Retention money has always been a flashpoint in the New Zealand construction industry. For years, subcontractors watched their retentions vanish when head contractors collapsed. The 2023 amendments to the Construction Contracts Act are designed to stop that – but they only work if you use them.
What Is Retention Money?
Retention money is the portion of your progress payments that the head contractor withholds as security for your performance under a construction contract. Typically, this is 5%–10% of each progress payment, held back and released after the defects liability period ends.
On a $200,000 contract with 5% retentions, that’s $10,000 of your money sitting in someone else’s account for 12 months or more.
Why the Old Regime Failed
Under the 2015 retention money provisions, retentions were deemed to be held on trust, but:
- They could be mixed with general business funds.
- Head contractors routinely used them as working capital.
- When a head contractor went into liquidation, retentions were almost impossible to trace and recover.
At Commercial Collections, we’ve seen how devastating this has been for subcontractors – especially when multiple projects and years of retentions disappear overnight.
The 2023 Amendments: What Changed
The Construction Contracts (Retention Money) Amendment Act 2023 applies to construction contracts entered into or renewed after 5 October 2023.
Key changes are:
1. Automatic Trust Status
Retention money is automatically deemed to be held on trust by law. You don’t need special wording in your contract for this to apply.
2. Mandatory Separate Bank Account
Head contractors must now:
- Hold retention money in a separate New Zealand bank account used solely for retention funds; or
- Use a complying instrument, such as a bond or guarantee, that meets the Act’s requirements.
This is to stop retentions being used as working capital.
3. Separate Ledger Accounts
The head contractor must keep separate ledger accounts that clearly identify:
- Each party whose money is held; and
- Each construction contract the retention relates to.
This makes it easier to prove what is owed to you.
4. Quarterly Reporting
Head contractors must provide retention money information at least quarterly. You also have the right to:
- Request information about your retentions; and
- Inspect records at any reasonable time, without charge.
5. Strict Restrictions on Use
Retention money can only be used for:
- Paying it back to the subcontractor when it falls due; or
- Remedying defects in your work, after at least 10 working days’ written notice.
Any other use is a breach of the Act and exposes the company and its directors to penalties.
Penalties for Non-Compliance
The Act introduces significant penalties:
- Improper holding of retention money (e.g. not in a compliant account):
- Up to $200,000 for the company; and
- Up to $50,000 per director.
- Unauthorised use of retention money (e.g. using it as working capital):
- Up to $20,000 for the company; and
- Up to $50,000 per director.
- Record-keeping and reporting failures:
- Fines up to $50,000.
Importantly, directors are personally liable. This is intended to change behaviour at the top.
What Happens if the Head Contractor Becomes Insolvent?
If a liquidator or receiver is appointed:
- They step into the role of trustee of the retention money.
- They must notify you within 10 working days of their appointment.
- Because the funds should be in a separate trust account (or covered by a complying instrument), they are ring-fenced from the contractor’s general assets.
This means your retention money should be separate and recoverable, not lost in the insolvency pool with unsecured creditors.
What Subcontractors Should Do Now
The law gives you new protections – but you must actively use them.
1. Ask for Proof of a Separate Retention Account
Before you start work:
- Ask the head contractor to confirm in writing that they have a compliant retention money trust account or complying instrument.
- Request details of the bank and account structure (you don’t need the account number, but you want confirmation it’s a dedicated trust account for retentions).
2. Demand Quarterly Reporting
Don’t wait to be offered information:
- Remind the head contractor that quarterly reporting is mandatory.
- Ask for a statement showing:
- The amount of retention held for you;
- The contract(s) it relates to; and
- Any movements (releases, applications to defects, etc.).
3. Exercise Your Right to Inspect
You are entitled to:
- Inspect retention records at any reasonable time, without charge.
- Check that the ledger entries match your contract and payment claims.
If access is refused or delayed, that’s a red flag and may indicate non-compliance.
4. Tighten Your Terms and Conditions
Update your T&Cs and subcontracts to:
- Specify the maximum retention percentage (e.g. 5%).
- Set clear conditions for release (e.g. practical completion and end of defects liability period).
- State a timeframe for return (e.g. within 10 working days of the end of the defects liability period).
- Refer to the Construction Contracts Act retention provisions and your rights to information and inspection.
5. Act Fast When Retentions Are Due
When the defects liability period expires:
- Issue a formal written request for release of retention money immediately.
- Treat any unpaid retention as a debt due and payable.
- If payment is not made promptly, escalate – this is where we step in.
At Commercial Collections, we treat overdue retentions like any other recoverable debt and pursue them accordingly.
The Bigger Picture
Retention money is your cash, not a free overdraft for the head contractor. On every project, you’re effectively financing the job by allowing retentions to be held for months or years.
The 2023 amendments are designed to:
- Protect your money through trust status and separate accounts;
- Improve transparency via ledgers and quarterly reporting; and
- Deter abuse with meaningful penalties and director liability.
But legislation alone doesn’t protect you. Knowing and enforcing your rights does.
The Bottom Line
- Retention money must now be held in a separate trust account (or under a complying instrument).
- You are entitled to quarterly reports, inspection of records, and timely release of retentions.
- There are substantial penalties for companies and personal liability for directors who breach the rules.
- In an insolvency, properly held retention money should be ring-fenced and recoverable.
If your retention money isn’t being reported, held correctly, or returned on time, act quickly. Get in touch with Commercial Collections – we treat overdue retentions as debts and move to recover what you’re owed.