Retention bond an option for builders
Subcontractors were thought to have lost at least $18 million.
A late change to the new rules governing retention payments could save the construction sector as much as $20 million per year in finance costs.
CBL Insurance, a specialist insurer in credit and financial risk, said changes to the Construction Contracts Amendment Act will also increase certainty for businesses in the sector.
The act was drawn up after the collapse of Mainzeal Property and Construction in 2013, to ensure lead contractors kept money owed to smaller companies in trust.
‘‘Retentions’’ are generally about 5 per cent to 10 per cent of the subcontractor’s pay which is kept back to ensure any problems are t fixed.
The new law initially required all retentions to be held in trust for projects started after April 1.
Dean Finlay, CBL’s director of international business, said for lead contractors, that practically meant they either had to get a bank guarantee or set up a trust with enough cash collateral or liquid assets to cover the debt.
A late revision to the act gives construction firms a third option – a retention ‘‘bond’’ taken out by the lead contractors with an insurer.
If things went wrong, the subcontractor could call on the insurer to pay the bond and the insurer would seek recovery from the principal contractor, Finlay said.
The beauty of a bond was that it freed up cashflow for lead contractors because they did not have to ring-fence enough assets to cover their debt, a move which the Government estimated could save the sector up to $20m.
‘‘There’s no doubt those costs would have resulted in lower margins for builders and developers, potentially making some projects unviable, and higher costs for purchasers,’’ Finlay said.
Subbies had also been holding too much risk. ‘‘Often, a subcontractor’s entire profit margin is tied up in retentions.’’
Retentions became a major issue when Mainzeal failed, leaving unsecured creditor debts of at least $112m. Subcontractors were thought to have lost at least $18m.
The rule change will also extend to architects, engineers and quantity surveyors.