What Is Retention?
Retention is the practice of withholding a percentage of each payment due to a contractor until specified completion milestones — typically practical completion and the end of the defects liability period — are reached. Retentions exist to provide the principal (client) with security against defective or incomplete work: if the contractor fails to fix defects or complete outstanding items, the principal can use the retention to fund remediation by others.
Retentions of 5-10% of contract value are common in commercial construction, and can represent significant sums for contractors on large projects. Understanding your rights around retentions — when they can be withheld, how they should be held, and when they must be released — is important for every construction contractor.
The Construction Contracts (Retention Money) Amendment Act
The Construction Contracts (Retention Money) Amendment Act 2023 significantly changed the rules around retention in New Zealand. The Act — which came into force in phases from October 2023 — requires that retention money be held in a separate trust account and not used by the contractor for their own purposes while retained funds are held.
This change responds to a series of high-profile contractor insolvencies in which subcontractors lost their retention money because it had not been ring-fenced separately from the contractor’s operating funds. When Mainzeal, Ebert Construction, and other major contractors collapsed, subcontractors found that their retention money — which should have been their security — had been absorbed into the insolvent estate along with all other creditors.
Practical Requirements
The retention money rules require head contractors holding retention from subcontractors to: hold the money in a compliant manner (either in trust or with a bank guarantee); provide retention money statements to subcontractors on request; and release retentions promptly when the conditions for release have been met. Failure to comply with these requirements creates personal liability for company directors in addition to corporate liability.
Getting Your Retention Released
Retention release is often a source of dispute. To maximise your chances of prompt release, document practical completion clearly at the time it occurs, maintain a proactive defects notification and rectification process, and follow up retention release requests in writing with clear reference to the contractual entitlement. If retention is withheld beyond the contractual entitlement, the dispute resolution provisions of the Construction Contracts Act provide a pathway to challenge this.