Regulating retention: a lesson from New Zealand

Friday 29 August 2025


Downtown Auckland skyline and waterfront at dusk - Auckland, New Zealand. Credit: Nate Hovee/Adobe Stock

M Saleh Jaberi
ESK Law Firm, Tehran

Bruno Zeller
University of Western Australia, Perth

There are two contradictory facts about retention in the construction industry that must be reconciled: on one hand, it is the most widely used form of security in the industry; in contradiction, there are major issues in using it. Different measures have been taken by common law countries to address retention issues, including abolishing retention or introducing alternative security instruments for the parties. While each of these solutions has its problems, New Zealand’s solution of regulating retention by legislation can be a role model for other countries. This article delves into retention, its key issues, proposed alternative solutions, and the approach taken by New Zealand in dealing with retention.

‘We must end the retentions culture in construction and consign it to the steel dustbin of history’:[1] must we?

Introduction

Although a form of contract drafted for the Military Barrack Office in 1805 had provisions for retention at 12 per cent of the value of the work certified,[2] all the blame for the expansion of retention lies with the construction of the UK railway system in the 1840s. This large-scale railway construction project fostered an environment that encouraged new players to enter the construction industry to meet the rising demand. However, many of these new contractors were unable to successfully execute the work, leading to a high number of insolvencies. To address this issue, railroad companies began withholding 20 per cent or more of the contractors’ payments.[3]

Soon after, the practice of retention grew to widespread use throughout the 19th century,[4] and even a contract for building a public house in 1866 for the sum of £872 contained 25 per cent retention to protect the employer against failure of the contractor before completion, requiring the services of another contractor to complete the works.[5] This practice also spread to the rest of the construction industry: today, the retention system has become a vital part of any contract document for construction projects.

‘Retention’, also known as ‘retainage’ or ‘holdback’ in the United States and Canada, refers to a practice in construction contracts where the client withholds a portion of the contract value until the work is satisfactorily completed. The main contractor typically cascades the same retention through the entire delivery chain, including project subcontractors and vendors, to manage the impact of the retention deduction. The specific amount of money that can be withheld as a retention is subject to negotiation between the parties. Typically, the retention is around 3–10 per cent of the value of the work performed by the contractor.[6] The principal (client) shall release a portion of the withheld retention money, usually around 50 per cent, upon the practical completion of the works. The remaining retention money will then be released after the expiry of the contractually agreed defects liability period or the maintenance period.[7]

Retention was initially implemented in the construction industry as a mechanism to safeguard project performance.[8] However, given the significant transformation that the industry has experienced over the past century or so, the continued existence of retentions has become rather questionable. Eddie Williams argued:

‘Given the volatile circumstances in which retainage originated, it is a historical oddity that retainage remains commonplace today when construction markets are so very different.’[9]

Therefore, there appears to be a disconnect between the actual and the intended purpose of retentions. The existing literature on retentions outlines several of its uses. Arguably, it is important to assess whether retentions are truly fulfilling the purposes for which they were originally established. This paper will argue that the real problem lies in the misuse of retention funds and hence an abolishment of the clause would be tantamount to ‘throwing out the baby with the bathwater’.

To add to the now-questionable use of retention clauses, a few problems have been identified, including adverse impacts on the cash flow of contractors, sums held are always being at risk of being lost owing to insolvencies, and the retention release being abused by employers. Hence, some countries have abolished the practice of retentions, finding alternative provisions to deal with the risks for which retentions were originally implemented. Others have attempted to outlaw the practice but have been unsuccessful. Yet, there are some countries that appear content with the ongoing practice of retention and consider it to be useful.[10]

As an example, following the collapse of a major contractor who owed substantial retention funds to subcontractors, New Zealand has reformed the law governing retentions, becoming a pioneer in limiting this practice by legislation. The first reform mandated that retentions be ringfenced and held in trust. The second reform tightened the requirements around accounting and record-keeping, made it easier for subcontractors to access retention funds, and introduced criminal penalties in the form of fines for non-compliance with the retention regulations.[11]

This article first addresses the purposes of using retention in the construction industry and discusses the difficulties in using retention. It then considers the solutions proposed for such difficulties and alternative options for protecting the quality of work. Finally, this article analyses the New Zealand approach towards retention, with the aim of identifying a potential role model for other countries to emulate.

Reasons behind the popularity of retention

Construction projects are distinctive undertakings that typically require a significant financial and resource commitment. Each project is often highly complex, involving the application of novel methods and technologies, and is generally subject to strict time and cost constraints. Due to the substantial cost and duration of construction activities, partial payments for the work are typically disbursed during the production process. In essence, project owners provide partial payment for an ‘incomplete product’ prior to the project’s completion and final acceptance. Extending payment during the production phase carries inherent risks, including the potential for overpayment for the work completed, payment for defective work, and the continued solvency of the involved parties until the project is complete.[12] To counter these risks, the practice of retainage has evolved as a common approach in the industry.

Therefore, there appears to be a disconnect between the actual and the intended purpose of retentions.

According to a survey conducted in 2012, ten reasons were identified for using retention in the construction industry.[13] The varied purposes of retentions, as outlined in the table below, share a common element of performance security in one form or another. This security is intended to either rectify defects or address non-performance due to insolvency, or simply to incentivise good performance by the contractor. Some of the applications of retentions are valid during the construction phase, while others are relevant for the defects liability period or the maintenance phase. The purposes listed in Table 1 are also ranked (1 to 5) in the order of most important to the least important in the minds of the industry players.

At first glance, the current retention practice appears uncontentious: for principals or head contractors, it guarantees that the contract work is free of defects, while in principle, the contractor/subcontractor’s money is safeguarded and eventually released after a contractually agreed specific event or circumstance occurs. Moreover, withholding cash retention is the best assurance for principals and head contractors compared to other types of guarantees. Many subcontractors lack the ability to obtain bank guarantees, or would need to do so by offering valuable working capital or personal assets as collateral. At the same time, principals and main contractors are often hesitant to accept surety bonds due to the perceived risks associated with them.[14]

Description of purposes of retentions

Rank

Performance security – eg, to assure project completion or complete outstanding work or in case of non-performance

1

Rectify defects during the defects liability period

2

Leverage to get defects put right

3

Motivation/incentive for early or timely completion

3

Protection against insolvency

4

Rectify defects during construction

5

Financial security in case of overpayment

5

Administrative convenience

5

Funds to pay mechanic’s lien

5

Quality assurance

5

On the other hand, those holding the retentions are essentially given carte blanche as to how they hold and use retention money, which results in several issues.

The key issues relating to retention

The implementation of retention mechanisms unfortunately has become tainted by exploitative practices which frequently culminate in the delayed or non-payment of retention monies to subcontractors. These abusive practices have overshadowed and undermined the unique advantages that retention once provided to the construction industry as a straightforward, effective, economical and readily available form of performance security.[15]

According to the study conducted by the Pye Tait Report[16] into retentions in the English construction industry, several issues emerged. Delays in paying retention monies appear to be commonplace in the construction sector, and the contractor survey also provided evidence of frequent non-payment of retentions. Delayed or non-payment of retention monies may also weaken relationships throughout the construction supply chain. Furthermore, according to this survey, head contractors sometimes utilise these retention monies as their working capital (such as for labour costs) or incorporate them into their general expenditures.

Insolvency is another issue, as most principals hold retentions in their own bank account. This suggests that for contractors there is no protection from upstream insolvencies, as retention monies held against their work are not typically ringfenced in a separate account which is at arm’s length from the normal business accounts of the principal. The insolvency of a single large main contractor or client can have widespread ramifications across multiple contractors within the supply chain. This is because the insolvent main contractor or client is, in most cases, simultaneously involved in a substantial number of projects and construction contracts with various subcontractors at a given point in time. Consequently, the financial failure of the principal entity can trigger a domino effect, adversely impacting a wide range of subordinate contractors throughout the supply chain.

Subcontractors can also experience a drain on cash flow due to retention, exacerbated by issues such as overdraft fees and limited access to finance, as well as incurring additional administrative time as a result of the practice of retentions. Evidence gathered from another part of this survey also indicates that a proportion of contractors increased tender prices to offset retention. This can also have an impact on the wider economy, as it may be a factor in reducing the competitiveness of businesses and incurring higher costs for clients. The survey also shows that, if contractors have less readily available working capital where monies are held in retention, this may have an impact on the economy as a whole if construction sector business growth is obstructed.

The aforementioned key issues relating to retentions are listed in Table 2 and ranked 1 to 5 in the order of most problematic to the least in the industry.

The key issues relating to retentions

Rank

The late and non-payment of retention money by holding parties

1

Employers/head contractors using retention money they are holding on behalf of their subcontractors as working capital

2

Insolvency of employers/head contractors

3

Considerable strain on the supply chain, predominately on subcontractors and their ability to maintain cash flow to their business

4

Increasing tender prices to cover retention risks

5

The use of retention provisions is divisive and weakens relationships throughout the construction supply chain

5

Retention may constrain business growth

5

Table 2: Key issues relating to retentions

It must also be noted that almost all businesses and subcontractors that are subject to retentions believe that some form of assurance is needed in construction contracts.[17] Therefore, alternative mechanisms to retention should be explored to find whether they are suitable replacements for retention.

Proposed solutions to retention issues

The negotiation of security provisions by a principal is often influenced by a variety of factors, including concerns regarding the potential inadequacy of damages as a remedy for non-performance and project funding requirements.[18] Conversely, a contractor’s or subcontractor’s approach to negotiating such provisions is frequently driven by considerations related to cash flow and business operations. Those receiving security seek to mitigate their exposure to the risks of non-performance, while those providing security are primarily concerned with maintaining the operational viability of their business.[19]

The insolvency of a single large main contractor or client can have widespread ramifications across multiple contractors within the supply chain.

Despite the widespread use of cash retention across all levels of the construction industry, retention is not universally considered an appropriate or desirable form of security.[20] As an alternative to retention, it is also common practice for contracting parties to agree on the use of alternative security instruments, either as a substitute for or in addition to cash retention. These alternative security mechanisms – discussed below in brief – often include:

• retention bonds;

• performance bonds;

• escrow accounts;

• parent company guarantees; and

• retentions held in trust funds.

Retention bonds

A retention bond, also referred to as a retention guarantee or retention surety bond, is a financial mechanism provided by a bank or surety company to a project owner or client. This bond serves as a substitute for the retention amount that the project owner would typically withhold from the contractor. In essence, the bond ensures that the surety company will pay the retention amount to the project owner if the contractor fails to fulfil their contractual obligations or defaults on the project. If the retention bond is accepted after withholding a part of the payment due to the contractor as retention, the principal must then release retention as the security provided by retention money is now located in the bond.[21]

Performance bonds

A performance bond functions as a risk mitigation mechanism, designed to ensure that compensation is provided to the client in the event that a contractor fails to fulfil their contractual obligations. In this arrangement, a third party, typically a financial institution such as a bank or insurance company, undertakes to pay a specified sum of money to the client, who may be the main contractor, should the contractor be unable to meet their commitments. However, unlike retention bonds, the value of the performance bond does not reduce at the point of practical completion.[22]

It is believed that both the use of retention bonds and performance bonds in lieu of retention money are generally unsuitable alternatives for most subcontractors.[23] Subcontractors typically have insufficient assets to provide the necessary security required by banks before they act as a surety for a bond. Furthermore, bonds would potentially increase prices across projects as a result of reduced competition, as potentially many subcontractors may exit the market because they cannot obtain bonds at a reasonable price.[24] Within the European construction market, particularly in the United Kingdom, the prevailing view is that on-demand performance bonds are not readily available for civil and building projects.[25] As such, construction clients more commonly procure default performance bonds, if at all.[26] From the principal’s point of view, even an on-demand bond bears the risk of nonpayment since the contractor would be able to restrain the principal from calling upon the retention bond by filing a case in court.[27]

Escrow accounts

An escrow account functions as a mechanism to segregate a portion of a contractor’s funds as security for interim payments. In this arrangement, the principal deposits an agreed-upon sum, often equivalent to two or three months’ projected interim payments, into an independent, interest-bearing deposit account managed by a third-party stakeholder. This account can be jointly held by the principal and contractor, or maintained by a solicitor acting as an agent on their behalf. The primary purpose of these accounts is to act as a security, allowing the contractor to access the escrowed funds only in the event that the employer fails to make one of the regularly scheduled payments stipulated in the building contract.[28] Principals are unable to use the money deposited in the escrow account for other purposes, such as working capital, as they would be able to with the cash retention. However, escrow accounts are not generally viewed as a form of security against defects, and a more important purpose is to provide a form of security in the event of insolvency (of the principal and/or main contractor, depending on how the account is set up).[29] Furthermore, to use an escrow account parties may have to spend additional time administering payments and bear the additional professional time and costs of the others involved in operating that account.[30]

Parent company guarantees

In the construction industry, a parent company guarantee is a type of guarantee where the immediate or ultimate parent company of the contractor promises to be responsible to the principal if the contractor fails to perform their obligations under the contract. In other words, if the contractor fails to do so, the guarantor agrees to pay the principal for any losses arising from the contractor’s failure.[31] The specific liability of the parent company depends on the wording of the contract in each case which is determined through negotiation before the contract is finalised. It is common for the construction contract to require the contractor to obtain such a parent company guarantee as a prerequisite for the right to call for payment under the contract.[32]

Prima facie, such a third-party guarantee provides an incentive for contractors to return to remedy defects and they incur only minimal costs in procuring such a guarantee, though further research revealed that the extent of a guarantor’s liability is not always straightforward and is frequently the source of disputes.[33] Resolving these types of disputes can be both costly and time-consuming. Moreover:

‘There are two main drawbacks of using a parent company guarantee in place of retentions in the construction sector. Firstly, not all contractors have a parent company and therefore would not be able to provide the guarantee, and secondly, there is no security if the parent company goes into administration.’[34]

Therefore, third-party guarantees are not commonly used as the sole form of security compared to other types of security arrangements.[35]

Retentions held in trust

A retention held in a trust fund (or account) is a set-aside fund that would have otherwise been withheld by the client or employer in their own financial records. The client or main contractor is required to establish a dedicated account and deposit enough money to cover the costs owed at the conclusion of the contract. This retention money is therefore ringfenced and distinctly identified from the start of the project while it is protected in the event of the client or contractor becoming insolvent. According to the Pye Tait Report:

‘Although evidence is limited, there is sufficient information to suggest this option as a potential alternative means of implementing cash retentions that would work across the construction sector.’[36]

The optimal model for any security of payment scheme is that retention money is held in a retention trust account for the duration of the construction project.

A recent article that analysed the strengths and weaknesses associated with retention trust accounts in Australia and New Zealand also proposed that the optimal model for any security of payment scheme is that retention money is held in a retention trust account for the duration of the construction project until it is due to be paid or otherwise applied under the terms of the contract.[37] In a similar article, Ali Al Ebrahimi suggested the implementation of a deemed statutory trust framework.[38] In this model, a statutory trust account will be created whereby a principal makes progress payment to the head contractor; in return, the head contractor is required to hold the relevant proportion owed to the subcontractor on trust.[39] This requirement will then cascade down the contractual chain, meaning that further trust will be required by law and within each tier of the pyramid scheme.[40]

A study was conducted in 2020 in Scotland regarding retentions in the construction industry, a part of which was allocated to alternative mechanisms to retentions.[41] As indicated in Figure 1, when asked what options they thought should be ‘applicable for wider use across the whole sector’, most respondents (42 per cent) agreed that retentions should be held in trust, with 27 per cent agreeing with retention bonds and 24 per cent saying escrow stakeholder accounts.

Although the general prohibition of retention had its supporters,[42] New Zealand decided to use this alternative solution to restrict retention. On 31 March 2017, it introduced a retention trust scheme that applies to parties in construction contracts.[43]

New Zealand’s retention trust scheme

Although it is relatively common for main contractors in New Zealand to provide clients with both bond and retentions as security, subcontractors usually only provide retentions as security. This is because subcontractors, who are often small companies, are generally not in a strong enough financial position to obtain a performance bond from a third party or provide the necessary security (such as cash or a property mortgage) to a bank in order to get a bank guarantee.[44] Therefore, the retention practice had been open for abuse by principals and head contractors, which made the legislators look for a solution.[45]

The first attempt to secure payment to contractors in New Zealand can be traced back to the Contractors and Workers Liens Act of 1892. This legislation was originally based on the American model and underwent further changes and amendments over the years, with the most significant ones occurring in 1939 under the Labour government of Michael Joseph Savage. The main focus of this legislation was that even though the retention monies were held, the contractor and, more importantly, their subcontractors maintained a lien on the principal’s land and chattels until all monies were recovered. This legislation was revoked by another Labour government under the Wages Protection and Contractors’ Liens Act Repeal Act of 1987, which made it difficult for subcontractors to recover retentions.[46]

In 2001, a family company – Hartner Construction – filed for bankruptcy, leaving behind debts totalling more than NZ$30m and no funds available to pay unsecured creditors (subcontractors). This led to the enactment of the Construction Contracts Act 2002, which aimed to give subcontractors a degree of security around payments. Since the Act came into effect on 1 April 2003, it is reasonable to say that payment behaviours at the head contractor level have largely improved. The previously common ‘paid when paid’ or ‘paid if paid’ clauses have, with few exceptions, become a thing of the past. Most in the construction industry now understand and adhere to, at least in a formal manner, the payment claims and payment schedule procedures outlined in the Act.[47] Just over ten years later, however, the collapse of another major construction company showed that retention practice is an issue that should be addressed in the Act.

Spark Arena in Auckland, the ASB Sports Centre and the Supreme Court building in Wellington are landmark buildings that were constructed by Mainzeal Property and Construction Limited, which was for a time the third-largest commercial construction company in New Zealand. But in a shock to the construction industry, Mainzeal collapsed in 2013 and was put into liquidation. When Mainzeal collapsed, owing at least NZ$110m, at least NZ$18m of that was for ‘retentions’,[48] which highlighted a requirement for a new retention regime to change behaviour and ensure that clients and head contractors no longer used retention money as a means of transferring business risk to subcontractors.

The Construction Contracts Amendment Act 2015 and the Regulatory Systems (Commercial Matters) Amendment Act 2017 amended the Construction Contracts Act (CCA). These amendments, collectively referred to as the ‘Retention Money Provisions’ or the ‘Retention Regime’, aimed to ensure that retention money is protected and responsibly managed.[49] The principal changes made to the CCA were in relation to the following requirements:

• retention money must be held in trust;

• accounting records must be kept; and

• rights to inspect retention money records.

The Retention Money Provisions, contained in subpart 2A of CCA, came into effect on 31 March 2017 and applied to all commercial construction contracts entered into after this date.

The Retention Money Provisions stated that all retention money must be held in trust for the benefit of the contractor in the form of cash or other liquid assets that are readily converted into cash.[50] The retention money does not, however, need to be paid into a separate trust account and can be commingled with other funds.[51] The funds may be invested, and the party withholding the funds is entitled to the benefit of the appreciation of the investment and interest up to the date the retention money is payable. If the funds are invested, the party withholding them is also liable for any shortfall resulting from realising the investment.[52] A party withholding retention money must also ensure it keeps proper accounting records of all retention money held on trust or that is protected by a financial instrument, as well as records of any transactions in relation to the funds.[53] A party withholding retention money must make the records available for inspection to the party the retentions are withheld from at all reasonable times and without charge.[54]

While the Retention Money Provisions were beneficial in regulating retention, explicitly permitting head contractors to combine retention money with their other funds was problematic when viewed within the context of general trust law. It is a fundamental and uncontroversial principle of trust law that trust property must be identifiable in order for a trust to exist.[55] Furthermore, if retention monies are held in trust and cannot be identified (and subsequently traced) once mixed with other funds, then considering retentions as trust property does not provide any advantage to subcontractors in the event of the head contractor’s liquidation. In this scenario, the only recourse available to the subcontractor would be a damage claim, which would rank equally with the claims of all other unsecured creditors.[56]

Requiring head contractors to maintain ‘proper accounting records’ of the retention monies, including details of ‘all dealings and transactions’ related to the funds, will increase the likelihood of a subcontractor being able to trace and identify its funds in the event of the head contractor’s liquidation. However, the onus will be on the subcontractor to regularly inspect the accounting records, which may necessitate engaging a forensic accountant if the retention monies are mixed with other funds.[57]

The said drawbacks surfaced in a number of construction firm insolvencies, the highest profile of which were Ebert and Arrow. At the date of insolvency, Ebert had withheld NZ$4,466,071 of retentions for contracts entered into on or after 31 March 2017; and Arrow withheld NZ$4.53m for contracts entered into on or after 31 March 2017.[58] The court in Ebert made an order appointing Ms Bennett, Mr Fisk, and Mr Longman to be receivers of the retention trust fund and allowing them to deduct their fees and expenses in administering the fund, reducing the funds available for subcontractors. In Arrow’s case, the liquidators were administering the retention fund as agents of the company and were not seeking a court order to support this.[59]

To address these issues, On 5 April 2023, the Construction Contracts (Retention Money) Amendment Act 2023 was passed. The changes in the Amendment Act further strengthen and clarify protection for subcontractors’ retention money and make it easier for subcontractors to access retention money without a court order, in the event of a company’s insolvency. Parties to commercial construction contracts entered into after 5 October 2023 will need to comply with the new retentions regime set out in the Act. The key changes applied to the CCA are as follows:

• Retention money is automatically deemed to be held on trust by the party who is entitled to hold retention money, for the benefit of the party from whom retention money is withheld. The party who is entitled to hold the retention money does not need to actively create a trust.[60]

• The party holding retention money must hold that money in a separate bank account. The bank account must be registered in New Zealand, and it must be used solely for the purpose of holding the retention money. The party holding the retention money must advise the bank that the account is for the purpose of holding retention money.[61]

• The party holding the retention monies must maintain detailed accounting records pertaining to the retention monies. These records should be made available to the party from whom the retentions are being withheld on a quarterly basis. However, the records must be accessible for inspection at any reasonable time and without charge.[62]

• The party holding the retention money can only use it for the purposes set out in the construction contract and must comply with the provisions governing the use of retention money. The party holding the retention money must give a minimum of ten working days’ notice that it intends to use the money for the purpose of remedying defects and give details of the defects to be remedied.[63]

• Failure to hold retention money in accordance with the requirements of the legislation is an offence, and a party who holds retention money is liable for a fine of up to $200,000 per offence. If the party holding the retention is a body corporate, each director also commits an offence and is liable for a fine of $50,000 per offence.[64]

• When a liquidator or receiver is appointed, the party holding the retention money ceases to be a trustee of the retention money (the liquidator or receiver steps in and is the ‘new trustee’). The new trustee must notify the party from whom the retention money is withheld within ten working days of their appointment. The new trustee can have reasonable costs and fees met from the retention money on trust.[65]

These changes should provide contractors and subcontractors with more confidence that their retention monies are not being used as working capital. Additionally, recording and reporting requirements as well as enforcing penalties for noncompliance will help to some extent in compliance with the regulations. Moreover, if a principal or head contractor fails to release retention money on the day it becomes payable, the principal may have to pay interest to the contractor[66] which could be a solution for delay in release of retentions. Although the teething problems with the new legislation show that creating a retention regime that actually works is no easy task,[67] it seems the New Zealand retention scheme addressed major retention issues in the construction industry as identified in this article.

Conclusion

There are two well-recognised facts regarding retention practice in the construction industry: namely, it is the most commonly used performance security in the construction sector[68] and there are significant problems in using it that create several challenges in the whole industry.

Abolishment of retention was proposed by a few countries, such as in the UK, in order to resolve the conflict between these two facts.[69] However, it is criticised as not being workable because there is no genuine alternative form of security both available to all industry participants and viewed as acceptable by principals and head contractors. In addition, ‘principals and head contractors will inevitably find ways to work around blanket prohibitions’.[70] Therefore, the issue is not with the concept of retention as a form of security itself. The real problem lies in the misuse of retention funds by the parties holding them. If regulation is deemed necessary, the objective should not be to eliminate retention entirely, but rather to address the problems that have plagued its implementation – specifically, the insecure holding and inequitable release of retention funds. This way, the construction industry can continue to benefit from retention as a legitimate security mechanism.[71] The New Zealand approach is an example of putting this theory into practice.

The financial distress experienced by contractors in New Zealand due to the insolvency of a few large companies likely served as a catalyst for policymakers to intervene and implement a regulatory framework surrounding retention practices. The initial amendment to the NZ CCA required that retention monies be held in a trust account. The subsequent reform strengthened the accounting and documentation requirements, facilitated subcontractors’ access to retention funds, and introduced criminal sanctions in the form of fines for failing to comply with the retention regulations.

Although it is recommended that any legislation enacted in the UK be similar to the one in New Zealand rather than abolishing retention practices entirely,[72] the UK legislature seems to prefer a less interventionist approach in the hope that industry-led efforts will mean that the use of retentions will gradually die out by itself. However, as Lord Aberdare said:

‘The [UK] government still hasn’t decided on a legislative approach to tackling retentions, claiming to be waiting for the emergence of an industry consensus, which seems even less likely to arrive than Godot.’[73]

 

[1] Nigel Griffiths, The UK Government construction minister, speaking at the British Constructional Steelwork Association Annual Dinner on 2 March 2004, as reported in Contract Journal, 3 March 2004.

[2] Ronan Champion, ‘Do we need retention?’ (2005), 21(6), Construction Law Journal, 404. It is also claimed that the concept of retentions is at least as old as the Industrial Revolution, see DJ Wyatt, ‘Specifying retainage requirements’ (2003), 56 (12), The Construction Specifier, 36-3.

[3] DC Bausman, ‘Retainage Practice in the Construction Industry’ (Foundation of the American Sub-contractors Association, November 2004).

[4] TL Donaldson, A Handbook of Specifications (1859).

[5] Tooth v Hallett (1869) LR 4 Ch App 242. See also, Lamprell v Billericay Union (1849) 3 Ex 283 [154 ER 850]; Young v Smith (1879) Hudson’s BC (4th Edition, volume 2) 70 at 73; Hickman & Co v Roberts [1913] AC 229; Loxton v Ryan [1921] St R Qd 79.

[6] There is no general or implied right in a construction contract to retain money. An owner may only hold back an amount as retention where there is an express contractual term permitting it to do so. Chun Lee Engineering Co Ltd v Aoki Corporation [1991] HKCA 297 (noted by Bateson, [1992] ICLR 407). In the matter of Pan Interiors Ltd [2005] EWHC 3241 (Ch) at [54]. Where a contract makes provision for there being a retention of money, but the amount of retention is unspecified, there will be no right of retention: The Builder & Construction Group International Pty Ltd v Datalec Services Pty Ltd [2009] NSWSC 1136 at 7–9.

[7] See, eg, FIDIC Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (‘The Red Book’) (2nd Edition, 2017) clauses 14.3, 14.9; AS 4000–1997 General Conditions of Contract, clauses 5.1, 5.4; JCT Design and Build Contract 2016 (DB 2016), clause 14.8.

[8] It is also argued that ‘Historically, the aim of retention, the withholding of a portion of the contractor’s prospective profit by the owner until the end of the job, was to ensure satisfactory and timely completion of the project. In practice, however, retainage requirements often go far beyond withholding of profits, and are utilized as a mechanism for addressing defects discovered after the completion of construction’. Richard A Stockenberg and Jennifer S Woodbury, ‘Retainage Revisited: A Time to Revise and Reform’ (1996), 16(1), Construction Lawyer, 41.

[9] Eddie Williams ‘Declare war on retainage’ (2005), 45(6), Modern Steel Construction.

[10] Priyanka Raina and John Tookey, ‘The purpose of retentions: a review of the existing literature’, World Construction Conference 2012 – Global Challenges in Construction Industry, 2012.

[11] Jane Hughes and Isobel Moorhouse, ‘Retention–time to say goodbye?’ (2024), 35(3), Construction Law, 3.

[12] Inflexibility in Contracting and Retainage Practices Could Hurt Construction Industry, Report No. 00-26 (Office of Program Policy Analysis and Government Accountability (OPPAGA), December 2000).

[13] See n10 above, 288.

[14] Jeremy Coggins and Mitchell Francis, ‘Is There a Place for Retention in Today’s Construction Industry?’ (2023), 2023(2), International Construction Law Review, 92.

[15] Ibid, 95.

[16] Pye Tait Consulting, Retentions in the Construction Industry: BEIS Research Paper 17 (Department for Business, Energy & Industrial Strategy (UK), October 2017) 38, 41 (‘Pye Tait Report’). This report was also influential in other countries and led to similar research, see eg, KPMG, Retention Money Provisions – An Implementation Review of the Retention Money Provisions in the Construction Contracts Act 2002 (Ministry of Business, Innovation & Employment (NZ) Report, 27 August 2019).

[17] Practice of Cash Retention Under Construction Contracts: Public Consultation Findings, (Scottish Government, 5 November 2020), 15; available at www.gov.scot/publications/practice-cash-retention-under-construction-contracts-public-consultation-findings (accessed on 25 July 2024).

[18] Julian Bailey, Construction Law: Volume II (2nd edn, Routledge, 2016), 1057.

[19] See n14 above, 97.

[20] See n18 above, 1057.

[21] Alex Ross, ‘Retaining Retention Money: A Critical Analysis of the Retentions Regime in the Construction Contracts Amendment Act 2015’ (2016), 22(3), New Zealand Business Law Quarterly, 189.

[22] See n16 above, 116.

[23] Regulatory Impact Statement: Retentions in Construction Contracts (New Zealand Ministry of Business, Innovation and Employment, December 2013), 5.

[24] Ibid, 15

[25] Jane Jenkins and Pauline Page, ‘Protection Against Contractor Insolvency by Bonds’ (2009), 25(5), Construction Law Journal, 332.

[26] The most commonly used standard forms of performance bond are conditional or default bonds. See for example, the Association of British Insurers (ABI) Model Form of Guarantee Bond, Institution of Civil Engineers (ICE) Form of Default Bond and Model Form MF/1. By contrast, the International Federation of Consulting Engineers (FIDIC) Form of Conditions of Contract for Construction, 1st edn, (1999) contains both an on-demand performance bond and a default performance bond.

[27] See eg, Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC). Sumitomo Mitsui Banking Corporation Europe Limited v Euler Hermes Europe [2019] EWHC 2250 (Comm). MW High Tech Projects UK Limited v Biffa Waste Services Limited [2015] EWHC 949 (TCC). Kawasaki Heavy Industries Ltd v Laing O’Rourke Australia Construction Pty Ltd [2017] NSWCA 291.

[28] Richard Pike, ‘Escrow accounts and PBAs’ (Construction Newsletter, Sep/Oct 2012), 6.

[29] See n16 above, 121.

[30] Chris Hoar, ‘Alternative Forms of Financial Security in Construction Projects: The Rise of the Escrow Account’ (Construction Newsletter, February 2016), 2.

[31] Katie Graham, ‘The Parent Company Guarantee v Bonds Debate’ (Construction Newsletter, October 2006), 171.

[32] Ibid, 171.

[33] See n14 above, 89.

[34] See n16 above, 122.

[35] See n14 above, 89.

[36] See n16 above, 126.

[37] Joseph Xuereb and Harrison Frith, ‘Retention Trust Accounts: Administrative Nightmare or No-Brainer?’ (2023), 39(2), Construction Law Journal, 99-115.

[38] Ali Al Ebrahimi, ‘Is Australia’s Building Industry Providing Adequate Protection to Subcontractors Where a Head Contractor Becomes Insolvent?’ (2019), 35(7) Construction Law Journal, 393-417.

[39] John Murray, Review of Security of Payments laws (Report, 21 May 2018), 307–310.

[40] Richard Davis, Construction Insolvency, (5th edn, Sweet & Maxwell, 2014), 331.

[41] See n17 above.

[42] John G Walton ‘Construction Contracts Amendment Bill 2013 – Revision or Review – Update?’ (paper presented at the AMINZ Breakfast, Wellington, 4 July 2014); Master Plumbers, Gasfitters & Drainlayers NZ Inc ‘Commerce Select Committee Submission on Construction Contracts Amendment Bill 97-1’.

[43] Construction Contracts Amendment Act 2015, s 2(2). There are three Australian jurisdictions which have legislated to require retention money to be held in a separate trust account with an approved or recognised financial institution. They include Western Australia, New South Wales and Queensland.

[44] Janine Stewart and Riaia Donald and Stefan Jammes, ‘Retentions: Where’s the Trust?’(2015), 21 (2), New Zealand Business Law Quarterly, 192.

[45] David Finnie and Noushad Ali Naseem Ameer Ali, ‘The New Zealand Construction Contracts Amendment Act 2015 – for Better or Worse?’ (2015), 15(4), Construction Economics and Building, 102.

[46] T Ramachandra and JOB Rotimi, ‘The Nature of Payment Problems in the New Zealand Construction Industry’ (2011), 11(2), Australasian Journal of Construction Economics and Building, 24.

[47] John Walton, ‘20 Years of the Construction Contracts Act 2002’, AMINZ Construction Day, 13 September 2022.

[48] Receivers’ First Report on the State of Affairs of Mainzeal Property and Construction Limited (In Receivership & In Liquidation) Mainzeal Living Limited (In Receivership & In Liquidation) (PricewaterhouseCoopers, 8 April 2013) at 9. See also, Sally Peart, ‘Mainzeal case little comfort for subcontractors’, (Otago Daily Times, 25 March 2019), at www.odt.co.nz/business/mainzeal-case-little-comfort-subcontractors, accessed on 25 July 2025).

[49] KPMG, Retention Money Provisions – An Implementation Review of the Retention Money Provisions in the Construction Contracts Act 2002 (Ministry of Business, Innovation & Employment (NZ) Report, 27 August 2019) 6.

[50] S18C, CCA, inserted by the Construction Contracts Amendment Act 2015 (2015 No 92).

[51] S18E (2), ibid.

[52] S18 F of CCA, ibid.

[53] S18FC of CCA, inserted by s152 of the Regulatory Systems (Commercial Matters) Amendment Act 2017 (2017 No 12).

[54] S18FC (4) of CCA, ibid.

[55] Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL) at 705.

[56] See n44 above, 196.

[57] Ibid.

[58] See n49 above, 28–29.

[59] Ibid.

[60] S18 (c)4(b) of CCA, as amended in 2023.

[61] 18E of CCA, ibid.

[62] 18E & 18FC of CCA, ibid.

[63] 18C(c) of CCA, ibid.

[64] 18DA of CCA, ibid.

[65] 18J of CCA, ibid.

[66] S18G inserted on 31 March 2017 by s18 of the Construction Contracts Amendment Act 2015 (2015 No 92).

[67] Kate Holland, ‘How Do You Solve a Problem Like Retentions?’ (Building Disputes Tribunal, 17 January 2024), at: https://buildingdisputestribunal.co.nz/how-do-you-solve-a-problem-like-retentions/, accessed on 25 July 2025.

[68] John Green ‘We Can’t Fix the Past - Can We Fix the Future?’ (paper presented to RANZ Conference, Auckland, June 2013), 4.

[69] The Construction (Retentions Abolition) Bill 2021–22 (UK), sponsored by Lord Aberdare.

[70] See n14 above, 99.

[71] Ibid, 100.

[72] See n11 above, 3.

[73] Joshua Stein, ‘Trusting construction sector to tackle retentions likened to “waiting for Godot”’ (Construction News, 30 March 2022), see www.constructionnews.co.uk/buildings/trusting-construction-sector-to-tackle-retentions-likened-to-waiting-for-godot-30-03-2022/, accessed on 25 July 2025.

Dr M Saleh Jaberi is an attorney at law and a partner at ESK Law Firm. He is also the author of the book Construction Law and is actively involved in construction contracts. He can be contacted at Jaberi@esklawfirm.com

Bruno Zeller B Com, B Ed, Master of International Trade Law (Deakin), PhD (The University of Melbourne) is Professor of Transnational Commercial Law at the University of Western Australia. He is also Adjunct Professor at Murdoch University, Adjunct Professor at the Sir Zelman Cowan Centre, Victoria University Melbourne, and Visiting Professor at Humboldt University, Berlin and Aalborg University, Denmark.