Retentions are the portion of a subcontractor’s payment withheld by the head contractor as security for defects — commonly five or ten percent, released in stages after practical completion. The practice is longstanding and, in principle, unremarkable.
The problem it created is that when head contractors failed, retention money that subcontractors had earned was gone, absorbed into the general pool of company assets. A series of high-profile collapses made the scale of the loss obvious, and the law changed in response.
Retention money is trust money
The Construction Contracts Act now requires retention money withheld under a commercial construction contract to be held on trust for the subcontractor it belongs to. It is not the head contractor’s working capital, and it cannot be used as such.
The regime was strengthened further, and the key features now are:
- Retention money must be held in a separate bank account or ledger used only for that purpose, at a New Zealand registered bank.
- The trust arises automatically. It does not depend on anyone declaring it, and it cannot be contracted out of.
- Retention money must not be used for any purpose other than remedying defects in the subcontractor’s work.
- Proper accounting records must be kept and specified information provided to the subcontractor, including the amount held and where.
- Failure to comply carries offence provisions, with liability extending to directors personally in defined circumstances.
Critically, because the money is held on trust, it does not form part of the head contractor’s assets available to general creditors if the company fails. That is the entire point of the reform.
What a subcontractor should actually do
The protections only work if you use them. Practical steps that cost nothing:
- Ask for the information you are entitled to. You can require details of retention money held on your behalf. Asking is normal and a reluctance to answer is informative.
- Track retentions as a receivable. Retention money is frequently the difference between a profitable year and a loss, and it is the line most often left untracked in small subcontracting businesses.
- Diarise release dates. Retentions are commonly released in two tranches, and money nobody chases is money that sits.
- Read the retention clause before signing. Percentage, cap, release triggers and defects liability period all vary, and all are negotiable more often than subcontractors assume.
Payment claims and schedules still matter more
Retentions sit inside the Act’s broader payment regime, and that regime is where subcontractors have the most leverage — and lose it most often through paperwork.
A compliant payment claim triggers an obligation on the payer to respond with a payment schedule within the contractual or statutory timeframe. If they do not, the claimed amount generally becomes due in full, and it can be pursued as a debt with limited grounds for the payer to argue about the underlying work.
This is a genuinely powerful mechanism, and it depends entirely on your payment claims complying with the Act’s requirements. Subcontractors who invoice casually give away a statutory advantage that costs nothing to hold.
Adjudication
Disputes under the Act can go to adjudication, a fast statutory process producing a binding determination enforceable while any further proceedings continue. It is designed to keep money moving rather than to produce a perfect answer.
It is faster and cheaper than court, though not free, and the timeframes move quickly once started. For a subcontractor owed money by a solvent head contractor, it is usually the right tool.
The uncomfortable reality
None of this helps if the money was never set aside. The trust regime substantially improves your position in an insolvency, but recovery still depends on the funds existing and being identifiable.
Which makes credit assessment the first line of defence, not the last. Knowing who you are contracting with, watching for slow payment as an early signal, and being willing to decline work from a payer with a poor record protects you better than any statutory remedy applied afterwards.
General information only, not legal advice. Take advice on your specific contract and circumstances.
