Retention

Retention protects the party paying for the work. If the contractor walks off, goes into administration or leaves defects unfixed, the principal can use the retained money to cover the cost.

A common arrangement is to deduct a percentage from each progress payment, often 5% or 10% of the claimed amount, until total retention reaches a cap, often 5% of the contract sum. The exact rates are set in the contract, so check the annexure or contract particulars.

Retention is then released in stages. Typically half is released at practical completion and the balance at the end of the defects liability period, once defects are closed out. Head contractors usually hold retention on their subcontractors on similar terms, so the same money flows down the chain.

For a deeper look, read Construction Retention: What Builders and Subbies Need to Know.

Retention is cash held back from payments. A bank guarantee is a promise from a bank to pay the principal on demand, up to a set amount. Both are forms of security, and many contracts let the contractor choose or substitute one for the other.

Cash retention hurts the contractor's cash flow but costs nothing to arrange. A bank guarantee keeps cash flowing but uses the contractor's banking facility and carries fees. Larger contractors often prefer guarantees, while many subcontractors have retention held because they lack the facilities.

Under AS 4000-1997, security, including retention, is dealt with in clause 5. Check how your contract treats interest on cash retention and the conditions for converting it to a guarantee.

Because retention can be lost when a head contractor becomes insolvent, several states now require it to be held on trust.

• NSW. Under the Building and Construction Industry Security of Payment Act 1999 and its 2020 Regulation, a head contractor whose contract with the principal is worth $20 million or more must hold subcontractor retention in a retention money trust account with an authorised bank.

• Queensland. The Building Industry Fairness (Security of Payment) Act 2017 has project trust accounts and retention trust accounts. After the 2025 pause, they apply to eligible Queensland Government contracts of $1 million or more and other eligible contracts of $10 million or more.

• Western Australia. The Building and Construction Industry (Security of Payment) Act 2021 requires retention money to be held on trust.

• Other states. Rules differ or are under review. Check your state's Act and regulator before relying on any threshold.

• Not diarising release dates. Retention is often left unclaimed for months after the defects liability period ends. Put the dates in the system on day one.

• Ignoring the release conditions. Many contracts require a written request or a final certificate. Read the clause.

• Mixing retention with operating cash. Where a trust applies, spending retention can be an offence, and directors can be personally liable.

• Leaving subcontract retention out of sync. If a head contractor releases subcontractor retention later than it receives its own, check that the subcontract allows it.