Today’s blog was written by guest contributor Robert Finley.
The total loss to the industry from Mainzeal’s collapse was estimated to be well over $100 million, but the retentions held by Mainzeal were, at its collapse, $18.3 million. Financial and cash flow difficulties and disputes often arise on projects long before any retention money is due to be released. However few, if any, causes of building company failures are attributable directly or indirectly to the retention regime.
In my opinion, the major issue is not retentions but other contract payments not being made when properly due in the first instance. Many an engineer (or architect) to the contract fails to comply with their duties in accordance with the contract. This may be incompetence, deviousness, inability to resist the demands of the principal or a combination of all three. I believe that any scheme that only relies upon what an Engineer certifies as due for payment is inadequate and doomed to failure.
All too often a contractor will go to adjudication to pursue payment and the principal will simply go into liquidation. When a successful determination is made there is no money to pay the contractor. While retentions always figure in the claim they are, for the most part, a relatively minor component of the shortfall, often just 5-10% of the total amount in dispute and unpaid.
The retention system only works well and serves its purpose of ensuring that contractors and subcontractors attend to their outstanding contractual obligations if everyone is still standing.
There can be no doubt that the current system with all of its peculiarities is broken and needs fixing, but there are many avenues in which this must be done, and retention money is but one of these. While the proposed trust system may help to protect retentions, these are only a minor proportion of money owed where a contractor fails.
Robert Finley has had a lifelong interest in contractual affairs and has recently retired as a Commercial Risk Manager for a large construction contractor. He is a qualified engineer, BE, FIPENZ, and has served for the Registered Master Builders Association on the Joint Contracts Committee with the NZ Institute of Architects and is a former President of the Society of Construction Law.