CCA Retentions Regime: Complying Instruments – What are they and what are my options?

It is important to note that all Complying Instruments must meet the requirements set out in the CCA.

The CCA defines “Complying Instruments” in section 18FB:

(2) The issuer of the instrument must be:

1. A licensed insurer; or
2. A registered bank; or
3. Any other person, who is not an associate of party A, prescribed or within a class prescribed in regulations.

(3) The instrument must:

1. Be issued in favour of party B or endorsed with party B’s interest; and
2. Require the issuer to pay the retention money to party B if party A fails to pay that money on the date on which it is payable under the construction contract; and
3. Enable party B to enforce that promise against the issuer; and
4. Comply with any requirements that are prescribed in regulations and that apply in respect of the instrument.

(4) The premium or other money that is payable, or that may become payable, to the issuer for the instrument must have been fully paid by party A and all terms and conditions must have been satisfied so that the instrument is, and remains, in effect.

An instrument may be in different formats (such as insurances, bonds, or guarantees) as long as it fulfils the requirements described in sections 18FB (2–4).

Party A is furthermore required to maintain and disclose records of all Complying Instruments held in respect of any Party B. The reports provided by Party A to Party B must include the following details in respect of each Complying Instrument:

• The name of the entity that issued the Complying Instrument; and
• The policy number (or similar); and
• The amount secured under the particular Complying Instrument.

Costs incurred in procuring and maintaining a Compliant Instrument cannot be recovered from Party B.

Party A maintains a bank account for the specific purpose of holding contract retentions. 

A retention account must be opened, and the money kept, within New Zealand with a registered New Zealand bank.  Retention money is automatically held “on trust” by Party A.  

A retention amount (specified under the relevant construction contract, commonly 5–10% of the contract value) is deducted from each of Party B’s progress payment claims.  The trust arises as soon as the amount becomes retention money and continues until certain contractual obligations have been fulfilled, defects have been fixed, and the money is paid to Party B. i.e., Practical or Final Completion is achieved.   

Alternatively, the trust will come to an end when: 

• Party A uses the money to remedy defects (to the extent permitted under the construction contract); or
• It otherwise ceases to be payable to Party B; or  
• Party B relinquishes its rights in respect of the retention monies.

• Retention monies from multiple parties and multiple projects can be held within the same retention account.   
• They can be utilised by all Parties A, regardless of their financial situation. 
• Retention accounts are a relatively simple self-managed solution ensuring compliance with the Construction Contracts Act (Retention Money) regime.  
• Party A has entitlement to any interest accrued on retention monies.

• Requires ongoing management and administration to ensure compliance with the CCA. 
• Requires monthly reporting to all Parties B. 
• May require adjustment to your progress payment schedule template to include a retention summary (as required under clause 18FD of the CCA (Retention Money) Amendment Act 2023). 
• The cost of managing and administering the trust account rests with Party A, and Party A cannot charge or deduct any monies from Party B for doing so. 

• Complying Instrument.
• Performance bond.
• Bank bond / Bank guarantee.
• Surety bond / Surety guarantee.

* Not to be confused with a Bond in lieu of Retentions (Clause 12.3.3, NZS3910:2013).

A retention bond is a guarantee from a third party, typically a financial institution. If a company fails to deliver on its contractual obligations and does not return to fix defects, the bond provider will pay instead.

There are three parties to a bond:

1. The Principal / Client / Head-Contractor (Party A) – known as the Bond Principal.
2. The Contractor / Subcontractor (Party B) – also referred to as the Beneficiary.
3. The Bond Provider – a bank or other institution, known as the Guarantor or Surety.

A bond operates much like a mortgage – i.e., it is a loan facility, which if drawn down, must be repaid in full plus any fees and/or interest. A retention bond is a type of performance bond which requires conditions to be satisfied before it can be either called upon or released (if not, then it is an on – demand bond). A bond normally applies to a single project only.

• As good as cash.
• Replaces traditional retentions but fulfils the same role / purpose.
• Demonstrates Party A’s financial stability.
• Once in place, requires no ongoing management or administration.
• Provides security for performance of Party A’s contractual obligations.
• Improves Party A’s cash flow.
• Eliminates trust obligations and related liability under the CCA for the Party A and its directors.
• Reduces likelihood of CCA breach(s).
• Can be drafted to suit individual parties’ requirements and/or projects

• May not be suitable for low value and/or small projects, i.e., Small alteration projects.
• Will not be an option for smaller companies and/or companies with fewer assets and borrowing capacity.
• Must be repaid in full if it is called upon by the Party B.
• May be difficult to obtain for Parties A where they are working on multiple concurrent projects, all requiring bonds.
• Specific contract drafting will be required to ensure the conditions of the Retention Instrument and Construction Contract are aligned (NZS contracts 3910, 3915 and 3916).

• Insurance policy.

An Insurance Retention Instrument is a financial guarantee from a third party, in the form of an insurance policy, that protects retentions (in respect of one or more Parties B) up to a designated maximum value.

This retention instrument operates like an insurance policy.

Party A deducts and holds retentions from Parties B. However, it is not necessary to hold retention money on trust as the Retention Instrument protects the full value of the retentions. This means Party A can use these funds as working capital.

The policy responds when Party A is unable to pay a relevant retention amount to Party B.

• Reduces retention management and administration.
• Reduces risk of CCA breach(s).
• Enhances cashflow for Party A up to the insured value.
• Is renewable annually.
• Can be dollar specific (i.e., a group of projects) or project specific. Can be used across multiple different projects, of any size and value, involving multiple Parties B.
• Avoids the scenario whereby third party retention information is intermingled with retention account information of Party B.
• Can be updated and revalued as retentions values change.
• Does not necessarily have to be repaid by Party A, if called upon.

• Subject to terms and conditions set by the insurer.
• Subject to verification of Party A’s financial status. This may not be an option for smaller companies and/or companies with fewer assets or turnover.
• Party A may need to operate a compliant trust account as a backup to manage retentions that exceed the policy’s maximum limit i.e., where there is a shortfall between the value of the Retention Instrument and actual retentions.
• Party A will still have some administration / management obligations. For example:
  • Servicing premium payments.
  • Provide the policy provider with a monthly retentions report (this report becomes the policy schedule).
  • Provide each Party B with a monthly retentions report.
• Specific contract drafting will be required to ensure the conditions of the Retention Instrument and Construction Contract are aligned (NZS contracts 3910, 3915 and 3916).

• Retention account.
• Trust account.

Party A can engage a third party to manage and administer a retention account on their behalf.

A third party takes responsibility for operating and maintaining the retention trust account on behalf of Party A. Those approved to take on this role are authorised by statute under clause 18E(3) of the Construction Contracts (Retention Money) Amendment Act 2023.

The account can be held by:

• An incorporated law firm.
• The Public Trust.
• A trustee company.
• A Chartered Accountant.
• A person holding a licence under the Auditor Regulation Act 2011, or other person authorised under that legislation.

• Management and compliance with the CCA retentions regime is outsourced, and Party A can focus on core business.
• Party A cannot misuse (or be tempted to misuse) retention monies.
• Retention monies from multiple parties and multiple projects can be held within the same retention account.
• Specialist management of retentions reduces risk of CCA breach(s).
• Can be utilised by all Parties A, regardless of their financial situation.

• Retentions are deducted from progress payment claims, and require ongoing administration, reporting and management.
• Party A pays a third party for management and administration of retentions.
• May not be suitable for shorter or low-value projects as the cost of administration may outweigh the benefits.