A late change to the new rules governing the management of retention payments held by main contractors could save the construction sector as much as $20 million per year in finance costs, says a specialist insurer in credit and financial risk. The change also increases certainty for the businesses the rules are intended to protect.
The Construction Contracts Amendment Act as initially drafted would have required retentions (money withheld by a main contractor to ensure work is completed satisfactorily) for all new projects starting after April 1 this year to be held on trust.
However, revisions to the Act give construction firms the option of purchasing a retention bond to cover money owed rather than ring-fencing the equivalent amount in cash or liquid assets.
CBL Insurance has created a specific retention bond which complies with the new regulations, and will be available to approved construction firms.
Dean Finlay, Director of International Business at listed insurance specialist CBL Insurance, says the change is a positive move.
“MBIE’s advice to the government was that the cost to companies of raising money to match the amount of retentions they held would be up to $20 million,” Mr Finlay said.
“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.
“A retention bond provides security for the sub-contractor and flexibility to manage cashflow for the principal – and, in the case of a principal going into liquidation, will likely mean a swifter and cleaner resolution for all concerned.”
Mr Finlay said the previous regime left sub-contractors holding too much risk.
“Often, a sub-contractor’s entire profit margin is tied up in retentions. Under the old act, if the developer or main contractor collapsed the subbie’s business could very easily have followed suit.”
Leading commercial and infrastructure construction company NZ Strong has been the first firm to sign up with CBL Insurance.
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