How much is retention on a construction contract?

It is whatever the contract says, and it varies. Five per cent of each certified payment is a figure often seen, sometimes with a cap on the total and sometimes with a higher rate on the early part of the contract. The rate should be read together with the release dates, since a low percentage held for a long defects period can cost a contractor as much cash as a higher one released quickly.

When is retention released?

The contract sets the dates. A common arrangement releases half at practical completion and the rest when the defects period ends, often around twelve months later. A subcontractor can wait longer because its release may be linked to the head contract. Defects claims and disputes can delay or reduce the amount, so the release date in a forecast is an expectation rather than a certainty.

What happens to retention if the contractor goes into liquidation?

It depends on where the job is and how the money was held. Where a statutory trust or dedicated account applies and has been complied with, the money may be kept apart from the insolvent party's general assets. Where there is no trust, or the money was not actually set aside, the party owed it may have only an unsecured claim. New Zealand and parts of Australia have statutory schemes, and a bill before the UK Parliament would ban retentions.

Can you borrow against construction retentions?

Usually not on an ordinary receivables facility, because the amount is not yet collectable and may be reduced by defects claims. A lender may treat a retention as eligible once it has fallen due and is undisputed, and some specialist construction financiers offer products aimed at this. Whether a retention can be assigned at all depends on the contract, so a lender reads that clause first.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Retention in Construction: a Worked Example

Invoiced, certified, and still not money.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

To a lender, a construction retention is two different numbers depending on whose file it is in. For a contractor, it is money earned and invoiced that cannot be collected until the job is finished and the defects are fixed, so a large balance is a working-capital drag and weak security. For a developer, it is a bill that has been deferred, not avoided, so it stays in the sums of what the project still has to pay. Whether the money survives the insolvency of whoever holds it depends on the contract and on where the job is.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.

Read the file →

PART OF Property Development Finance

// 01 — WHY ONE SIDE KEEPS BACK PART OF EVERY PAYMENT

A building's defects usually appear after the contractor has been paid and has moved on. A retention gives the party paying for the work something to hold while that risk runs. Each progress claim is paid less a percentage, the deductions build into a balance, and the balance is released in steps. The same deduction runs down the chain: the developer holds back from the head contractor, and the head contractor from each subcontractor.

The percentage, any cap and the release dates are set by the contract. A common pattern releases half at practical completion and the remainder at the end of a defects period, which is often around twelve months. Retention rates and periods vary from job to job, and some contracts replace the cash with a retention bond.

// 02 — HOW THE MONEY IS HELD IN THREE MARKETS

For a lender, the important question is what happens to the money if the holder fails. The answer has been changing, and it is different in each market.

In New Zealand, under the Construction Contracts Act 2002 as amended, retention money under commercial construction contracts is held on trust. For contracts entered into or renewed since 5 October 2023, the party withholding it must keep it in an account used only for retention money at a registered New Zealand bank, held by itself as trustee or by an approved independent trustee, or hold a complying instrument (an insurance product, bond or guarantee from a licensed insurer or registered bank) at its own cost. The rules do not reach contracts with a residential occupier. A developer's commercial building contract is inside them, so unless a complying instrument is in place its lender cannot treat the retained amount as money that can simply stay undrawn until release, and the funding mechanics need agreeing at the start.

In Australia the rules are set by state. In New South Wales a head contractor on a larger project, with a threshold of 20 million Australian dollars, must hold subcontractors' retentions in a trust account with an authorised deposit-taking institution. Queensland has its own retention trust rules for the contracts its scheme covers, and the other states differ again.

In the UK, the government said in March 2026 that it proposed to prohibit deducting retentions under construction contracts, by amending the Housing Grants, Construction and Regeneration Act 1996. A Commercial Payments Bill carrying the ban was introduced in the House of Lords in May 2026 and was still before Parliament in October 2026, with a transition period proposed, so a reader should check the position. Where no trust or scheme applies, a retention is a claim against the holder, and if the holder fails it may rank with the other unsecured creditors.

// 03 — THE EXAMPLE

A glazing subcontractor installs façades on commercial buildings. The case is constructed for this page like every figure in it, and the 5% retention, the 8% margin and the 75% advance rate belong to the example and are not offered as market norms. Its largest job is a US$8.0m subcontract, with half the retention released at practical completion and half twelve months later.

One job (US$000)

Certified to date 6,400

Retained at 5% 320

Received in cash 6,080

At practical completion: 5% of 8,000 400

Released at practical completion 200

Held for twelve more months 200

Job margin: 8% of 8,000 640

Retention as a share of margin 400 ÷ 640 = 62.5%

On practical completion day, before the first release, more than three-fifths of the profit on the job is still in someone else's hands. The subcontractor has paid its own glass suppliers and installers in full. Growth makes this worse: a business winning more work is building up more retention on each new job while the old ones are still running out their defects periods.

Across all its jobs the subcontractor has US$1.5m of ordinary invoices and US$900,000 of retentions. It asks its bank for a working capital line against receivables.

Borrowing base (US$000) Retentions in Retentions out

Ordinary invoices 1,500 1,500

Retentions 900 –

Eligible receivables 2,400 1,500

Advance at 75% 1,800 1,125

Difference in borrowing capacity 675

A retention is commonly ineligible because it cannot be collected until a future event, the sum may be reduced by a defects claim, and the debtor's obligation may depend on someone else's sign-off. A lender would also ask who holds the US$900,000, and whether those head contractors could fail before the money is released. Some specialist facilities will advance against a retention once it falls due, but the ordinary borrowing base leaves it out.

// 04 — WHAT IT IS NOT, AND WHAT A LENDER READS BESIDE IT

The name causes one confusion. Retention of title is a supplier's claim to goods until they are paid for. It has nothing to do with this page, though a lender to a contractor may meet both in the same file.

The closer neighbours are the instruments that do a similar job. A retention bond is a guarantee given in place of cash, so the contractor gets the money and pays a fee to a bank or surety. A performance bond covers failure to complete the contract, usually for a larger share of the contract price, and may sit alongside a retention. Each uses the contractor's bonding or banking capacity, and that is why a lender reads the contractor's bond lines with its receivables.

DEFINED IN ONE PARAGRAPH → · PROGRESS CLAIM → · PERFORMANCE BOND →

// 05 — WHERE IT DECIDES A FILE

On a development loan, retentions are cost still to be paid. The amount withheld from the builder has been certified and is owed, even where the lender has not yet advanced it, so it belongs in the cost to complete at every drawdown. The release at practical completion arrives around the time of the peak debt, and the final release can fall after the loan has been repaid, which raises a question to settle early: who funds the last payment if the facility has closed?

On a loan to a contractor, the retention ledger is read for its ageing and its counterparties. Balances that stay on the ledger well past their expected release dates suggest disputed work or an unpaid chain. A contractor whose receivables look healthy but are largely retentions has less liquidity than its current ratio suggests, and that is often the first thing a working capital review finds.

DRAWING A DEVELOPMENT LOAN → · COST TO COMPLETE → · BORROWING BASE →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Ministry of Business, Innovation and Employment (New Zealand), Retention Money Guidance for the Construction Contracts Act 2002, republished December 2024 — Sets out the trust, the account and independent-trustee requirements, complying instruments, the residential-occupier carve-out and the contracts covered from 5 October 2023 — section 02.
NSW Government, Retention money (Security of Payment), applying the Building and Construction Industry Security of Payment Regulation 2020 — Requires head contractors on projects at the 20 million Australian dollar threshold to hold subcontractors' retention money in a trust account with an authorised deposit-taking institution — section 02.
UK Government, Late payment consultation: time to pay up — government response, 2026 — States the proposal to ban deducting and withholding retentions under construction contracts and the route through the Housing Grants, Construction and Regeneration Act 1996 — section 02.

// QUESTIONS PEOPLE ASK

How much is retention on a construction contract?: It is whatever the contract says, and it varies. Five per cent of each certified payment is a figure often seen, sometimes with a cap on the total and sometimes with a higher rate on the early part of the contract. The rate should be read together with the release dates, since a low percentage held for a long defects period can cost a contractor as much cash as a higher one released quickly.
When is retention released?: The contract sets the dates. A common arrangement releases half at practical completion and the rest when the defects period ends, often around twelve months later. A subcontractor can wait longer because its release may be linked to the head contract. Defects claims and disputes can delay or reduce the amount, so the release date in a forecast is an expectation rather than a certainty.
What happens to retention if the contractor goes into liquidation?: It depends on where the job is and how the money was held. Where a statutory trust or dedicated account applies and has been complied with, the money may be kept apart from the insolvent party's general assets. Where there is no trust, or the money was not actually set aside, the party owed it may have only an unsecured claim. New Zealand and parts of Australia have statutory schemes, and a bill before the UK Parliament would ban retentions.
Can you borrow against construction retentions?: Usually not on an ordinary receivables facility, because the amount is not yet collectable and may be reduced by defects claims. A lender may treat a retention as eligible once it has fallen due and is undisputed, and some specialist construction financiers offer products aimed at this. Whether a retention can be assigned at all depends on the contract, so a lender reads that clause first.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
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THE NUMBER · THE ECONOMY · COLLATERAL MARKETS

An office building earns US$1.0m a year of net operating income. Buyers price such buildings at a 5% yield, so it is valued at US$20m. The loan against it is US$12m.

If the yield buyers want rises to 6%, what is the loan-to-value?

3 MORE ON THE ECONOMY · COLLATERAL MARKETS →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHRetention (construction) What is a retention in a construction contract?