Smith Nick: Construction Contracts Amendment Bill — Third ReadingText is incorporated into the Bound VolumeSmith Nick: Construction Contracts Amendment Bill — Third Reading[Sitting date: 20 October 2015. Volume:709;Page:7347. Text is incorporated into the Bound Volume.]Hon Dr NICK SMITH (Minister for Building and Housing): I move That the Construction Contracts Amendment Bill be now read a third time. The building and construction sector is a significant sector of the New Zealand economy. It contributes about $16 billion per year to GDP and employs over 200000 people. It is central to the rebuild of Canterbury and to resolving some of the housing and infrastructure challenges for Auckland.The industry needs the very best of construction law that will work for massive multibillion-dollar projects like the Waterview tunnel down to smaller projects like home alterations. This task of ensuring our construction law is fit for purpose is even more important now than ever given the massive building programme projected over the next few years. It is during such boom times that there is a risk of commercial and building practices getting sloppy.I must reflect briefly on the history of New Zealand construction law. Prior to the fourth Labour Government we had the Wages Protection and Contractors’ Liens Act which enabled a builder or subcontractor to register their interest in a property and ensure payment against the title of the land. The Minister who was then responsible Geoffrey Palmer argued that there was no such need for special legislation in the sector and that the law of contract was sufficient. The problem with this academic approach was that the management of risk in the sector favoured property developers and main contractors at the expense of the thousands of small businesses that did the bulk of the actual construction work. If a project was successful all was well—everyone got paid and the developer took their profit. If the project went badly the developer went broke and the contractors and their subbies did not receive payment. The practice developed for the worse in the 1990s with the evolution of “pay when paid” contracts creating a precarious stack of cards and excessively risky developments.It became increasingly apparent that this laissez-faire approach was not working and in 2001 I tabled a member’s bill for a Construction Contracts Act. The Government of the day led by Minister Laila Harré thought likewise and so the 2002 Act came into existence. The Act has worked well. It has provided an effective payment dispute resolution process and knocked on the head those particularly obnoxious contractual arrangements of “pay when paid”.This bill arises from necessary improvements to that law. The most significant of the changes are in respect of retentions. These will be welcomed by the tens of thousands of mum and dad businesses involving plumbers painters electricians tilers plasterers and many other trades. The retentions are sums where the principal or main contractor retains a portion often 10 percent to ensure that the work is of standard. The first change in this bill is that it makes plain that the prohibition on the “pay when paid” provisions applies equally to those retentions. The second change arises from the way some contractors misused these retentions as working capital for the next project. This puts the subbies’ money at risk in a way in which they had no control or ability to minimise that risk.The failure of Mainzeal where $18 million of retentions was lost for mum and dad subcontractors well illustrates the need for law change. The losses were of such a scale that they caused huge pain for hundreds of small and medium sized businesses across New Zealand and also resulted in some of those businesses failing as a consequence of those payments not being made. The bill significantly changes the law on how retentions must be managed. The significance of requiring they be held on trust is that they will be treated preferentially in any business failure akin to wages and tax. This is appropriate. The balance we have attempted to strike in this law is maximising the security of these payments for subbies while minimising the extra compliance costs that go with these provisions.It is important for the record that I set out how these new provisions will work. Retentions are to be held on trust. Payers can hold those retentions in liquid assets such as accounts receivable but if they do not get paid they are still obligated to meet those payments. The trust ends when the retentions are either paid out in full or used to fix defective work. These new retention provisions will affect about $200 million a year of funds that are held and are a significant refinement in the way our construction law works.The Construction Contracts Act will also be amended to remove the distinction between residential construction contracts and commercial contracts so that parties to either kind of contract have full and equal access to provisions under the Act. These follow on from regulatory changes we made on 1 January requiring written contracts in the residential construction sector. This is a substantial change that more than doubles the scope of the Construction Contracts Act from about $6 billion per year to $16 billion per year.Thirdly the scope of the Act will be widened to include construction-related services such as the work that is done by architects by engineers and by quantity surveyors. Parties to contracts for the performance of these services will be able to access the payment and dispute resolution processes in the Act. This amendment will be of particular benefit to consumers to help them hold architects engineers and quantity surveyors to account for their work. It will also benefit those designers and quantity surveyors enabling them to use the payment provisions of the Act to ensure they are properly paid for their services in a timely manner.These amendments will come into force on 1 September 2016 to give these professions enough time to adapt to this new construction law. I would like to thank those building and construction sector representatives who gave their time to participate in the working groups and reference groups to assist my ministry with the review of the Construction Contracts Act and in developing the amendments to regulate retentions. I also want to acknowledge the work of the Commerce Committee. Can I also thank the team in the ministry the Parliamentary Counsel Office and all those who have worked on this bill. This will make for a more robust and a more commercially disciplined construction sector and as I said at the beginning at a time when there is a record level of construction this bill is to be welcomed by the House.