Understanding Retention in Construction Contracts: Australia’s Rules and Best Practices

By

Samantha Nemeny

Last Updated Jan 22, 2026

By

Samantha Nemeny

Retention is becoming one of the most consequential financial pressures on Australian projects. 

As contractors manage larger workloads and tighter margins, withheld payments can erode liquidity, slow closeout, and increase exposure across multiple tiers of subcontracting. For construction leaders, retention management is now a strategic function, not a procedural one. 

It demands stronger governance, clearer release mechanisms, and disciplined tracking to protect cash flow and reduce disputes. 

This article examines how retention operates in Australia, where the risks emerge, and the practices that help teams strengthen financial performance across every project.

What Is Retention in Construction?

Sitting at the intersection of risk, trust, and cash flow, retention is a portion of payment withheld under a construction contract to guarantee performance and completion.

The principal withholds retention from the head contractor, and the head contractor, in turn, withholds retention from subcontractors. It’s a common security mechanism in Australian standard form contracts that ensures the work is completed to the required standard and any defects are rectified.

For contractors, retention can act as an alternative to other forms of security, although payment is deferred until the contracted milestones and closeout requirements are met.

How Retention Works In Practice

Retention is typically calculated as 5% of progress payments until it reaches a cap of about 5% of the contract value. The funds are then held until the contractor meets the agreed-upon completion milestones.

Here’s how it works:

• At practical completion, a portion of the retention is released once the works are fit for use and handover occurs. 
• The balance is released at the end of the defects liability period, typically six to twelve months later, once all defects have been rectified and all final obligations have been met. 
• These release points reflect standard industry practice and are driven by the contract rather than legislation.

According to a cost/benefit analysis conducted by The DWF Group, the scale of retention is where small figures translate into sticky financial situations. If the retained amount must also include GST, an additional 10% on top of the retention figure is effectively quarantined from cash flow. 

So, even “just 5%,” when multiplied across various subcontracts and layered with GST, becomes a significant drag on working capital and, therefore, project resilience.

Retention limits vary by jurisdiction as well.

There is no uniform statutory cap across all jurisdictions, and in practice, retention percentages are mostly set by contract practice (with 5-10% being commonplace).

Queensland is the only state to set out specific retention limits (set by the QBCC Act), which stipulates that:

• No more than 10% of any individual progress payment can be deducted as retention
• The total value of retention and other security held before practical completion cannot exceed 5% of the contract price
• Once practical completion is reached, the maximum amount of retention and security that may be held is reduced to 2.5% of the contract price

Retention Under Australian Contracts and Law

Retention is a contractual mechanism that operates under the terms of the construction contract, with payment rights reinforced by the Security of Payment legislation in each state and territory. If retention is not released when due, contractors can claim it through the progress payment and adjudication process.

Security of Payment laws make “pay when paid” clauses invalid across Australia. A contractor cannot make the release of retention conditional on receiving payment from another party in the contract chain.

Three states also require retention money to be held in trust to reduce insolvency risk for subcontractors:

1. New South Wales SOPA requires retention trust accounts for projects over $20 million.
2. Queensland is phasing in Project Trust Accounts between 2022 and 2025, which capture retention money.
3. Western Australia SOPA requires retention trust accounts for eligible contracts under the 2023 reforms, generally applying to contracts of at least $1 million.

There is good reason for retention through trusts: details compiled in Retention Trust Scheme Accounting Guidelines by the Government of Western Australia point out that before the Scheme, retention money was often used as working capital. 

This made it “especially vulnerable to being misappropriated or lost altogether during financial disputes or cases of insolvency.” Clearly, retention misuse and non-release are serious and systemic enough to justify a robust statutory trust framework.

Common Pressure Points in Retention Management

Retention creates ongoing friction for contractors, subcontractors, and commercial teams because it affects cash flow, administration, and financial risk across the project lifecycle.

• Cash Flow Squeeze

  Retention holds back earned revenue and often captures a significant portion of a subcontractor's profit margin. Restricted cash flow makes it more challenging to fund payroll, materials, and resources, placing financial pressure on delivery teams.
  
  A report by EC Credit Control found that up to 70% of Australian construction firms experience late payments, and retention practices amplify this cash flow strain.

• Late Release

  Retention is frequently released late due to slow closeout, unresolved defects, or administrative backlog. Payment delays often extend beyond the defects liability period, creating tension and unnecessary dispute risk. Poor documentation and unclear release criteria increase timing uncertainty

• Insolvency Exposure

  If the party holding retention collapses, subcontractors face the risk of never recovering earned funds. State-based trust regimes aim to reduce this exposure, but protection is not consistent across Australia.
  
  Insolvency events turn retention from a standard commercial tool into a high-impact financial risk. Even commercial projects have a significant trickle-down effect on the sector.
  
  The amendments to the Construction Contracts Act 2022, introduced by the New Zealand Government in October 2023, recognise these far-reaching effects. For breaches around retention handling and reporting, companies can be fined up to NZD $200,000, and directors can be directly penalised for up to NZD $50,000.

• Tracking Complexity

  Multi-tier contracting creates multiple retention positions that must be matched between the head contract and subcontract layers. Manual or fragmented tracking leads to errors, disputed amounts, and missed release dates.
  
  Without a central retention register, commercial teams struggle to maintain visibility and enforce accurate payment timing.

Smart Retention Management Practices to Keep Cash Flow and Compliance in Check

Strong retention management is a commercial control function. The aim is to protect cash flow, reduce disputes, and secure release at the earliest contractual point.

Negotiate Clear Retention Terms Upfront

Retention problems usually start at contract award, not at closeout. By defining the percentage, cap, release milestones, evidence requirements, and withholding conditions at the outset, you set the standard for how release will occur.

Clear and objective triggers for practical completion and final release eliminate uncertainty and prevent subjective interpretation in disputes.

Maintain a Central Retention Register

Retention cannot be controlled if it is not visible. A single register that tracks amounts held and owed across all projects provides commercial and finance teams with a shared source of truth.

Recording release dates, required evidence, claim deadlines, and approvals prevents administrative backlog and ensures cash is released on time.

Align Release to Closeout Deliverables

Retention should only move when evidence is produced, not when satisfaction is claimed. Tying release to defined artefacts such as completion certificates, QA sign off, and defect logs makes the process factual and auditable.

With clear deliverables and internal workflows, project teams can submit release claims promptly at each milestone, rather than waiting for disputes to arise.

Reduce the Defects Liability Tail

The longer defects remain unresolved, the longer retention remains off the balance sheet. Proactive inspections and enhanced quality assurance during delivery help reduce the volume of defects at the end of the period.

Fixing issues early removes any justification for withholding and shortens the window where capital is tied up and at risk.

Digital tools strengthen this discipline.

Using connected site management and quality systems to document workmanship, track inspections, and record corrective actions creates a verifiable audit trail that supports timely release. Photographs, checklists, approvals, and closeout artefacts become organised evidence rather than scattered files that are easy to challenge.

A clear digital paper trail also reduces the opportunity for owners or head contractors to delay payment for commercial reasons.

When compliance is documented and accessible, it becomes much harder to dispute completion or extend the defects period, ensuring retention is released on time and with fewer administrative hurdles.

Plan for Retention in Cash Flow Forecasting

Retention represents quarantined capital, so its impact must be modelled across both project and portfolio forecasts. Visibility of cumulative exposure helps commercial teams understand where retention sits against margin, and where financial pressure may emerge.

Retention also affects contractors differently depending on when their work occurs.

Early-phase trades, such as steel, concrete, and structural packages, finish long before practical completion. This means they carry the retention burden for the longest period, often a year or more, while trades completing interior finishes or landscaping may wait only a few months for release.

Sequencing, therefore, creates unequal cash flow risk across packages and should be surfaced early in commercial planning.

When retention begins to exceed profit on a package, leaders can adjust resourcing, sequence payments, renegotiate security, or activate working capital facilities before cash pressure becomes acute.

Systemise Retention Governance

Manual tracking is one of the most common causes of late release and missed claims. Automating reminders, approvals, and document control through connected systems creates consistency and accountability.

Systemisation also strengthens audit trails, which becomes critical if adjudication is required to enforce release.

Use Alternative Security to Preserve Liquidity

Retention compounds over long projects and multi-year programs, creating a drag on working capital. Where the contract allows, substituting a bank guarantee or retention bond preserves liquidity while still providing equivalent security to the principal.

This approach improves cash position without increasing commercial risk and is often most effective on larger projects with accumulating retention.

What To Do If Your Retention Isn’t Released

If retention is not released on time, escalate the issue in a structured manner. Begin with the contract and the relationship before proceeding to statutory enforcement.

1. Check the Contract First

   Begin by confirming that all contractual release conditions have been met. Review defects, documentation, claim format, notice requirements, and any evidence tied to practical completion or final release.
   
   If a clause legitimately entitles the other party to withhold, resolve that issue first to avoid an unnecessary dispute.

2. Send a Formal Release Request

   Once you are satisfied that all obligations have been met, issue a formal request that references the retention clause, the release trigger, and the evidence you have provided.
   
   Keep the tone cooperative and solution-focused. Commercial relationships often influence payment outcomes in construction, so a direct conversation can resolve issues faster than adversarial escalation. Maintain a clear paper trail in case the matter proceeds to adjudication.

3. Use Security of Payment Legislation if the Payment Remains Withheld

   If the issue is not resolved through dialogue, you may need to rely on your statutory rights. Serve a payment claim for the retention under the relevant Security of Payment Act. If the payment schedule is inadequate or unpaid, escalate to adjudication to recover the funds through a fast-track statutory process.
   
   Pay when paid clauses are void across Australia, so retention release cannot be made conditional on upstream payment.

4. Seek Legal Advice for Unresolved or Complex Disputes

   If adjudication fails or the matter involves insolvency, fraud, or a complex contract dispute, seek specialist legal advice. Litigation and arbitration are typically the final steps, as adjudication is often faster and more cost-effective for recovering unpaid retention.

Retention discipline strengthens cash flow and reduces commercial risk

Retention functions as a critical financial control, shaping project liquidity, closeout certainty, and overall commercial performance. 

Strong governance, clear release mechanisms, and consistent tracking help construction teams reduce disputes and maintain a healthier financial position across their active projects.

Written by

Samantha Nemeny

33 articles

Sam—Samantha if she’s feeling particularly academic—has spent a decade in content marketing, with eight years focused on Australia’s construction industry. She has a knack for making complex ideas easy to understand, turning industry jargon into clear, engaging stories. With a background in SEO and marketing, she’s spent the past three years at Procore, helping industry professionals navigate the world of construction with content that’s both insightful and easy to digest.

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