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Retentions – Are They Really in Trust?

After the collapse of Mainzeal in 2013, which sent shockwaves through the construction industry, resulting in changes to the Construction Contracts Act that required the retentions from a contract to be held in trust. It does not need to be held in a specific trust account, but proper accounting records that correctly record the retention money held on trust must be kept and also must be made available for inspection by the contractor. The rules came into effect 31st March 2017.

BDO in their 2019 survey of the construction industry found that 70% of the 216 construction firms did not seek evidence that their retentions were held on Trust. But if you do ask and the retentions are kept separate, does that give you confidence. Based on the recent collapse of Ebert Construction in July 2018, the answer is no.

When a construction company goes into receivership, someone will have to apply to the Court to be appointed a receiver of the Trust funds; and their fees are paid before recovery of the funds from the company. However, they will only receive the payment of retentions if the funds have been put aside in a separate account (this is well established in the Regal Castings case), otherwise the retentions become unpaid invoices and not retentions. Referring back to the BDO survey 75% of the respondents did use a trust account, but this may be reflective of the fact that respondents were conscientious enough to respond in the first place.

The impact of the Ebert decision is that small-medium construction companies are going to miss out as the construction company will not use a separate account, or the monies in the account will not cover the fees to recover the amounts. In the Ebert case, it was estimated the cost of recovery and administering the trust was $150K, and those funds could be recovered from the retentions recovered. The most notable recent collapse of Stanley/Tallwood estimated that $900k-$1.3m of retentions should have been held in Trust but weren’t.

No doubt politicians will react to the recent collapses (with an election year looming) but in the meantime, to safeguard, at lease exercise your right to demand to see the accounting records showing that the retentions are being put to one side.


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