I was reviewing a set of final accounts recently and it struck me how many contractors had significant retention balances sitting with the principal at practical completion. Not disputed. Not lost. Just sitting there. Unclaimed, untracked, and in some cases overdue for release.
There is a lot of money sitting in other people’s bank accounts across NZ construction right now. And a lot of contractors either don’t know exactly how much they’re owed, or aren’t sure how to get it back.
This article covers what a retention is, how it’s calculated, who holds it, and what changed in 2023 for commercial contractors.
What Is a Retention?
A retention is a percentage withheld from each progress payment throughout a project. The party holding it keeps it as security against defects and incomplete work. In most NZ commercial contracts, this is the principal. In subcontracts, it’s typically the head contractor.
It is not a penalty. It is not withheld because there is a problem. It is standard contractual security held until you complete your obligations, and you are entitled to it back once those obligations are met.
How Is Retention Calculated?
Under NZS 3910, the most commonly used construction contract in New Zealand, the default retention scale is tiered:
- 10% on the first $200,000 of certified work
- 5% on the next $800,000
- 1.75% on amounts above $1,000,000
- Maximum total retention capped at $200,000
These are default rates and can be amended in the contract schedules. In practice, many principals and head contractors negotiate different rates, caps, or release structures, particularly on larger projects.
Two examples using the default NZS 3910 scale:
- On a $500,000 contract: 10% of $200,000 = $20,000 + 5% of $300,000 = $15,000. Maximum retention is $35,000.
- On a $2,000,000 contract: $20,000 + $40,000 + $17,500 = $77,500.
Worth noting: there is no legal requirement to withhold retention at all. It is a contractual mechanism, not a statutory one. If a contract is silent on retention, none is held.
When Is Retention Released?
Retention is typically released in two halves.
The first half is released at practical completion, when the principal certifies that the works are substantially complete and the building can be used for its intended purpose.
The second half is released at the end of the defects liability period. This is the period after handover during which the contractor is required to return and fix any defects that emerge. The defects period is commonly 12 months, but it is set by the contract, not fixed in law. Some contracts set it at 6 months. Others at 24.
The release of the second half is not automatic. In most contracts it requires a certificate or written notice. Contractors who don’t actively track this often find their entitlement expires or gets disputed simply because no one asked for it.
Who Holds the Retention Money?
In a main contract under NZS 3910, the principal holds the retention. In a subcontract, the head contractor holds the retention from the subcontractor.
Before October 2023, there was very little to prevent a principal or head contractor from pooling that money with their own operating funds, earning interest on it, using it for cash flow, and, in some cases, losing it entirely when they went under. The Mainzeal collapse in 2013 left subcontractors exposed to millions in unprotected retention. It took a decade before legislation caught up.
What Changed in 2023: Commercial Contractor Protections
The Construction Contracts Amendment Act 2023 came into force on 5 October 2023. It applies to commercial construction contracts entered into or renewed from that date. It does not apply to contracts where the principal is a homeowner building or renovating their own home.
Under qualifying commercial contracts, retention money must be held on trust for the contractor in a separate bank account or a compliant financial instrument such as a bank guarantee or qualifying insurance policy.
The party holding the retention must provide written reports at least once every three months showing the amount held, the contract it relates to, and where it is held. The contractor has a statutory right to inspect those records.
If the principal becomes insolvent and has complied with those requirements, trust assets sit outside the general estate. Your money does not get pooled with creditor claims.
Non-compliance is an offence. Companies face fines up to $200,000 per breach. Directors can be personally fined up to $50,000 per breach. MBIE has published guidance on the new requirements.
Why Most Contractors Leave Money on the Table
The contractors who manage retentions well recover them reliably. The ones who don’t often write off money that was legally theirs. The gap between those two groups is rarely about the law. It comes down to process.
The common failure points are:
- No system for tracking retention balances across multiple contracts
- Not knowing when the defects liability period ends
- Waiting for the principal to release retention rather than issuing a formal request
- Accepting partial release without querying the balance
- Not knowing what the contract says about release conditions
On a $2m project you could have $77,500 sitting with the principal. Across several projects in a busy year, untracked retention adds up fast.
What to Do Right Now
If you are working on live projects or recently completed jobs:
- Pull your contracts and identify every project where retention has been withheld
- Check the defects liability period end date for each one
- Confirm whether practical completion has been certified and whether the first half has been released
- If retention is overdue for release, write to the principal formally requesting it, referencing the contract clause
In the next Quick Take, I’ll cover what happens when a principal is slow to release retention after practical completion, and what your contract gives you as leverage. If you want to understand post-contract administration in depth, including retention, dispute resolution, and variation claims, that is covered as part of our Full Estimating and Surveying Certificate.
