Retentions: what construction businesses need to know and how to track them with confidence

In the construction industry, managing finances isn’t just about invoicing and paying bills. One of the key aspects that often causes confusion yet has serious compliance and cash-flow implications is retentions.

What Are Retentions?

Retentions are a common feature in construction contracts where a client (the principal or head contractor) holds back a percentage of progress payments owing to a contractor or subcontractor. This money acts as security to make sure the work is completed properly and any defects are fixed before final payment is released. Traditionally, this might be around 5–10% of the contract value. Retentions are more common in commercial construction jobs rather than residential jobs.

For example, if a subcontractor invoices $100,000 during a project, the principal might only pay $90,000 initially, holding the remaining $10,000 as retention until project milestones or defect periods are satisfactorily completed.

Why Retentions Matter in NZ

In New Zealand, retentions are governed by the Construction Contracts Act 2002, with important updates under the Retention Money Amendment Act 2023 that came into force on 5 October 2023. These changes strengthen protections around retention money to help ensure subcontractors are paid what they’re due and that funds aren’t misused.

Key requirements include:

• Segregating retention money — Retentions must be held in a separate trust account or compliant instrument and not mixed with general funds.

• Reporting and record-keeping — Parties holding retentions must provide detailed information to subcontractors regularly and keep robust accounting records.

• Compliance risks — Failure to comply with the retentions regime can lead to serious penalties, including fines for companies and directors.

These legal obligations mean construction businesses need to be careful with how retention funds are tracked, reported, and ultimately released.

Also, and very crucially, with slim margins in the construction sector, the 5-10% retention component can be the bulk of the profit. This can create cashflow issues if not received until 12 months later - or worse yet, if it is missed altogether.

The Challenges of Tracking Retentions

For busy builders and subcontractors, keeping on top of retentions can be tricky:

• Retentions affect cash flow because the money sits off-balance until release.

• Traditional accounting systems may lump retentions into accounts receivable or revenue, making it hard to see the true picture.

• With the new reporting regime in NZ, companies must demonstrate exactly what retention money they’re holding and why.

Without a reliable system, retentions can easily slip through the cracks, leading to disputes, compliance headaches, and even costly penalties.

How Affinity Accounting Can Help

At Affinity Accounting, we understand that every construction business is different, and so are your retention tracking needs.

Our team can help you:

✔ Set up retention tracking correctly within your accounting system so amounts are clearly identified and reported.
✔ Provide regular reporting and reconciliation to meet legal obligations and maintain transparency with subcontractors and clients.
✔ Integrate retention workflows into your accounts receivable and job cost reporting so nothing is overlooked.
✔ Ensure compliance with NZ’s retention money requirements, reducing risk and giving you peace of mind.

We work closely with a system called RetentionTrack - a MBIE recognised system for retention compliance and tracking. This integrates with Xero and other systems.

Get Ahead of Your Retentions

Retentions may be a small part of your overall contract value, but they can have a big impact on your cash flow and compliance obligations. With the right system and expert support from Affinity Accounting, you can stay on top of your retentions with confidence — and focus more on delivering quality projects.

Want to talk about how we can set up a great retention tracking system for your business? 

Get in touch with our team today.

What our clients say

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