Retention money requirements

About retention money

Retention money is the amount held back to subcontractors from a payment made to them under a construction contract, as a security for their performance.

The retention money regime sets out the requirements for holding retention money from subcontractors under the Construction Contracts Act 2002. The Construction Contracts Act 2002 impacts anyone who withholds retention money, including:

• construction companies
• local and central government procurement teams
• liquidators and receiver companies
• banks and other financial companies and legal services.

The retention regime was put in place to protect retention money that is owed to subcontractors should a head contractor's business fail. It also makes sure retention money that is withheld is responsibly managed.

It is not a legal requirement to withhold retention money, but if someone chooses to, they must meet the requirements of the Construction Contracts Act 2002.

Requirements for withholding retention money

The requirements include:

• keeping retention money held on trust, without mixing it with other money or assets
• ensuring that retention money held as cash is also held separately in a bank account with prescribed ledger accounts
• using retention money only to rectify non-performance of subcontractors' obligations under the contracts – if retention money is used to remedy those defects, subcontractors must be given ten working days' notice
• providing quarterly reports to each subcontractor retention money is withheld from
• providing each subcontractor with a report after each transaction with their retention money, promptly and free of charge
• paying out retention money when it's owed

• paying interest to subcontractors on late payments

• all requirements specified in the Construction Contracts Act apply, even if terms are added to a contract that go against the Act.

Parties under the retention money regime

There are two parties under the regime:

• 'Party A' – usually the main contractor ie the party who withholds retention money. Party A has several obligations to the subcontractor it holds retention money from.
• 'Party B' – usually the subcontractor ie the party retention money is withheld from.

Rights of party B

Party B is entitled to:

• receive quarterly, written reports from party A
• receive a written report promptly after each retention money transaction on a contract
• request accounting details at any time, promptly and free of charge
• receive interest if party A doesn't pay the retention money when its due
• receive assurance their retention money is protected against the insolvency of party A and would be distributed by an appointed receiver or liquidator
• request the Ministry of Business Innovation and Employment’s (MBIE) Integrity and Enforcement team to enforce party A's obligation to protect the retention money and to provide accounting information or regular reports. Refer to the complaints page

It's important to note that subcontractors are not bound by prohibited provisions in contracts, especially around what happens with retention money.

Interest earned on retention money

Interest earned on retention money held in a retention money bank account belongs to party A. If party A does not pay the retention money to party B when it is due, party A may have to pay interest to party B.

When retention money is paid out

Party A must pay out retention money when party B has:

• completed the work
• performed all its contractual obligations
• remedied any notified defects in the performance of its obligations under the contract
• remedied any defects during any defects liability period specified in the contract.

Practical completion and retention money

The date when party B (subcontractors) has completed their contractual obligations will vary according to the nature of the obligations under the contract. Some subcontractors, such as those involved in demolition, may be entitled to receive their retention money when they complete the work and leave the site. However, work done by other subcontractors may not be considered complete until the entire contract is completed by the main contractor and handed over to the client.

Receivership and liquidation

If party A goes into receivership or liquidation, the receiver or the liquidator becomes trustee of the retention money for all party Bs. The new trustee will be responsible for collecting, managing, or disbursing the retention money after deducting fees related to the administration of the retention money only.

The new trustee must notify party B within ten working days of their appointment as trustee.

Construction Contracts Act 2002 – legislation.govt.nz