Retention Money in Australian Residential Construction

What it is

Retention money is cash a head contractor holds back from a subcontractor''s progress payments as security against incomplete or defective work. In Australian residential construction it functions as a built in safety net so the head contractor is not exposed if the subbie walks off site, finishes poorly or fails to come back during the defects period.

The amount is set in the subcontract. The market norm across NSW, VIC, QLD and the smaller jurisdictions is 10 per cent of each progress claim until the retention cap is hit, with that cap usually pegged at 5 per cent of the total contract sum. Some standard form contracts use a flat 5 per cent across the life of the job. Either way it is held by the head contractor in its own accounts unless a statutory trust regime applies.

How release works

Retention is almost always released in two halves.

First release at practical completion

When the works reach practical completion the head contractor returns 50 per cent of the retention pool. Practical completion is the point where the work is finished except for minor defects that do not stop the principal from using the asset. The subbie issues a final claim for that half and the head contractor pays it out with the next progress payment cycle.

Second release after defects liability

The remaining 50 per cent sits with the head contractor through the defects liability period. In residential subcontracts that period is commonly 12 months although 6 month and 24 month windows also appear. If the subbie attends to all defects called up during the period the balance is released once the defects period ends. If the subbie does not attend, the head contractor can apply retention against the cost of rectification works.

Why it matters for residential builders

For a head contractor running residential projects retention is a working capital tool and a quality lever. It funds rectification without the builder having to chase a non responsive subbie. It also gives subbies a reason to come back and finish off snag lists. From the subbie''s side it is real money out of pocket so the rate, cap and release triggers should be negotiated up front rather than accepted on the standard form.

Tax treatment

The ATO treats retention as assessable income in the year it becomes legally due and payable. For most subbies that is the year of release rather than the year it was withheld. Head contractors get a corresponding deduction timing benefit. Both sides should record retentions on the balance sheet rather than running them through revenue.

When retention must sit in trust

The default position across most of the country is that retention is held in the head contractor''s general accounts. That changes in two places.

In NSW the Building and Construction Industry Security of Payment Regulation 2020 carries forward the retention money trust account scheme that started in 2015. Head contractors must hold subcontractor retentions in an approved trust account if the head contract is valued at $20 million or more. Residential projects rarely hit that threshold so most home builders sit outside the scheme, but volume builders and apartment work can fall inside it.

In QLD the Building Industry Fairness (Security of Payment) Act 2017 applies project trust accounts and retention trust accounts on larger jobs. Government head contracts at $1 million or more, and private and local government contracts at $10 million or more, currently require a project trust. Detached residential work for owner occupiers is excluded from the regime.

Common disputes

Retention disputes usually come down to four flashpoints. Whether practical completion has actually been reached. Whether a defect notified during the defects period is genuine. Whether the head contractor has set off retention against unrelated debts. And whether release was triggered but the cash was not paid out.

Security of Payment Act adjudication is available for unpaid retention in every state and territory once it is due. Adjudicators treat retention as part of the claim once the release trigger has happened, so subbies do not need to wait for court to get paid.

Practical points for residential head contractors

Set retention terms inside the subcontract rather than relying on house rules. Track retention by project and by subbie in your accounting system, not as a mental note. Diary the release dates at the start of the job so practical completion and end of defects do not slip past without action. Pay retention out cleanly the day it is due, because withholding past the trigger is the fastest way to draw an adjudication application.