Retention (Construction)

Retention is money you hold back from the contractor's progress payments as a form of security. It's one of the oldest risk management tools in construction, and despite ongoing debate about whether it's fair, it remains standard practice on Australian projects of all sizes. Understanding how retention works — the mechanics, the release triggers, and the trust obligations — is essential for developers.

Here's the standard structure. On each progress claim, the principal withholds a percentage of the certified amount — typically 5%. This accumulates until it reaches a cap, usually 5% of the total contract sum. At that point, no further retention is deducted from subsequent claims. The retained amount is split into two halves. The first half (2.5% of the contract sum) is released at practical completion. The second half (the remaining 2.5%) is held until the end of the defects liability period — usually 12 months after PC — and released once all defects are rectified.

The logic behind retention is straightforward. If the contractor walks off the job, does substandard work, or refuses to come back during the defects period, you have money in hand to engage someone else. Without retention, your only recourse is legal action — slow, expensive, and uncertain. On a $2 million contract, 5% retention means $100,000 in security. That's meaningful leverage.

But retention is also a constant source of tension. Contractors view it as their money being held hostage. Subcontractors feel it even more acutely because retention flows down the contract chain. A head contractor holds retention from the developer, then holds retention from every subcontractor beneath them. A plumber on a $150,000 subcontract might have $7,500 in retention tied up for over a year. For small businesses, that cash flow pressure is real.

In some Australian states, retention trust legislation has changed the game. NSW, for example, requires retention money on certain contracts to be held in a dedicated trust account — not mixed with the principal's or head contractor's general funds. The intent is to protect subcontractors if the party above them goes insolvent. Queensland has similar provisions. Other states are watching. If you're developing in a state with retention trust obligations, you need to comply or face penalties.

Some developers and contractors use alternative security instruments instead of cash retention. Bank guarantees are the most common alternative — the contractor provides a guarantee from their bank, which the developer can call on if needed. Insurance bonds work similarly. These instruments free up the contractor's cash flow but come at a cost (bank guarantee fees are typically 1-3% annually). The contract needs to explicitly allow substitution of alternative security for cash retention.

Tracking retention accurately across a project requires discipline. You need to know the cumulative retention held at any point, which progress claims the deductions came from, when the cap was reached, and the exact dates for first-half and second-half release. On multi-contract projects — where you might have a head contractor, a separate landscaper, and several direct subcontractors — each contract has its own retention schedule. Missing a release date doesn't just frustrate the contractor; it can trigger a payment dispute under security of payment legislation.