A construction industry survey suggests a third of builders are not holding money in trusts for subcontractors even though it is against the law not to do so.
It showed a strong link between the proportion of contractors ignoring the new law, and those facing cash flow problems, said James MacQueen of BDO chartered accountants, which did the survey.
This comes amid the failures of two building firms: It's been reported one of these, Ebert Construction, has at least $3.5 million in held funds (retentions); it's unclear about Christchurch company Maven Interior.
Mr MacQueen said about a third did not answer if they were holding the money in a trust or an insurance policy, as the March 2017 law demands.
Not doing this was a jailable offence, Mr MacQueen said.
However, it would probably fall to an individual creditor or the government to take legal action.
Before March 2017 there was no requirement for retentions to be held in trust, which meant no safeguards for subcontractors if contractors went bust.
The new law allows subcontractors to check trust funds to make sure they are there.
However, three-quarters of survey respondents had not done so.
The survey results asked: "Are they simply too scared to obtain bad news or frightened to offend the source of their income?
"Surprisingly, it's the larger companies that face the higher risks and should be more aware of managing their risks."
The survey concluded that "vulnerability of subcontractors" was a theme.
"What has occurred before, and inevitably will occur again, perhaps soon, is the financial collapse of a significant construction company. The unwitting victims, and sometimes the most surprised, are subcontractors."
Peter Degerholm, who was involved in drafting the new law, said the Ebert receivership would likely to be the first public test of the retention regime.
"Unanswered questions regarding the operation of the regime will now resurface, such as: Who will administer the disbursement of the retentions in trust?"
It was unclear who would cover the cost of administration and who would pursue any breach of trust, he said.
Under the law, retentions must be:
- automatically held in trust
- protected from receivers and creditors
- when requested by a payee, provide details of the trust arrangement
- paid out when the work is completed, unless applied to remedying defects