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 it's 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 in practice:
- 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. Five changes matter most.
1. Automatic Trust Status
Retention money is now held on trust by law, automatically. You don't need special wording in your contract for this to apply.
2. A Separate Bank Account
Head contractors must 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. Either way, retentions can no longer sit in the general account funding the head contractor's business.
3. Separate Ledger Accounts
The head contractor must keep ledger accounts that clearly identify each party whose money is held and each construction contract the retention relates to. If it ever comes to proving what you're owed, the paper trail now has to exist.
4. Quarterly Reporting
Head contractors must report on your retention money at least quarterly. You can also request information at any time, and inspect the records at any reasonable time, free of charge.
5. Strict Limits on Use
Retention money can only be used for two things: paying you back when it falls due, or remedying defects in your work, and the second only after at least 10 working days' written notice. Any other use is a breach of the Act.
Penalties for Non-Compliance
The penalties have teeth, and they reach directors personally:
- Improper holding of retention money (for example, not in a compliant account): fines up to $200,000 for the company and $50,000 per director.
- Unauthorised use (for example, using retentions as working capital): fines up to $20,000 for the company and $50,000 per director.
- Record-keeping and reporting failures: fines up to $50,000.
Personal liability for directors is deliberate. It's 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 and must notify you within 10 working days of their appointment. Because the funds should be sitting in a separate trust account (or covered by a complying instrument), they're ring-fenced from the contractor's general assets.
In short: your retention money should be separate and recoverable, not lost in the insolvency pool with the unsecured creditors.
What Subcontractors Should Do Now
The law gives you new protections, but they don't apply themselves. Five practical steps:
1. Ask for Proof of a Separate Retention Account
Before you start work, ask the head contractor to confirm in writing that they hold retentions in a compliant trust account or complying instrument, and which bank it's with. You don't need the account number; you need confirmation that a dedicated account exists.
2. Expect the Quarterly Report
Don't wait to be offered information. Quarterly reporting is mandatory, so ask for a statement showing the amount held for you, the contract it relates to, and any movements such as releases or applications to defects.
3. Exercise Your Right to Inspect
You're entitled to inspect the retention records at any reasonable time, without charge, and to check the ledger entries against your contract and payment claims. If access is refused or delayed, treat that as a red flag: it often means non-compliance.
4. Tighten Your Terms and Conditions
Update your T&Cs and subcontracts to cap the retention percentage (say, 5%), set clear conditions for release such as practical completion and the end of the defects liability period, state a timeframe for return (for example, within 10 working days of the defects liability period ending), and refer to the Act's 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 immediately. From that day, an unpaid retention is a debt due and payable, and we treat it like one: if payment doesn't follow promptly, that's where we step in.
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 letting retentions be held for months or years. The 2023 amendments protect your money through trust status and separate accounts, improve transparency through ledgers and quarterly reporting, and deter abuse with real 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're entitled to quarterly reports, inspection of the records, and timely release.
- Companies face substantial penalties for breaking the rules, and directors are personally liable.
- 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.