Holdback and Retention on Australian Residential Builds

What it is

Retention is the slice of each progress payment that the principal (the owner, or the head contractor where you are a subbie) holds back as security for the work. It sits in a pot until the contractor has finished and has stayed on the hook through the Defects Liability Period.

The standard Australian residential structure is 5 per cent retention on each progress claim, with half released at Practical Completion and the rest released at the end of the DLP. Net through the DLP is 2.5 per cent. That structure is so common it is sometimes written as "5 and 2.5".

Where retention sits in the contract

Retention is contractual. It is not imposed by law on owner-builder residential contracts. The HIA, Master Builders and state Fair Trading template contracts all have a retention clause that the parties choose to fill in (or strike out). The 5 and 2.5 split is the default that most of those templates carry.

Head contract retention

When the contract is between owner and head builder, retention is between those two parties. The owner deducts the retention from each progress claim and keeps the cash (or holds a bank guarantee for the same amount).

Subcontract retention

When the contract is between head contractor and subcontractor, the same structure usually flows down. The head contractor deducts retention from each subbie claim. In commercial work, that money may have to sit in a retention trust account. In residential work, the trust requirement does not generally apply.

The 5 and 2.5 structure across the build

The mechanics on a typical fixed-price residential build look like this.

Claim by claim

Each progress claim is reduced by 5 per cent. If the stage value is 50,000 dollars, the payment is 47,500 dollars. The 2,500 dollars is held.

At Practical Completion

The total retention sits at 5 per cent of the contract sum. Half of that releases to the builder with the final claim. That brings the held amount down to 2.5 per cent.

At end of DLP

The remaining 2.5 per cent releases once the DLP ends with no outstanding defects, or once any defects have been rectified.

Bank guarantee swap

Many builders swap cash retention for a bank guarantee. The guarantee covers the same percentage. The advantage is that the builder keeps the cash. The disadvantage is the bank charges a fee and ties up the builder's facility limits.

Where trust accounts are required

Trust accounts are required in commercial construction in Queensland. They are not generally required in pure residential.

Queensland project trust accounts

Under the Building Industry Fairness (Security of Payment) Act 2017 (Qld), eligible head contracts require a Project Trust Account (PTA). Progress payments from the principal flow into the PTA and are paid out to subcontractors from it. The QBCC oversees the framework.

Queensland retention trust accounts

Where the head contract requires a PTA and the head contractor holds cash retention from subcontractors, a Retention Trust Account (RTA) is also required. The RTA holds those cash retentions until they are due to be paid. Only one RTA is needed across multiple projects. The QBCC publishes a trustee guide for retention trusts.

Other states

WA introduced retention trust account requirements under the Building and Construction Industry (Security of Payment) Act 2021 (WA), phasing in by contract value. NSW retention trust requirements apply to head contracts above a threshold in commercial work. Victoria and SA have piloted reforms. Residential head-builder to owner contracts sit outside these schemes.

Release schedules in practice

The release schedule is the order in which retention comes back to the builder.

Standard schedule

Half release at PC. Half release at end of DLP. Both subject to no outstanding defects claim.

Variations to watch

Some contracts release the first half on issue of the Occupation Certificate rather than PC. Functionally similar in NSW but different timing. Other contracts release the second half on issue of a defects-free certificate signed by the owner, not on calendar expiry of the DLP. That can stretch the release if the owner is slow.

What can stop a release

A live defects notice. A claim for liquidated damages. A subcontractor charge that has been served on the principal. Outstanding documentation (warranties, certificates, as-built drawings).

How to manage retention as a builder

Three habits keep retention from becoming a slow leak in the business.

Track every retention deduction in a ledger

Each project gets its own line. Date, claim number, deducted amount, expected release date.

Diary every PC date and DLP end date

The release does not happen automatically in most cases. The builder has to ask. Send a formal release request a week before the expected date.

Consider bank guarantees

If the business has the facility headroom, a guarantee turns retention from working capital into a facility line. The bank fee is usually 1 to 2 per cent of the guarantee value per year. For a 12-month DLP holding 2.5 per cent of a 1 million dollar build, the fee is roughly 250 to 500 dollars. Worth it on big projects.

How to manage retention as an owner

For owners the rules are simpler.

Deduct from each claim

Apply the contract retention percentage to each progress claim before paying. Keep the held amount in a separate savings account.

Release on time

Pay the PC release with the final claim. Pay the DLP release when the DLP ends, less any quantified defect cost.

Document any withholding

If you withhold the second release, write down what defect it is for and a reasonable estimate of the rectification cost. A vague withholding is hard to defend.