In an article published by Mirage.news we learn of an Amendment to New Zealand’s Construction Contracts Acts of 2002. The Act which was initially enacted to prohibit conditional payment terms in construction contracts, has now been amendment to require retention to be held in trusts.
A Global Movement
The move by the government of New Zealand follows a global trend that has been observed in countries such as a the United Kingdom, Australia, Malaysia, and certain US States.
Acts such as these (collectively known as “Prompt Payment Acts”) are meant to counter abusive practices used by prime construction contractors to hold back amounts due to subcontractors.
Procurement practitioners must become savvy and aware of these practices as these same practices increase risk and exposure to Owners.
What is retention
The practice of retaining a portion of the amount due to a contractor is common. The idea is to withhold or retain the fee (not the incurred cost) of a contractor in order to ensure that the contractor completes the work. This practice was initially only used by Owners retaining a portion of payment from their prime contractors, but over time, general contractors have trickled down this practice to their subcontractors.
Why Prompt Payment Laws
Mega company failures like the fall of the UK’s Carillion in 2018 exposed the risks of such practices. Subcontractor failures followed the failure of Carillion in record numbers as many subcontractors went unpaid and unable to remain in business.
In response governments around the world have begun a renewed effort to further limit the power of Owners and Contractors alike.
Recent Practice
Recently, I negotiated a construction contract in the US State of Oregon where my Client was required to hold retainage funds in an interest bearing account.
The General Contractor attempted to write contractual language to avoid the requirement, but my Client’s legal team rejected the move citing that the law offered no exceptions.
Had our Client allowed the contractor’s language, the Client could have been in violation of the law and at risk of fines and penalties.
What Can Procurement Do to Protect Clients?
Procurement professionals must be on guard and remain vigilant to the risks that violating (either willfully or unknowingly) these laws.
Local vendors and local business stakeholders are the first line of defense. Ask if they are aware of any “Prompt Payment” regulations. If neither the business nor the Vendor know ask legal.
If you are subject to any “Prompt Payment” regulations be sure to have your Legal team read the actual law. Do not assume you can write language to avoid the regulation. Also as an added protection add language to compel your General Contractor to comply with all laws when dealing with subcontractors. I also include provisions to exclude the use of trickle down terms or pay-when-paid terms and requirements for the Contractor to document their payment terms with each subcontractor.
Provisions such as these will mitigate business exposure to fines penalties and civil actions. These provisions also protect the Owner from Liens by ensuring that everyone in the construction supply chain is paid when they should.
Closing
I have been tracking these legal trends and practices for some time now. It is clear that the industry is working to change payment behaviors. Procurement professionals need to be aware of these changes and ensure that they are complying with the law. While these protections are intended to protect subcontractors, they are good for everyone and we must not allow practices that circumvent them.
What have you observed? Have you had to hold retainage in a trust? What issues have you dealt with? Tell me your stories.
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