125: Retention money part 2

When you decide to take on subcontracting work, the head contractor may choose to hold back a certain percentage of the contract value (usually between 2 and 10%) as ‘retention money’. This money provides security that the job will be completed, and defects will be remedied. 

It is up to the parties involved as to whether they agree to retention money being held, but it can only be held as part of a commercial construction contract. 

The detail is in the contract

If retention money is held from you as part of a commercial construction contract, that contract must include certain details. 

Check your contract and make sure it includes: 

• the reason why retention money is being withheld – this could be security for the proper completion of your obligations under the contract, including remedying defects
• the percentage or amount of retention money being withheld
• the criteria to be satisfied before the money is released to you (release of retention money cannot be conditional on anything other than you completing your contractual obligations)
• the date when the money must be released, or how the due date is to be established – this cannot be later than the completion date of your obligations
• the procedures to be followed before the head contractor can use the retention money to remedy any defects in your obligations under the contract.

If any prohibited provisions are included in the contract, these will not be enforceable. This includes making payment of retention money (or the timing of such payment) conditional on anything other than you completing all your obligations under the contract. The contract also can’t require you to pay any administration fees or costs associated with retention money. 

It’s also important to note that the release of money should only be based on your own contractual obligations. In August 2024, the High Court found that certain provisions of subcontracts which stated retentions would be released on practical completion of the head contract – where work was dependent on the work of other subcontractors’ work being completed – breached the Act.

What you should expect to receive

A head contractor can’t just take your money and hang onto it, there are specific rules about how they hold the money and reporting you can expect. First of all, the money must be held in trust – this means it can’t be used as working capital or cashflow and is protected if the holder becomes insolvent.

If you have retention money held as part of a contract, you should expect a statement at least once every three months which includes:  

• the total amount of retention money being withheld in each contract
• the date and amount of each transaction into and out of the bank account, and the contract to which it relates
• full details of the bank account in which the money is being held, including name of bank, branch, account name and account number
• all sources of security if retention money has been secured by more than one complying bank accounts or instruments
• how each retention money account balance is secured.

They cannot charge you for this information, and three months is only the minimum frequency - you can ask for reporting at any time. 

If things go wrong

The Construction Contracts Act has been strengthened in recent years and provides more protection than ever for retention money. If there are concerns about the performance of your obligations under a contract, you must receive 10 days advanced notice in writing to give you the chance to remedy any defects before money can be taken. Then, money can only be taken to remedy those defects in accordance with the contract you’ve agreed to. 

MBIE hold the responsibility to monitor compliance. Get in touch if you have concerns about how your retention money is being held or used. 

In case of receivership or liquidation

Good news – if worst comes to worst and a contractor you have a commercial contract with goes into receivership or liquidation, your retention money is protected and will not be available to the receiver, liquidator or other appointed agent to pay their debts.

The receiver or liquidator will notify you of their appointment within 10 working days and be responsible for managing or distributing the money based on your original contract and any further commercial negotiations. 

Quiz

1. What is the minimum frequency you should be receiving reporting if you have retention money withheld from you? 
   
   1. Once a week
   2. Once every 3 months
   3. Once a year
   4. Once a month
2. When can retention money being withheld from you be spent by the head contractor? 
   
   1. When they are low on cashflow, with 5 days notice
   2. To pay other subcontractors, as long as they pay it back before your contract ends
   3. To remedy defects in performance as agreed by the contract, with 10 days written notice
3. Retention money is only paid out when the entire job is finished
   
   1. False – retention money only applies to your specific contractual obligations
   2. True – retention money waits until the very end of a project