LBP Codewords

Are you managing your retention money properly?

Codewords #124

5 May 2025

5 minutes to read

The retention provisions in the Construction Contracts Act 2002 (CCA) were put in place to protect retention money owed to subcontractors in the event of a business failure, and to ensure retention money withheld under construction contracts is responsibly managed. 

Every worker and small businessperson deserves to be paid for their work, and subcontractors need to feel confident that they will be paid what they are owed. Whether you regularly work as a head contractor, a subcontractor, or both, it is important that LBPs understand their rights and obligations under the Construction Contracts Act. 

The Construction Contracts Act was strengthened in April 2023 to provide extra protection for subcontractors, if a head contractor chooses to hold retention money.   

Understanding retention money 

In practice, retention money is usually withheld by a head contractor, as an assurance that the subcontractor will complete their work to the agreed standard. The subcontractor has up to 12 months after the job is finished to fix any defects in their work.  

However, if a head contractor spends the money they are retaining as retention money, and then becomes insolvent, the subcontractor could lose their money. 

The strengthening of the Construction Contracts Act is designed to make sure subcontractors still get the money they are owed in the event of an insolvency. This means both contractors and subcontractors can trust that work will be completed promptly to the terms of the contract, and everyone will be paid what they are owed when the job is finished.  

Retention money isn’t mandatory 

It is not a requirement to hold retention money. Head contractors who choose to hold retention money typically hold between 2 and 10% of the contract value, for up to 12 months after the job is finished.  

This money can then be used by the head contractor to remedy defects by the subcontractor, assuming this is permitted by their contract and 10 working days advance notice is given in writing.  

The Construction Contracts Act does not set a minimum contract amount for retention money to apply. This means the rules and requirements apply to all retention money withheld under commercial construction contracts in Aotearoa New Zealand.  

Understanding the requirements to hold retention money 

By law, the head contractors (who hold the retention money) must hold the retention money in a trust. They must also provide reports to the sub-contractor, when requested. 

The requirements to hold retention money include:  

  • 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 contract 

  • 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 

It is also a requirement for retention money to be paid out as soon as it is owed on completion of the contract – if payments are late, interest can be charged by the subcontractor. 

Whatever you put in your contract about retention money, you can’t change your obligations under the Construction Contracts Act, even if you add terms that go against it.  

Offences and penalties have been updated 

When the Construction Contracts (Retention Money) Amendment Act was passed, it also introduced offences and penalties for companies and in some cases, directors, who fail to hold retention money on trust.  

Offences have been introduced for: 

  • providing false information on retention money 

  • failure to comply with accounting, recording and reporting requirements 

  • use of retention money for a purpose other than fixing defects in the subcontractor’s performance 

  • failure to provide regular information to the subcontractor on retention money 

If a head contractor is not fulfilling their obligations and is in breach of the retention money regime, sub-contractors have a right to lodge a complaint with MBIE. A complaints form can be found in the links below. 

Ministry of Business, Innovation & Employment (MBIE) has provided information and education, with links below, for LBPs to better understand your rights and obligations, no matter what side of the job you are on.   

 

Record your Codewords articles relevant to your licence class and complete the quiz for your LBP skills maintenance requirements. 

Share
Related articles