As a legal requirement of the Construction Contracts Act 2002 (CCA), retention money must be protected so that if the party withholding the retention (party A) becomes insolvent or refuses to return the retention money to the other party (party B) when it is due, party B does not suffer the financial loss.
Examples of party A and party B include:
The Construction Contracts (Retention Money) Amendment Act 2023 (Amendment Act) strengthens the CCA’s retention regime and applies to all commercial construction contracts for both Principals and Head Contractors. Under the Amendment Act, retention money is automatically held on trust. It must either be protected by:
Aon can provide a complying instrument under the CCA called a Retention Instrument. The Retention Instrument works by protecting a maximum specific dollar amount of retentions so that it is not necessary to hold retention money on trust in the form of cash, enabling these funds to legitimately be used within the business.
Advantages of a Retention Instrument:
- Frees up cash. Cash does not have to be held separately for retentions protected with a Retention Instrument.
- It is not an “on demand” instrument. There is a process for the legitimate payment around the claim of the retention to party B.
- Party A does not have to disclose other retentions that they hold on other party Bs or other commercially sensitive information.
- Party A has been financially vetted by the insurer and has met the financial criteria meaning the insurer is prepared to put its capital behind party A.
- Complies with the CCA.
- Reduces risk of a breach of the CCA and a resulting fine.
If the application is successful and accepted by party A:
- The insurer provides a maximum limit up to which they will secure retentions across multiple projects, where retentions are being held on behalf of a party B (as advised by party A to the insurer).
- If the limit provided by the insurer is less than the total of all retentions held by party A, party A is required to hold the balance of retentions in a compliant bank account.
- Party A is required to regularly provide the insurer a retention report* of the retentions they currently hold on behalf of their party B’s. This current report becomes the “policy schedule” of retentions secured by the Retention Instrument at that time.
- Once a retention is protected by the Retention Instrument, it remains protected until it is paid back to party B or removed from the most recent retention report provided to the insurer.
- Like an insurance policy:
- the Retention Instrument is annually reviewable
- a premium is payable by party A before the Retention Instrument is issued. This needs to be paid in full before the Retention Instrument is issued.
- Once the Retention Instrument is issued to party A, party A can utilise the retention cash it is currently holding (up to the value of the retentions protected by the Retention Instrument).
*The retention report provides the insurer specific details to ensure compliance with the Amendment Act. It includes details of party B, project, construction contract, total amount of retention money held, date of the retention and the amount protected by the retention instrument.
Talk to Aon about a Retention Instrument to find out how we can support you.
Contact | Warren Tucker, National Manager - Surety (Bonds and Retentions)
Call +64 9 362 9079 or +64 27 523 0085 | Email email@example.com