Feature SUBCONTRACTOR PROTECTION
RETENTIONS IN THE SPOTLIGHT (AGAIN) Big construction company collapses are back in the news, with Wellington’s Armstrong Downes Commercial going into liquidation in May, owing $9.2 million to unsecured creditors. NZ Plumber looks at the impacts on plumbing businesses.
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iquidators in the collapse of Armstrong Downes Commercial (ADC) say the company had held retentions in a separate account, so it is hoped that all subcontractors will see their money back. Although the retentions regime was updated in 2017, requiring head contractors and any party holding retentions to hold them ‘on trust’ rather than being able to use them for their own working capital, loopholes remain. These gaps, which came to light when Ebert Construction, went under in 2018, are being addressed by the Construction Contracts (Retention Money) Amendment Bill, which has been working its way through Parliament since June 2021 and may be enacted this year. Until the Act is amended, however, subcontractors should be aware that the current Construction Contracts Act does not automatically create a trust for retention monies, which would legally separate these funds from the company’s assets.
Request financial information “As the law stands, there are still issues with how retentions are being handled, and a lot depends on the record keeping of the holding company,” says Jonathan Forsey, Special Counsel at Duncan Cotterill in Christchurch. “Enforcement of obligations is difficult but there are still steps parties who are having retentions held can do to help their position. “The Act as it stands does enable a party which has retentions held to request financial information confirming this is the case, and the holding party is obliged to provide it. “This is an easy thing to do and should be regularly checked.”
$190,000 by ADC, which has since been paid by the developers. Derek says he thinks it is hard for subcontractors who have successfully tendered for a project to then front up to the head contractor and ask them to reveal their finances. His business tries to avoid having retention monies held on them, preferring to use bonds. “We put the money in our bank account as a term deposit, which is then tied to the builder,” explains Derek. “That way, the money is there for the builder if we don’t perform or go bankrupt.” He admits that not all builders will accept bonds but, for subcontractors who do use this option, it is vital to include a termination date. “Otherwise, the money can be held by the builder in perpetuity,” he warns. In an ideal world, Derek Plimmer would like to see New Zealand adopting the same practice as in Queensland, Australia, where a project bank account is set up before construction work starts, with money deposited to cover the cost of the contract plus a 10% overrun provision. “Bills are approved by the builder
and paid from the project account direct— never from the builder’s account,” he explains.
Seek wider support Colleen Upton of Hutt Gas and Plumbing, which lost hundreds of thousands of dollars overnight in the Mainzeal collapse, advises anyone caught up in the Armstrong Downes liquidation to seek support and be open with their staff. Colleen notes that while it was one of the worst times of her life, it was also one of the best things to happen because it made the business carry out a serious and urgent re-evaluation. “We sought help too—our accountant, a business mentor, and other colleagues,” she says. “We decided very early on that we wanted to move our model from 100% commercial to 50/50 commercial and domestic to aid cashflow.” “Don’t try and hold it all in, don’t try and do everything yourself—and don’t feel like you have failed and beat yourself up,” says Colleen. “It is a team effort to turn around after something like this.”
Consider using bonds Derek Plimmer, who runs Plimmer Plumbing in Wellington, was owed
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Take steps to ensure your retention monies don’t melt away in the event of a major construction company collapse.
