18 Dec 2018

Measures to protect subcontractors' money 'needs to go further'

3:41 pm on 18 December 2018

Measures designed to protect subcontractors and suppliers' money in a construction company collapse appear to be failing.

Helmet, cone and broken bricks at construction site.

Photo: 123RF

Industry players are warning of more losses unless there are tougher penalties for construction bosses who fail to follow the rules and set aside retentions on new contracts.

Daniel Pepperell discovered the perils of subcontracting the hard way when his interior fit-out company, Bay of Plenty and Waikato Suspended Ceiling Services, lost $120,000 in the Ebert collapse, half of that retention money.

"They'd paid every bill up to date, it was the last one that they didn't pay and the next day they went under, how could we possibly see that coming?"

Retentions are the payments companies hold back, typically 5-10 percent, as a sort of insurance policy, to make sure a contractor finishes the job.

After the Mainzeal collapse in 2013, in which subcontractors lost millions because the money they were owed wasn't ring fenced, the law was changed to force companies to set aside the retention funds.

Mr Pepperell believes he will get about $17,000 of the $120,000 back, which he said was better than nothing. He said more needed to be done to protect subcontractors' money, which is what the law change which took effect in April last year, was designed to do.

"Unless there's real government change and law change in this area I don't think anything different will happen."

A construction lawyer for Minter Ellison, Janine Stewart, said ultimately it was up to subcontractors to check the money was being properly looked after.

"The difficulty for them is that if they then discover that their retentions are not being recorded properly or held then there's no teeth in the act for them to take action pursuant to that Act."

There is no official word on how or even if companies are complying with the law. When it failed, Ebert had $3.6 million set aside in a fund, $1 million short of what it should have had.

The latest firm to enter liquidation, Corbel Construction, had an account with $110,000 in it, but the liquidator has so far identified $227,000 owing under contracts signed since the law change.

A survey by BDO earlier this year found a third of firms were unwilling to confirm they are complying.

Advisory partner James MacQueen said tight margins were making it harder to keep that money set aside.

"As time goes by they've got less retentions under the old regime and more under the new regime and therefore they need to put increasing amounts of money on trust. And if they didn't have the money back then then they certainly don't have the money going forward."

Graham Burke, president of industry organisation Specialist Trade Contractors' Federation, said the law as it stood was better than nothing, but it needed to go further, punishing bosses who did not comply.

He said when a company did go under, payouts to the owners of retentions funds, even if they're mixed in with other money, should be prioritised.

"That money should be set aside and not be able to be used for anything, other than paying those retentions out. That was the actual intent of the Act."

Mr MacQueen warned if the ambiguities were not fixed and the government did not more closely monitor compliance, storm clouds will gather.

"I think we'll see what we're seeing at the moment with a two-tier construction sector, with some good companies that are complying, an increasing number who don't or can't comply. And those that can't comply probably have other issues as well and therefore we'll probably see a few more collapses over the next 12 months or so."

The law's perceived lack of bite is on the government's radar, with the the Ministry of Business Innovation and Employment intending to carry out a study next year to see whether companies are complying. It is not ruling out making changes to the regime depending on what it finds.

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