Construction Contracts (Retention Money) Amendment Bill

I present a legislative statement on the Construction Contracts (Retention Money) Amendment Bill. I move that the Construction Contracts (Retention Money) Amendment Bill be now read a third time.

ASSISTANT SPEAKER (Hon Jacqui Dean): I’ll just say that that legislative statement is punished—published. Ha, ha! I feel punished; I don’t know. That legislative statement is published under the authority of the House and can be found on the Parliament website.

Hon Dr MEGAN WOODS: I move, That the Construction Contracts (Retention Money) Amendment Bill be now read a third time.

It’s with a great deal of satisfaction that I now begin the bill’s final progress and passage through this House. I want to begin by acknowledging and thanking my predecessor, the Hon Poto Williams, who introduced this bill in June 2021.

I think everybody in this House knows why we need this bill. The Construction Contracts Act 2002, regulating construction contracts, included processes for dealing with payments and disputes under a construction contract and the protection of retention money. The Construction Contracts (Retention Money) Amendment Bill, this bill, strengthens and clarifies the retention money requirements that sit under that Act.

The changes made by the bill contribute to the Government’s building system reforms by providing fairer outcomes for subcontractors when things go wrong. That is one of the important things that we have in place, that we have a structure and a system in place for when those things do go wrong.

Retention money is an amount of money held back from a payment under a construction contract as security for performance. Holding retention money is voluntary; however, when retention money is held, it must be held on trust by the head contractor for the benefit of the subcontractor. An independent review by KPMG in 2019 on the effectiveness of the retention money regime found that while there was overall compliance with the regime, a number of those businesses who were surveyed were using retention money as working capital and co-mingling money. This is an issue because it increases the risk of subcontractors not being paid for the work they have done, particularly when the head contractor becomes insolvent before paying out the subcontractors’ retention money.

The changes in this bill safeguard those subcontractors who are often—and too often—the first to miss out in the event of a construction company becoming insolvent. It gives those greater protections for subcontractors’ retention money. The bill clarifies and strengthens the requirements. The key changes that we’re seeing here include clarifying the existing trust requirement and improving the transparency of how retention money is held. It introduces offences, penalties, and defences, and clarifies how retention money is administered in the event of insolvency.

By strengthening the trust requirement, the bill mitigates the risks with the use of retention money as working capital by head contractors. It clarifies that the trust requirement will almost also mean that the money becomes clearly identifiable and separate from other assets held by the head contractor, and the bill also introduces offences for those who fail to comply with the retention money requirements. It also clarifies holding accounting and reporting requirements for that retention money, and, under the bill, head contractors will have a role in providing subcontractors with updated retention money records on a regular basis.

People need to know what is occurring. This will aid compliance and better allow subcontractors to know when head contractors have not complied with their obligations. This also helps to address the power imbalance between subcontractors and head contractors, where subcontractors are often unable to enforce their rights.

Finally, this bill clarifies how unallocated withdrawals or deposits from a bank account used to hold retention money between subcontractors is held.

The majority of the submissions received by the Transport and Infrastructure Committee generally supported the policy intent behind the bill. Submitters’ feedback has been considered throughout the development of the bill and, since select committee, the bill has been further amended through a Supplementary Order Paper to clarify that the chief executive of the Ministry of Business, Innovation and Employment will enforce the retention money regime. This is in response to submitters’ feedback that clarity on enforcement will help deter non-compliance with the regime. These changes will ensure that there are strict penalties in place for companies who fail to meet their obligation to those who carry out their work. I would like to thank the members of the committee that put the work into making these changes at the committee stage.

The changes made today provide important protections for subcontractors so that they can be certain their payment is being kept safe. It can’t be used for any other purpose, and will be there for them should the head contractor’s business fail. The bill clarifies and strengthens the regime. It will ensure that risk is fairly managed across contractors, subcontractors, and clients. These changes are planned to come into force six months after this Act receives Royal assent. I’d like to thank the many people across the building and construction sector who gave their time to help make this bill what it is. As I’ve already thanked the committee, I’d also like to thank the officials and the Parliamentary Counsel Office who worked on the bill. I commend this bill to the House.

The question is that the motion be agreed to.

Thank you, Mr Speaker. Look, I’m happy to take a call on the final reading of the Construction Contracts (Retention Money) Amendment Bill. We will be supporting this final reading, as we have with the previous stages.

There’s just a couple of comments I want to note in relation to this as we pass through. Firstly, I want to thank the Minister for making it clear in the committee stage that the amendments that she has proposed under section 18FB will enable either situation where parties B are working on multiple contracts within the one project, or, indeed, working for the same party A across multiple different projects—that they all indeed can come under the one complying instrument. That was a concern that had been raised with me by industry participants. I heard clearly from Dempsey Wood, a great construction company out there—focused on this legislation—that there were some challenges around the potential implementation of this. So it was encouraging to hear the Minister confirm that that is the case, and that was her reason for not supporting my Supplementary Order Paper which provided clarity to that extent. On that basis, I think it’s really clear to put on record that that was a key concern from industry participants, because the other aspect that we didn’t see addressed was around some of the questioning we had on this side of the House from both National and ACT members around the potential cost versus benefit aspects of this legislation and the lack of clarity around that and the potential impact of the additional working cash-flow being locked up if we’re going through the trust model, as has been supported by the committee of the whole House in the previous stage of this bill.

So what I think we will see in practice as this starts to roll out is that most participants will be looking more at complying instruments, although it would have been nice to have had some insight into potential costs of those complying instruments. I’m sure there could have been, or certainly should have been, some information around what that might look like because, as I say, having more than twice the amount of retentions potentially held up by using the trust model—where each participant in that chain holds aside 10 percent, for example, in a pretty standard sort of contract scenario, party A down through multiple party Bs—then you can indeed end up with more than double the amount of retentions held, which is not the intent of the bill.

We all agree in this House with the intent to better protect that retention money that has been held aside, and to the Minister’s point, yes, it is voluntary, but, actually, it is standard practice. That is what happens in the construction sector. There are multiple participants within any given contract scenario. The head contractor generally only performs a portion of the work and subsequent levels of subcontracting are utilised to complete other aspects of those contracts. And so it is critical to ensure that we are not overburdening the sector, because we have seen far too many instances under this Government of additional cost being added to industries for negligible benefit, and it’s simply impacting our economy unnecessarily and reducing our productivity as well.

So we do have some reservations around those aspects and, as I say, I expect that will probably play out with people or construction contracts being more around the compliant instruments side than the retention money trust to try and alleviate that cash-flow pressure—of course, dependent on the cost of that, which we have yet to get any clarity around. And I think that is a concern that I’ve had, and the Minister talked as well, and to me it was clear there wasn’t a strong understanding of what the construction sector are needing or wanting or how it operates, when we saw a relatively flippant response around the potential impact of some of those scenarios that could play out in a realistic contract environment between participants on any given construction project.

So, look, we do support it. It’s a good step to help protect those subcontractors. There is further work to be done. And this is to the point, particularly around those subbies who have their tools on site or any other assets—you know, materials or products that they may have left on a site—which then suddenly becomes insolvency property. I accept that is outside the scope of this bill, but I would like to see a strong focus from the Minister on addressing an issue that is very clearly prevalent within the construction sector, because not only is it the loss of the monetary value of those assets but indeed in the case of tools, the inability for those subcontractors to then go and work on other projects. So that is a real issue we need to address, particularly at a time when we have seen a significant increase in the number of construction companies failing. We have over the last 12 months seen that lift to 336. That is nearly one every day. That is a worrying increase from what we saw the previous year. That was nearly a 100 percent increase, from memory. There are real challenges within the broader supply chain for the construction sector around accessing workforce, consenting processes, getting new products registered—any raft of issues that are stymieing the productivity of our construction sector—and it would be really encouraging to see a strong focus from the Government to try and address and alleviate some of those additional pressures.

But, look, we do support this stance that’s been taken here to strengthen the retention money and make one contribution to supporting an important sector.

It’s a pleasure to rise in support of the Construction Contracts (Retention Money) Amendment Bill. This was one of the first bills that I dealt with as an MP. I was on the Transport and Infrastructure Committee, and it was just a real delight to see this, because I’d seen the problem and I was seeing us create a solution, and it was done relatively cooperatively, I think, between every side of the House.

The underlying issue here is that there had been a habit of taking a percentage—say, 10 percent—of a price to be paid and to hold it back, and it had been abused—I go that far. It wasn’t being held back and then remitted. Every excuse under the sun was being given as to why sometimes that wasn’t returned, and the money was being used as working capital. Those are not good things. They are not fair things. So it was really nice to see this piece of legislation come alongside our subbies and our contractors, who work really hard and actually deserve to have the whole of the price paid, not a piece held back.

So what happened here was that we ended up with a piece of legislation responding to a bad habit of not everybody but some people to hold back that money, and the intermingling of that money and the use of it, for capital. It was a situation where it was David and Goliath. It was the big guys versus the little ones. I am very, very proud of the Labour Party and the Labour Government but also all the other parties for getting alongside this particular group of people and recognising that that power imbalance had led to an abuse that needed to stop. And it stops tonight. I commend this bill to the House.

It’s an absolute pleasure to be talking at 11 minutes to 12 a.m. on this fine night, on the Construction Contracts (Retention Money) Amendment Bill, third reading. Well, it’s a long time since this bill was introduced to the House back in 2021. Gee, a lot’s happened since then. Gee, a lot has happened in the last week, I think, when you reflect on what’s happened.

So my first point is I think it’s very disappointing that it’s taken so long. If this legislation is so important, as the Minister and the previous member, Helen White, spoke of, why the dickens did it take so long to get into this House? Gee, this House has been in urgency so many times doing the most ridiculous pieces of legislation. If you really wanted to help the construction sector, you would have done this years ago rather than at 12 o’clock on this night nearly two years later.

So, anyway, the second point is: I think the issue that Mr Seymour brought up just showed how poorly advised or disinterested the Minister is, actually, in the building and construction sector, which employs 280,000 people and accounts for about 10 percent of the GDP of New Zealand. It is a mammoth sector and probably employs the most amount of people in New Zealand, the second one being manufacturing, employing about 250,000. So it’s pretty standard, and in answering Mr Seymour’s question, it would have been pretty easy to say, “Well, the Ministry of Business, Innovation and Employment”—who actually advise the Minister and would have told her, no doubt, at some stage, that “Last year, we did $11 billion of commercial construction, we did $22 billion of residential construction.” That’s why my good colleague Tim van de Molen was talking about roughly $33 million, being 10 percent, which was about $3 million. They were pretty easy numbers to work out. And what this bill will mean is that those retentions are there, and let’s hope for the Minister’s assertion, which may be contrary to some of the legal advice we’ve had, that there can be a system put in place that we don’t end up doubling up in the amount of retentions as it cascades from prime contractor, subcontractor, sub-subcontractor, as Mr van de Molen quite rightly pointed out. Hopefully, that is not the case, because if it is, National’s bill will change this if we were lucky enough to win in October and it was necessary.

The second thing is about the tools. I hope that’s been dealt with. And the third thing was the court case, the Ebert court case that talked about the trusts, and the Minister again has given an assurance around that. Let’s hope that is the case. If all those things are as the Minister asserts, then we all agree this is a much better piece of legislation. It has just been too long in the making, too slow in bringing it to fruition, and in the meantime, the construction industry is now in a perilous state, with many, many companies going into receivership as a result of some bungling of the economy and some of the rules and regulations that have been put on them.

Thank you, Mr Speaker. I think that this is a very important piece of legislation, at this time of night, that we would be contributing to, the Construction Contracts (Retention Money) Amendment Bill. This Government is providing greater financial protection for the construction subcontractors. As part of the Transport and Infrastructure Committee who heard directly from these subcontractors, we know that they wanted change. This offers a fairer system for them. This offers the opportunity for them to be paid on time. So, without further ado, at this time of night, I commend this bill to the House.

I rise on behalf of the Green Party to support the Construction Contracts (Retention Money) Amendment Bill. To follow Andrew Bayly’s points, this bill has indeed taken a little while, so I won’t take much longer. This bill is good for workers, it’s good for people in the industry, and the Green Party’s happy to support it and see the outcomes that it will bring.

The time has come for me to leave the Chair. The House is suspended and will resume at 9 a.m. tomorrow.

Debate interrupted.

Sitting suspended from 11.55 p.m. to 9 a.m. (Thursday)