Sub-contractors demand protection from construction company collapses one year on from Mainzeal

3 March 2014

Media Release

The Government is dragging its heels on protecting sub-contractors against the risk of losing money from the collapse of construction companies exactly one year after Mainzeal went into liquidation, says the Specialist Trade Contractors Federation (STCF).

The STCF, which represents more than 5,700 contracting firms in New Zealand, says the Government has failed to introduce urgent changes to the practice of construction firms withholding payments or retentions from firms working on projects.

STCF president Graham Burke said: “It is now 12 months since Mainzeal collapsed, leading to around $70 million in losses for many sub-contractors across New Zealand - ranging from plumbers and electricians to steel fabricators and scaffolders. The time for talking is over”.

“At least $20m of those losses, hitting countless small businesses, was due to the retention system. This allows the main contractor – such as Mainzeal - to hold up to 10 per cent of the sum due to a contractor, interest free, for up to two years as a guarantee of the quality of the work.”

Since the Mainzeal collapse, the STCF has been pressing the Government to legislate to ensure the retention is held in trust for the sub-contractor. This would require a simple addition to current legislation and would mean retentions cannot be scooped up by the bank or receiver if the principal runs into financial trouble.

Alternatively, sub-contractors could be given an option of providing a bond as gurantee instead of the main contractor holding on to 10 per cent of the sum owed to them.

Mr Burke said: “We’re talking about money already earned by the sub-contractor. The main contractor uses the retention for security against a sub-contractor ‘going under’, however they are not prepared to offer that same security to the sub-contractor when holding his money”.

“Despite some very good conversations with Government officials and the Commerce Select Committee looking at the situation, nothing has changed yet.

“Now, more than ever before, this absurd situation requires urgent attention. That’s because of the surge in construction activity, especially in Auckland and Christchurch.

“Most people outside the industry might think that the situation for main contractors and, accordingly, sub-contractors would be more secure during the good times. However, history has shown that the most precarious times for companies are recessions and, ironically, during upturns.

“During economic upswings, firms often grow rapidly to meet demand and may over-extend themselves. If the bank refuses to loan them money, then there is the opportunity to use the retention payments they are holding as working capital. If the company fails, then those retentions will be used to pay secured creditors such as the bank or IRD.

“Given the unpredictable nature of the industry, there is a strong likelihood that, unless the Construction Contracts Act is amended to address this problem, we will ultimately see another Mainzeal scenario with thousands of small businesses once again suffering for the mistakes of the main contractor.”