How retention works in Australian construction and how to stop losing money on it

What retention actually is

Retention is a slice of every progress claim the head contractor holds back instead of paying you. It's not a fee, it's security. If you walk off site or leave defects unfixed, they can use it to get someone else to sort the work out. It's already your money. You've done the work, claimed it, had it certified, and then a percentage is withheld. The materials, the labour and the super left your account weeks ago. That's why it hurts more than the percentage suggests. Five per cent on a job running 12% net margin is close to half the profit on that job, sitting somewhere you can't touch it, for as long as the contract says. Your contract sets all of it: rate, cap, release dates. Not custom, not what the last builder did. Read the security clause before you sign, and pay a construction lawyer to read it if the job is big enough to matter.

What a normal retention clause looks like in Australia

There's no national standard, but two shapes turn up again and again. The first is 5% of each progress claim, capped at 5% of the contract sum. The second, common in the standard form contracts, is 10% of each claim until the total held reaches 5% of the contract sum. Both cap in the same place, but the second gets there twice as fast, so it takes more out of your early claims, when cash flow is tightest. Release usually comes in two halves. Half at practical completion, when the works are done apart from minor bits that don't stop the building being used. The other half at the end of the defects liability period. Twelve months is common, six months happens, twenty four months turns up on bigger commercial and government work. Plenty of contracts hold retention on variations too. Worth knowing before you sign, not after $60,000 of them.

A worked example on a 80,000 subcontract

Say you've got a 80,000 electrical subcontract on a commercial fitout, ex GST. Retention is 10% of each claim until it hits 5% of the contract sum, so the cap is $9,000. Defects liability is 12 months. Claim 1, $40,000. They hold $4,000, you get $36,000. Claim 2, $35,000. They hold $3,500. Total held $7,500. Claim 3, $30,000. Only ,500 is left to the cap, so that's all they hold. Claims 4 to 6, $75,000 between them. Nothing held, paid in full. The whole $9,000 was gone by the time you had claimed 05,000 of the 80,000, while you were still funding cable and wages yourself. At practical completion $4,500 comes back. The last $4,500 falls due 12 months later. At 12% net that job earns $21,600, so the $9,000 held is 42% of the profit. The bigger number is the $4,500 itself, which is what you lose if the release invoice never goes out. Do four jobs a year like that and $36,000 of your money is in someone else's account. That is a decent second-hand ute.

Where your retention sits, and why the rules differ by state

If your retention is in the head contractor's general account and they go under, you are an unsecured creditor behind the bank and the ATO. In a trust account, it's ring fenced. Several states have moved on this. New South Wales runs a retention money trust account scheme for head contracts above a set value. Queensland has project trust accounts and retention trust accounts under its building industry fairness laws. Other states have their own versions or are looking at it. The thresholds, the contracts caught and the start dates differ by state, and they've been changed more than once. Anybody quoting you a number from memory, this article included, is a coin flip. Ring your state's building authority and ask. What you can do anywhere is ask in writing whether your retention is held in trust. If it isn't, push for a bank guarantee, or price the risk in.

Security of payment gives you a statutory right, and the clock is short

Every state and territory has security of payment legislation. It gives you a right that sits alongside your contract, not instead of it. Broadly: you serve a payment claim, they have a set number of days to respond with a payment schedule, and if they don't pay or respond you can go to adjudication. Adjudication is quick, far cheaper than court, and a determination is enforceable. The catch is the clock. The timeframes are short, strict, and not the same in every state. Miss the window to serve or to apply and you can lose the right on that claim. What your mate in another state did may not apply to you. Whether you can chase a retention release this way depends on your contract and your state's act. Read the timeframes, and if there is real money at stake ring a construction lawyer early, not after you've missed a deadline. None of this is legal advice.

Record the retention on every claim, not at the end

The single biggest cause of lost retention is not knowing what you're owed. Record it on the claim, as you make the claim. Every progress claim should carry four lines: value claimed, retention withheld this claim, retention held to date, and retention remaining to the cap. The QS either agrees those numbers or corrects them that month, while everyone still remembers the job. Arguing about it 18 months later out of a folder of PDFs is where money quietly disappears. Then keep one register for the business. One row per job: contract sum, retention rate, cap, held to date, practical completion date, defects liability end date, the amount due at each release and whether it has been paid. You want that answer in four seconds, not four hours. Whatever you run it in, a spreadsheet, your accounting file, or a job management system that tracks retentions against each job, the discipline is the same.

Diarise both release dates the day you sign

The day you sign, put two dates in the calendar: expected practical completion and the defects liability end date. Set a reminder 30 days before each. Thirty days out, you email. Before the date, not after. Keep it short: the job, the contract number, the clause the release comes from, the amount due, the date it falls due, your bank details. Attach the invoice. Plenty of head contractors won't process a release without one, and none will ring to tell you. Get practical completion confirmed in writing too. If nobody tells you when it happened, your 12 month clock never starts, and that's how a release date slides off the edge of the year. Treat the defects period as live work. Close a defect out, photograph it, email the photo, ask for written confirmation it's closed. If something lands at month eleven that is not yours, say so in writing, quickly, with evidence.

A bank guarantee instead of cash, and the real reason subbies lose retention

You don't always have to hand over cash. Most contracts allow an unconditional bank guarantee instead. It isn't free. The bank charges to set it up, then an ongoing fee, usually a percentage per annum of the face value, and it will want security behind it. Get the real number first. On $9,000 it's not worth the paperwork. On $60,000 across four jobs it might be. Ask during negotiation, while you still have something they want. After you sign you're asking a favour. Same with capping retention lower, excluding variations, or releasing the lot at practical completion. Some say no. Some say yes, because nobody ever asks. Which is the whole problem. Most retention is not lost in a dispute. It's lost because nobody sent the invoice, and nobody at the other end has a reason to remind you. One missed release is worth more than a year of software. We build retention tracking into StackLyft for that reason, and the pricing is on the site so you can do that sum yourself. A whiteboard with both dates on it works too, if somebody looks at it.

Questions

How much retention is normal on an Australian construction job?

The two shapes you see most are 5% of each claim capped at 5% of the contract sum, or 10% of each claim until the total held reaches 5% of the contract sum. Release is usually half at practical completion, half at the end of the defects liability period. That is common practice, not a rule. Your contract decides it.

How long can a head contractor hold my retention?

Until the release dates in your contract, and no longer. Normally that is practical completion for the first half and the end of the defects liability period for the balance, commonly 12 months later. If those dates have passed and no defects are on foot, put the demand in writing with an invoice attached, then check your state's security of payment act or get legal advice.

Do I have to pay GST on retention I have not been paid yet?

It depends on whether you report GST on a cash or an accruals basis, and on how the claim is invoiced. On an accruals basis you can end up remitting GST on money still being held from you. Check with your accountant or the ATO, and ask what happens if it's never paid.

What happens to my retention if the head contractor goes broke?

In their general account, you are an unsecured creditor and will probably see very little of it. If it's in a retention trust account it's protected from their other creditors. That is the argument for asking where your money is held, and for offering a bank guarantee instead.