Smith Nick: Construction Contracts Amendment Bill — In CommitteeText is incorporated into the Bound VolumeSmith Nick: Construction Contracts Amendment Bill — In Committee[Sitting date: 12 March 2015. Volume:703;Page:2243. Text is incorporated into the Bound Volume.]Hon Dr NICK SMITH (Minister for Building and Housing): I firstly want to acknowledge the work of the Commerce Committee on this Construction Contracts Amendment Bill. It makes a number of changes to improve the dispute resolution process that was put in place in 2002. The first of those changes is to expand the dispute resolution process to include residential contracts. When we did a review of the Building Act that identified the fact that there were many residential building disputes that would be more easily resolved by the specific processes set out in the Construction Contracts Act. The second change it makes is that it includes professional design and quantity surveying and disputes in that respect that previously were not covered by the law. There are also some technical amendments that improve the way in which the dispute resolution system which overall has been good law works.The reason I have chosen to take a call early in the Committee stage is that members will be aware of a pretty significant debate that has gone on in the construction sector about the issue of retentions. Yesterday I tabled in Parliament Supplementary Order Paper 52 which makes substantive changes in respect of retentions and how they operate under law. This was an issue the select committee raised during submissions. Given the fact that actually the Supplementary Order Paper changes are in some respects more significant than the original bill I think it is worth just taking a moment before Parliament to note those significant changes around retentions what they mean and why the Government thinks we should progress with these changes.In the construction industry it is long-established practice not just in New Zealand but internationally for retentions to be held after construction work is completed to ensure that if there are any defects or difficulties with the work either the main contractor or the principal is able to ensure that those defects are fixed. Sometimes those retentions are 5 percent; I have seen contracts that have them as high as 10 percent. When you are talking about a construction industry that is currently riding an all-time boom—about $15 billion a year—the amount of moneys involved in these retentions come to many hundreds of millions of dollars. One of the concerns the Government has particularly for the subcontractors is that these retention moneys can be misused by main contractors who are effectively using them as working capital for the next project. The part that does not serve the public interest around that is that if another project gets into financial difficulty and the main contractor ends up in liquidation then you can have hundreds of subcontracting businesses that end up as unsecured creditors and are subsequently not paid. So the Government has given consideration over recent months to whether we could have better law in this regard.It is interesting to look at international practice. The Parliament of New South Wales has recently passed law in this respect and has introduced quite a strict structure where retentions would have to be held in separate trust funds separated from the main contractor and the subbie and would then be released when the work was found to be without defect or the like. In other jurisdictions you could set up a system. For instance I am responsible for running the tenancy bond system. What we do there is that when a bond is required in a residential tenancy that money is actually paid off to a Government fund. The Government manages that fund. In the event that there is a dispute or when the tenancy comes to an end the Government then refunds that bond.We have put in a lot of work and there has been a lot of consultation and discussion with industry with subcontractors and with the banking sector about what would be the right response for New Zealand. Our view is that law reform in this area is required and we are trying to find a balance between what would provide the right incentives for the management of risk within the construction industry and at the same time trying to minimise compliance costs. If you impose excessive compliance costs that is simply going to add to the cost of business to the cost of building houses commercially and to the cost of infrastructure across New Zealand. What the Supplementary Order Paper provides is what I would describe as a deemed trust model. It is not that the main contractor who is holding retentions is going to have to set up a separate bank account. It is not going to have to set up a lawyer’s trust account but it is going to have to treat retention moneys as deemed trust funds. That means that the main contractor will have to be far more transparent in the way in which they report those funds that are held in retentions. It also means that in the event of a liquidation as occurred very publicly and controversially around the Mainzeal Property and Construction collapse the deemed trust funds would have a higher security in a liquidation than other funds—i.e. those subcontractors would be above the unsecured creditors and would receive funding and payment for work that they actually did providing it was up to standard and met the normal tests. That would be a huge relief to people who are caught up in liquidations of those sorts.I commend the Supplementary Order Paper to the House. I think it makes a much-needed improvement to where the risks should sit within the building and construction industry. The Government has chosen an implementation date of 1 April 2016. We think that is a reasonable period of notice to be able to allow the construction industry to take on board this new legal framework for the way in which retentions are managed. Overall what the Government believes is that this change in the law around retentions will see the risk around collapse in the construction industry fit more appropriately with the parties end up with a more disciplined industry and require a more efficient albeit cautious response to commercial contracts. Of course an ambition of these changes is that fewer people in the building and construction industry end up doing work and not being paid for it. I commend the original bill but also the Supplementary Order Paper to the House.