Since 5 October 2023, retention money withheld under New Zealand commercial construction contracts is automatically held on trust. It must sit in a compliant bank account, be reported to the party it belongs to at least every three months, and is protected from the retaining party’s creditors if that party fails. Penalties for non compliance reach $200,000 per offence for companies and $50,000 per offence for directors personally.

For a property owner commissioning work, this matters for two reasons. It imposes obligations on you if you retain money, and it gives you a practical test of whether the contractors you are engaging run a properly administered business.

What is retention money?

Retention is a percentage of each progress payment that the paying party withholds as security for the performance of the work. It is typically released in two stages, part at practical completion and the balance at the end of the defects liability period. It flows down the contracting chain: the principal retains from the head contractor, the head contractor retains from subcontractors.

The purpose is legitimate. Retention gives the paying party leverage to ensure defects are rectified. The problem historically was what happened to that money in the meantime.

The problem the reforms fixed

Before the reforms, retention money was often treated as working capital by the party holding it. When that party became insolvent, the money had usually been spent and the subcontractors who had earned it ranked as unsecured creditors, which in practice meant they received little or nothing.

The Ebert Construction collapse in 2018 was the case that forced change. Retention money was found not to have been properly held, and subcontractors who had completed and been signed off for their work lost substantial sums. The Construction Contracts Amendment Act 2015 had introduced a retentions regime, but it lacked teeth and was widely ignored because compliance was difficult to verify and there were no meaningful penalties.

What the current regime requires

The Construction Contracts (Retention Money) Amendment Act 2023 received Royal Assent on 5 April 2023 and applies to commercial construction contracts entered into or renewed on or after 5 October 2023. Its main requirements:

Retention money is automatically held on trust. The trust arises by operation of law as soon as the money becomes retention money. It does not require a declaration of trust, a deed, or any positive step by the holder. This closes the gap where a holder could argue no trust had been created.

Funds must be held in a separate compliant account. Retention money must be held in cash in a bank account, or be covered by a complying financial instrument such as a bond or insurance product. It must be identifiable as retention money and must not be intermingled in a way that makes it untraceable.

Regular reporting is mandatory. The holder must provide information to each party whose money is held, including the amount held and the account details, as soon as practicable after the money is first retained and then at least every three months.

Retention money cannot be used as working capital. Using retention money in the business is a breach of the trust and of the Act.

Penalties are significant. Offences carry fines of up to $200,000 for the company. Directors can be personally liable for up to $50,000 per offence. Personal director liability is the change that has driven behavioural shift most effectively.

The trust survives insolvency. Because the money is held on trust, it does not form part of the holder’s assets available to general creditors. This is the substantive protection the reforms were designed to deliver.

Why this matters right now

New Zealand construction insolvency is at elevated levels. Deloitte’s insolvency trends reporting put total formal corporate appointments in 2025 at 3,080, a 12 percent increase year on year and the highest in fifteen years, with construction accounting for 24 percent of all company failures at 747 formal appointments, up 14 percent. Centrix separately recorded 751 construction liquidations in 2025, up 13 percent, and 768 in the year to March 2026, representing around 0.9 percent of all registered construction companies. Hospitality was the second most affected sector.

In that environment, counterparty risk is not theoretical. The retentions regime provides a real protection, but only where it is actually being complied with.

What property owners and principals should do

If you hold retentions, comply. The obligations apply to any party retaining money under a commercial construction contract, including principals retaining from head contractors. Set up a compliant account, keep the money identifiable, and issue the quarterly reporting. The personal liability for directors is not a theoretical risk.

Consider whether you need to retain at all. Retention is not the only performance security available. A performance bond or a retention bond achieves a similar protection without the administrative burden of the trust regime, and is often preferred by contractors because it does not tie up their cash. For an owner, a bond from a rated surety can be better security than cash held by yourself.

Use compliance as a due diligence test. When assessing a head contractor, ask directly how they hold subcontractor retentions, which bank the trust account is with, and whether they can produce their quarterly retention reporting. A contractor with clean, immediate answers is demonstrating administrative discipline that tends to correlate with how they run everything else. Hesitation is informative.

Look at the whole financial picture. Retention compliance is one indicator. Also consider trading history and longevity, the pattern of payment to subcontractors, whether the business owns its own manufacturing and plant, project references in your sector, and whether the pricing you have been given is credible against the market. An abnormally low tender in a market with elevated insolvency is a risk signal, not a saving.

What contractors and subcontractors should do

Subcontractors are entitled to the information the Act requires, and asking for it is normal. If quarterly reporting is not arriving, request it in writing. Non provision is a breach and it is also an early warning sign about the financial health of the party holding your money.

Check that retention is being calculated and released in accordance with the contract, and that release at practical completion and at the end of the defects liability period is actually happening on time rather than drifting.

Frequently asked questions

When did the retentions trust regime take effect? The Construction Contracts (Retention Money) Amendment Act 2023 received Royal Assent on 5 April 2023 and applies to commercial construction contracts entered into or renewed on or after 5 October 2023.

Does retention money have to be in a separate bank account? It must be held in cash in a bank account and be identifiable as retention money held on trust, or alternatively be covered by a complying financial instrument such as a bond or insurance. It cannot be intermingled in a way that makes it untraceable or used as working capital.

What are the penalties for not complying? Offences carry fines of up to $200,000 for a company. Directors can be personally liable for up to $50,000 per offence.

Does the regime apply to residential building work? The regime applies to commercial construction contracts. Residential contracts with an owner occupier are treated differently under the Construction Contracts Act. Take specific advice on which category a contract falls into.

What happens to retention money if the head contractor is liquidated? Because the money is held on trust, it does not form part of the assets available to the general body of creditors and should be available to the subcontractors it belongs to. In practice the outcome depends on whether the trust obligations were actually complied with, which is precisely why the reporting requirements matter.

Can retention be replaced with a bond? Yes. A retention bond or performance bond from an acceptable surety is a common alternative that provides security to the principal without tying up the contractor’s working capital. It also removes the trust account administration.

Sources

  • Construction Contracts (Retention Money) Amendment Act 2023
  • Construction Contracts Act 2002
  • Russell McVeagh, Changes bring clarity to the retentions regime
  • Duncan Cotterill, commentary on the construction contract retention money scheme
  • Deloitte, New Zealand insolvency trends reporting, 2025
  • Centrix, construction sector liquidation data, year to March 2026

This article is general information and not legal advice. Obtain legal advice on your specific contracting arrangements.