Retention And Payment Claims: Protecting Your Money On The Build

PAYMENT CLAIMS AND RETENTION NEED ACTIVE CONTROL.NSW: understand deadlines, evidence and money held back.

Money leaves your project every month in progress payments, and a developer's instinct is to hold some of it back. Held back for what, under what terms, and released how? On a small subdivision or duplex project those questions are usually answered by luck rather than by the contract, and the luck runs out at the worst moment: handover, defects, or a builder who stops work.

New South Wales has a specific protection for retention money, but its scope surprises most small developers, because it applies to head contractors on contracts valued at $20 million or more. On a two-lot subdivision you are outside it, which means your protection has to come from the documents you signed.

The deal question: whose money is it while it is being held?

Start with what retention actually is. NSW Government guidance on retention money held by head contractors describes it as a form of security provided by subcontractors to a head contractor: money held by the head contractor out of progress payments to the subcontractor as security for defective work or late completion, and it notes that usually up to 5 per cent of the total contract value is held until the subcontractor has completed the job and fixed any defective work.

That is the commercial purpose. The legal question is where the money sits while it is held and what happens if a company in the chain fails.

The NSW scheme, and its threshold

The NSW Government page states that retention money held by head contractors for projects valued over $20 million must be held in a trust account with an authorised deposit-taking institution, and that the requirements are set out in the Building and Construction Industry Security of Payment Regulation 2020. The scheme's stated purpose is to protect subcontractors' retention money in trust for major construction projects, including if a construction company becomes insolvent.

The threshold is applied to the head contractor's construction contract with the principal, determined by the contract price or, where the contract does not provide an amount, the market value of the work carried out and the goods and services supplied. If a project value reaches the threshold after the head contractor first enters the construction contract, the requirement applies only to contracts entered into by the head contractor after the threshold has been reached. Building Commission NSW's security of payment FAQs answer the same question directly: you only need to keep retention money in a trust account if your contract is valued $20 million or more.

What the trust obligations involve

Where the scheme applies, the operational requirements are specific and they are not the kind of thing you can retrofit. The NSW Government guidance sets out that the head contractor must keep retention money separate in an account with an authorised deposit-taking institution, notify the ADI in writing that the account is a retention money trust account, and let the Secretary know the ADI, branch or BSB details, account name and number, opening balance and the date the account was opened. Money can only be withdrawn in accordance with the contract with the subcontractor or as otherwise agreed in writing, and only by cheque or electronic funds transfer. If the account becomes overdrawn, the Secretary must be told within five days, with the amount and the reason.

Record keeping is part of the scheme too: a ledger tracking amounts deposited and withdrawn, provided to the subcontractor at least once every three months or as otherwise agreed in writing but at least once every six months. The Government page notes that head contractors who fail to comply will face fines of up to $22,000.

The payment claim side, which is where disputes start

Retention only matters if the payment claim underneath it is being managed properly. Under the Act, a respondent must give the claimant a payment schedule within 10 business days of receiving a payment claim, and Building Commission NSW's FAQs state that if the respondent fails to provide a payment schedule they are liable for the total amount claimed, and that they may then find themselves in court proceedings without recourse to a cross-claim and unable to raise a defence based on the construction contract. On the other side of the same exchange, making a payment claim has its own requirements about when a claim can be made and what it must contain, and getting those wrong weakens the claim.

The FAQs also set out the supporting statement obligations and penalties: a maximum penalty of $22,000 for failing to provide a supporting statement with a payment claim to a principal, and maximum penalties of $22,000 and three months' imprisonment for knowingly providing false or misleading information in that statement.

The trap: assuming the trust rules protect your small project

The most common misunderstanding is believing that because retention must be held in trust in NSW, a subcontractor's money on your project is automatically protected. On a contract below the $20 million threshold, the statutory trust does not apply. What protects the subcontractor, and what protects you when you are the one paying, is the contract: the retention percentage, the trigger for release, the defects liability period, the set-off rights and the process for a disputed claim.

The second version of the trap is paying progress claims without certified evidence of the work. If you release money on a claimed percentage rather than on a verified stage, you have given up your main lever and you have weakened your position if the work is later found to be defective or incomplete.

The third version is asymmetric risk. If you are using a builder as head contractor, your retention sits in their hands under their contract terms. Ask where it is held, on what basis it is released, and what happens if the builder fails before release. On a small project the honest answer is often that there is no protection beyond the builder's balance sheet, and that is something to know before you sign, not after.

The checks a capable student would run

1. Read the retention clause and write down four things: the percentage, what it is security for, when it is released, and who holds it.
2. Check the threshold position if you are the head contractor, and confirm whether the trust scheme applies to your contract.
3. Tie each progress payment to certified evidence, not to a claimed percentage.
4. Know the 10 business day payment schedule rule and diarise it, because missing it can make you liable for the whole claim.
5. Confirm what a supporting statement is required for, and who signs it.
6. Ask what happens to retention if the builder fails, and get the answer in writing before you sign.
7. Reconcile retention in your feasibility. Retention is cash out of your project that comes back later, and the timing affects your peak debt.

The Think Property Club lesson

Retention and payment claims are the machinery that keeps money moving safely through a build. A developer does not need to be a construction lawyer to run a project well, but a developer does need to know what the contract says about holding money, releasing money and disputing money, and to have evidence for every release. That is the difference between a project where disputes stay commercial and a project where they become personal and expensive.

Your next actions

• Have a construction lawyer confirm your retention clause, release triggers and set-off rights before you sign.
• Diarise the 10 business day payment schedule deadline against every claim you receive.
• Require certified evidence of progress before any release, and record it in the project file.
• Confirm with your accountant how retention is held and recorded, and whether the trust scheme applies.
• Ask your finance broker how retention affects the progress payment drawdown and your peak debt.

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