Retention money is one of the biggest cash flow headaches in the New Zealand construction industry. If you're a subcontractor, you might have 5–10% of your invoice value held back on every claim — sometimes for years — while you wait for a principal or head contractor to release it. And if they go under before releasing it, that money can disappear entirely.
Here's how retentions work under NZ law, what your rights are, and how to protect yourself.
What Are Retentions?
A retention (or retainage) is a percentage of money withheld from a contractor or subcontractor's payment claim — held back as a financial security to ensure work is completed to the required standard and defects are remedied. When the project reaches practical completion (and again at the end of the defects liability period), the retention is released.
Typical retention rates in NZ: - 5% is the most common rate in residential and commercial construction - 10% is used on some larger or higher-risk projects
On a $200,000 subcontract, 5% retention means $10,000 sits with your client for months or years. Multiply that across a few active projects and you're often chasing $30,000–$80,000 that's effectively yours but unavailable.
The Construction Contracts Amendment Act 2015
New Zealand's Construction Contracts Amendment Act 2015 (which amended the Construction Contracts Act 2002) introduced significant protections for retention money held from 31 March 2017 onwards.
The key requirements:
1. Retentions must be held on trust. If a party holds retention money (i.e., they've withheld it from a subcontractor), they must hold it separately — on trust — rather than mixing it with their general operating funds. The money doesn't belong to the head contractor; it belongs to the subcontractor until the contractual conditions for release are met.
2. Records must be kept. Parties holding retention money must keep proper records of: - How much is held - Who it belongs to - Any interest earned on it
3. Rights on insolvency. If the party holding your retentions becomes insolvent, the trust status means those funds should sit outside the general pool of assets available to creditors — meaning you have a priority claim on them.
In practice, compliance with the trust requirement has been inconsistent, and enforcement is difficult. But the law is on your side when a dispute arises.
When Can Retentions Be Released?
Retentions are typically released in two stages under most NZ construction contracts:
Stage 1 — Practical Completion: Half the retention (or all of it, depending on the contract) is released when the project reaches practical completion — meaning the work is substantially finished and fit for its intended use, even if minor defects remain.
Stage 2 — End of Defects Liability Period (DLP): The remaining retention is released at the end of the DLP, typically 12 months after practical completion. This final release confirms all defects notified during the DLP have been remedied.
Some contracts also allow retentions to be released proportionally as sections of work are completed — this is worth negotiating upfront on larger contracts.
How to Chase Your Retentions
Retentions don't automatically come back to you. You need to actively claim them. Here's the process:
1. Calendar your DLP end dates. When you reach practical completion on a job, note the date and set a reminder for 12 months later. This is when you're entitled to make your final retention claim.
2. Issue a payment claim for the retention. Under the Construction Contracts Act, retentions are claimed the same way as any other progress payment — via a formal payment claim issued to the paying party. Include: - The contract reference - The retention amount owing - The payment due date (typically 20 working days after your claim)
3. Follow up in writing. If the paying party doesn't respond or doesn't pay within the required timeframe, send a written follow-up. Document everything — emails and payment claims are your evidence if it goes to adjudication.
4. Issue a payment schedule dispute if needed. If the payer disputes your claim, they must issue a payment schedule within the response timeframe set in the contract (or 20 working days if nothing is specified). If they don't, you can apply to enforce the amount owed through the court or adjudication under the CCA.
Use our Retentions Calculator to track what's held and when it's due back.
Negotiating Retentions Out of Your Contract
The best retention strategy is to minimise how much gets held in the first place. Options to negotiate:
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Retention bonds: Instead of cash retentions, offer a performance bond or retention bond from a bank or insurer. This gives the client security without tying up your cash. Bonds cost roughly 0.5–1% of the bonded amount annually — often cheaper than the cash flow cost of a 5% cash retention.
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Reduced retention rate: On work with a strong track record, negotiate down to 2.5% or request that retentions apply only to the defects period (not throughout the entire construction phase).
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No retention on materials: Retentions typically apply to labour value, not materials. Make sure your contract specifies this — it reduces the effective retention rate on material-heavy trades.
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Proportional release: Negotiate for retention to be reduced as major milestones are completed rather than held in full until practical completion.
What Happens If Your Client Goes Under?
This is where retentions get dangerous. If the party holding your retentions becomes insolvent before releasing them, your position depends on whether they complied with the trust requirement.
If the funds were properly held on trust (separately, in a separate account or clearly identifiable), you should have a priority claim on them ahead of general creditors. In practice, proving this requires the liquidator to identify those funds — which is often difficult if the head contractor was mixing funds.
If the funds weren't held separately, your claim may end up as an unsecured creditor claim in the insolvency — meaning you get cents in the dollar, if anything.
Practical protection steps: - At the start of every job, ask in writing where your retentions are held and confirm they're in a separate trust account - Check the financial health of major clients before starting large projects — Companies Office registers, credit checks - Consider whether you can negotiate retention bonds rather than cash retentions with clients you're less confident about
Quick Reference: Key Timeframes
| Event | Default timeframe |
|---|---|
| Response to payment claim (no contract spec) | 20 working days |
| Practical completion — 1st retention release | As per contract |
| Defects liability period | Usually 12 months |
| Final retention release (end of DLP) | On written claim after DLP expires |
| Adjudication (unpaid claim) | Can be initiated immediately after dispute arises |
Related Resources
- Retentions Calculator — track what's held across active projects
- Job Cost Calculator — factor retention into your cash flow projections
- Unpaid invoices: your options as an NZ tradie
- Tradie contract guide
NZ Tradie Tools provides free calculators, templates and guides for New Zealand tradies. Visit tradietools.nz.