Subbies and tradies: retention money and what to do when a head contractor fails

What retention money is

Retention money is a portion of what you are owed that the contractor holds back until the work is finished and defects are fixed. Under the Construction Contracts Act, retention money under commercial construction contracts entered into or renewed from 31 March 2017 had to be held on trust. The Construction Contracts (Retention Money) Amendment Act 2023, in force from 5 October 2023, makes retention money trust property automatically, requires it to be kept in a compliant bank account, limits how it can be used and deals with what happens if the payer enters receivership or liquidation. Older contracts stay under the earlier rules, so check the date of yours.

In plain English, the money is meant to be kept separate and not used as the payer's working capital. If the payer fails, the idea is that your retention should be protected from other creditors.

What to check on your contract

• Does the contract allow retentions, and what percentage and release dates apply?
• Is the retention held in a separate trust account, and can you get information about it? Ask the payer in writing.
• When is it released (practical completion, end of defects liability period)?
• Are payment claims being submitted using the Act's payment claim and payment schedule process?

Payment claims: the fast route

1. Send a compliant payment claim in writing (it should identify the work, state the amount and say it is made under the Construction Contracts Act).
2. The payer must respond with a payment schedule within the contract period or 20 working days, whichever is shorter. If they do not respond and do not pay, they can become liable for the whole claimed amount (check the exact periods on the MBIE website).
3. If you are not paid, you can pursue adjudication, which is faster and cheaper than court, or in some cases suspend work after giving notice.

If the payer is in financial trouble

• Check the Companies Office register and the NZ Gazette for liquidation or receivership notices.
• Write to the liquidator or receiver straight away, state that you are owed retention held on trust, and attach your contract and evidence.
• Lodge your claim on the liquidator's form by the deadline. If the money was not held on trust, you may rank as an ordinary creditor.
• Raise it with MBIE (building.govt.nz) if you think retention was misused or mishandled.
• Do not keep working on credit once you suspect non-payment. Stop and take advice.

Help

Free help is available from Community Law, the Citizens Advice Bureau and your industry association. If your own business is struggling because of unpaid invoices, read the guide on what to do when your business fails.