Who the rules apply to
The Act calls the party holding retention "party A" (usually the head contractor) and the party it's held from "party B" (usually the subcontractor). The rules apply when a commercial construction contract lets party A withhold an amount as security for party B's performance, or when party A withholds one even though the contract doesn't provide for it.
Construction Contracts Act 2002, s18A, s18B(1) and (5); building.govt.nz, "Retention money requirements".A commercial construction contract is one where none of the parties is a residential occupier of the premises.
s5, "commercial construction contract".They don't apply to a contract entered into before 31 March 2017, unless it was renewed on or after that date (and then only for retention withheld in the renewed term) or the parties agreed they would.
s11A(3).Withholding retention isn't compulsory. building.govt.nz: "It is not a legal requirement to withhold retention money, but if someone chooses to, they must meet the requirements of the Construction Contracts Act 2002."
building.govt.nz, "Retention money requirements" (last updated 26 February 2024; checked 1 Nov 2026).It's held on trust, automatically
Retention money is trust property, held on trust by party A for party B. The trust is created by the Act itself as soon as the amount becomes retention money, which is when the contract allows it to be withheld, whether or not it has actually been withheld or calculated. It is trust property whether or not party A complies with the rules.
s18B(2) and (3), s18C(1), (2) and (4)(b).Retention money isn't available to pay party A's other creditors, and can't be taken by them under a court order.
s18FA.It must be in a proper bank account
Party A must put retention money into a bank account that meets section 18E as soon as practicable, and keep it there until the trust ends. The account must be at a registered bank in New Zealand, held by party A as trustee, used only for retention money, and the bank must be told it holds retention money on trust. (Some trust accounts held by lawyers, accountants, trustee companies and others also qualify.)
s18D(1) and (2), s18E(1) to (3).Instead of a bank account, party A can rely on a complying instrument, such as insurance, a bond or a guarantee from a licensed insurer or registered bank, that pays party B if party A doesn't.
s18D(3), s18FB.Interest earned on retention money belongs to party A, unless the contract says otherwise or it's paid late.
s18D(5), s18G.Records and reports
Party A must keep accounting and other records of all retention money held for party B, and let party B inspect them at all reasonable times, free.
s18FC(1) and (5).Party A must report to party B as soon as practicable after an amount becomes retention money, and at least once every 3 months until the trust ends. The report gives each amount retained, the contract and the date; the total held under each contract; the bank account details (or the instrument details); and a statement that party B may inspect the records. The information must not be false or misleading.
s18FD(1), (2) and (6).The free retention report template (Word) sets out those contents.
Using it to fix defects
Retention can be used to fix defects in party B's work only if the contract allows it, the contract's own rules about it are followed, and party A gives party B written notice at least 10 working days beforehand, setting out the intention and the defects.
s18C(3)(c).Paying it out
A contract term is void if it makes payment of retention depend on anything other than party B's own performance, delays payment past the date party B has performed all its obligations to the agreed standard, or makes party B pay to administer the retention, the bank account or the instrument.
s18I(1).building.govt.nz says party A must pay out retention money when party B has completed the work, performed all its contractual obligations, and fixed notified defects and any defects in the defects liability period. When that is depends on the work: a demolition subcontractor may be entitled when they finish and leave the site; for others it may be when the whole contract is handed over.
building.govt.nz, "Retention money requirements": "When retention money is paid out" and "Practical completion and retention money" (checked 1 Nov 2026).If retention is paid late, interest is payable to party B from the date it was payable until it is paid, at the rate in regulations or any higher rate in the contract.
s18G.If the head contractor fails
If party A goes into receivership or liquidation, the receiver or liquidator becomes trustee of the retention money trust in place of party A. They must handle it the same way party A must, notify party B of their appointment within 10 working days, and may have their reasonable fees and costs met from the trust.
s18J(1) and (2), s18K(1), (3) and (5); building.govt.nz, "Retention money requirements": "Receivership and liquidation".Penalties
Failing to keep retention money as section 18D requires is an offence: a fine of up to $200,000 for party A and, where party A is a company, up to $50,000 for each director. It's a defence to prove all reasonable steps were taken.
s18DA(1) and (2); building.govt.nz, "Retention money offences and penalties" (last updated 27 February 2024).Failing to keep the records, or to report, is an offence with a fine of up to $50,000 each.
s18FC(6), s18FD(7).Party B can ask MBIE's Integrity and Enforcement team to enforce party A's obligations to protect the retention and to report.
building.govt.nz, "Retention money requirements" and "Retention money offences and penalties" (checked 1 Nov 2026).What changed on 5 October 2023
The Construction Contracts (Retention Money) Amendment Act 2023 replaced sections 18C (the trust), 18D (how retention money must be kept and used), 18E (the bank account) and 18FC (records), and added sections 18DA (the offence for not keeping it as required), 18EA (unallocated withdrawals and deposits in a shared account), 18FD (reporting to party B), and 18J and 18K (a receiver or liquidator becoming trustee), all from 5 October 2023.
The amendment notes under ss 18C, 18D, 18DA, 18E, 18EA, 18FC, 18FD, 18J and 18K of the Act on legislation.govt.nz (checked 1 Nov 2026).Work out what's held with the free retention calculator, and track it with the retention tracker (Excel).
Retention not paid?
Unpaid claim pack $295 (plus GST if applicable): your claim checked, the dates worked out, and next steps from the Act. Invoiced after delivery, due on the 20th of the month after the invoice.