably faced substantial problems in their own businesses, and maybe had gone out of business as a result. In the meantime, also, we have had dozens—dozens—of collapses in the construction industry, with no protections for the subcontractors. Finally, that is going to be remedied when this piece of legislation goes through, but the questions have to be asked, and people listening to this at home should be asking this themselves: why did it take this Government so long, why did it not listen to the select committee in the first place, why did the Minister not listen to the submitters and to what was being said by the industry, and what was wrong?

I think that it was the work that was done by Clayton Cosgrove around the country by talking to submitters and talking to subcontractors—actually, he is the real hero of this piece of legislation.

It comes as news to those of us on this side of the House to hear that the Hon Clayton Cosgrove even had any meetings on this bill. I want to give the proper credit to the Hon Dr Nick Smith for the work that he and his officials have done, because that is where the credit really belongs. Nevertheless, there is, clearly, broad support across the House for this important measure. I welcome that, and I am happy to add my support to this bill.

Bill read a third time.