Concern at builders’ cashflow non-compliance
Nearly a third of construction companies are failing to comply with a retention payments law enacted last year that would give subcontractors some recovery in the event of a company collapse.
Retentions payments are when the main contractor holds back payments of between 5 per cent and 10 per cent from the subcontractor in case there are problems that require more work to complete a job.
New Zealand Specialist Trade Contractors Federation president Graham Burke said a survey by BDO revealed the potential level of noncompliance and Government action was needed.
The law requires head contractors to put the money in a trust account so they cannot use it for general cashflow.
This doesn’t mean subcontractors will recover everything they’ve lost in a collapse.
‘‘But if a head contractor or construction firm like Ebert hadn’t had to put aside retention payments they might have continued on for another year or more when they were effectively insolvent, and the outcome could be much worse,’’ Burke said. The law came into effect in March 2017. ‘‘Nick Smith, who was the housing minister at the time, was adamant the retentions law would force change,’’ Burke said. ‘‘But the onus is also on the subcontractor to ask ... what arrangements have been made for holding the funds. There’s no requirement for the main contractor to declare how they were holding the payments. But if they go into receivership they must have the payments available.’’
Burke said his organisation has supported light-handed legislation. ‘‘Subbies have to take responsibility, too. You can have all the laws but if people don’t use them it’s not helpful.’’
Retention payments were only part of the answer, Burke said.
‘‘We need a new model. We have had more than 20 years of financial failures.’’
BDO partner James Mcqueen warned of the problems about retentions last year and said it was all very predictable.
His survey showed almost three-quarters of those who had retentions deducted hadn’t inquired if they were held in trust. Those who checked found 36 per cent non-compliance.
‘‘That’s consistent with our other findings that one-third are unwilling to confirm that they are complying with the law, presumably because they do not have the financial capacity to do so,’’ Mcqueen said.
More than a quarter of firms found juggling cashflow a challenge, and 41 per cent had clients pay them late.
About 28 per cent of firms that deduct retentions were unable to confirm that they were holding the money in trust.
Construction margins were often below 5 per cent.