What is retention money?
In many New Zealand construction contracts, the head contractor holds back a portion of each progress payment to a subcontractor. That money — the retention — is security that the subcontractor will finish the work and fix any defects. It’s usually released in stages: part at practical completion, the rest at the end of the defects liability period.
For a subcontractor, retentions are earned money that can’t be used yet. On a busy year with several projects, the total held back can be significant.
Why the rules changed
The collapse of several large construction companies left subcontractors unable to recover retention money that had been mixed with the failed company’s general funds. The Construction Contracts Act 2002 had already been amended to require retentions to be held on trust, and further changes took effect on 5 October 2023 to strengthen that protection.
The rules since 5 October 2023
According to building.govt.nz:
Held on trust automatically
Retention money is held on trust by the head contractor as soon as the contract allows it to be withheld. It doesn’t depend on a separate trust deed.
Kept separate
Retention money can’t be mixed with the head contractor’s own funds or used for its cash flow. If held as cash, it must be kept in a separate bank account, with designated ledger accounts.
Reporting to subcontractors
Head contractors must give subcontractors regular information about the retention money held on their behalf.
Penalties
Strict liability offences apply for failures such as not keeping proper records, using retention money for purposes other than remedying defects, or not providing required information. Penalties can reach $50,000 for directors and $200,000 for companies.
What subcontractors should do
- Read the retention clauses in every contract: how much is retained, the cap, and when it will be released.
- Keep your own register of retentions held by each head contractor, with expected release dates.
- Check the reports you receive against your own records.
- Diarise release dates — practical completion and end of defects liability.
- Claim releases promptly. Serve a payment claim for released retentions as soon as they fall due.
- Get advice if reports don’t arrive, don’t reconcile, or a head contractor is in financial difficulty.
Retentions and your cash flow
Retentions create a double squeeze. First, each progress payment arrives smaller than the work it covers. Second, the held-back money may not come back for months after the job ends.
Example scenario — illustrative only. A Hamilton plumbing subcontractor works on three commercial projects during the year. Across those jobs, a meaningful amount is retained. Half is due back at practical completion; the rest after a twelve-month defects period. That money was earned this year but won’t be in the bank until next year — while wages, materials and tax on the work are all due now.
Planning tips
- Don’t count retentions as cash. Track them separately in your forecast.
- Price retentions into your quotes, where you can, as a cost of carrying the job.
- Negotiate the terms — a lower retention rate, a cap, or a retention bond instead of cash retention.
- Stagger work so releases from older projects help fund newer ones.
Retention bonds and other alternatives
Cash retentions aren’t the only way to give a head contractor security. Depending on the contract and the parties, alternatives can include:
- Retention bonds or guarantees, where a surety provides the security instead of cash being withheld from each payment.
- A lower retention percentage or a cap on the total amount retained across the job.
- Staged release, with a larger share released at practical completion.
- Shorter defects periods for work that is easy to inspect, such as some finishing trades.
Each option has its own cost and conditions, so compare them against the cash flow cost of having money held back. For a subcontractor running several jobs at once, even a modest reduction in retentions can free up a surprising amount of working capital.
Questions to ask before you sign
- What percentage will be retained, and is there a cap?
- When exactly will retentions be released, and what triggers each release?
- How and how often will the head contractor report the retention money held?
- Would a retention bond be accepted instead of cash retentions?
- What happens to retentions if the project is delayed through no fault of yours?
Getting clear answers at the start is far easier than chasing them at the end of a defects period.
Where funding fits
Retentions tie up working capital, and working capital facilities can release the pressure. A revolving business line of credit can cover wages and materials while progress payments and retentions catch up, generally for businesses trading six months or more. For larger needs, a property-secured loan of $20,000 to $1m may suit.
Our construction and trades funding page explains how we help builders and subcontractors keep crews and suppliers paid.
This guide is general information, not legal advice. Talk to a construction lawyer about your specific contracts.