Retentions clause: how it works and how to negotiate it

TL;DR

A retentions clause lets the client (or head contractor) hold back a slice of each progress payment, typically 5% of each claim, as security against defects and non-completion. Half comes back at practical completion; the other half when the defects liability period ends. For commercial work in QLD, the statutory cap is 5% pre-PC and 2.5% post-PC. In NSW, retention on projects over $20 million must sit in a dedicated trust account. The main negotiating levers are the percentage rate, the release triggers, and offering a retention bond as an alternative to cash. Retention without a written release trigger is a cash-flow trap: make sure yours spells out the exact conditions for both tranches.

What a retentions clause does

Retention (also called retainage) is a contractual right to withhold a percentage of each progress payment. The purpose is dual: it gives the paying party a financial lever to ensure defects get fixed, and it creates a pot of money to draw on if the other party fails to complete.

In residential construction, retention flows in two directions:

Client to builder: the client withholds a slice of each stage payment. The builder gets it back once all milestones are met.
Builder to subcontractor: the builder withholds retention from sub-trade progress claims before paying across.

Both uses follow the same basic mechanics. The figures and trust-account obligations differ depending on the contract type and project value.

Typical retention percentages

The industry standard for residential work in Australia is 5% of each progress payment, withheld progressively across the job (verified 2026-05-08, NSW Government, Retention money held by head contractors).

Some contracts use 10% on early stages, stepping down to 5% after the slab or lock-up. Others hold 5% flat across all stages. Anything above 10% is uncommon and, for NSW residential contracts, risks being unenforceable as an unfair contract term under the Home Building Act 1989 (NSW) (verified 2026-05-08).

Typical rate	When used
5% per progress claim	Standard residential. Most HIA and MBA domestic contracts.
10% per progress claim	Less common; sometimes used on early stages of larger jobs.
Step-down (10% to 5%)	Reduces retention once the job reaches a defined milestone (e.g. lock-up). Negotiable.

The two-stage release

A well-drafted retention clause releases in two halves:

First tranche: at practical completion (PC) Half of the total retention is released when the builder achieves practical completion and the client takes possession. On a $500,000 contract with 5% retention, that’s $12,500 back at PC.

Second tranche: at end of defects liability period (DLP) The remaining half is released when the defects liability period expires and all listed defects have been rectified. Residential DLPs range from 13 weeks (HIA standard new homes contract) to 6 months or longer depending on the contract suite. If defects remain outstanding at DLP end, the payer can withhold the balance until rectification.

This split is the market standard. Contracts that tie 100% of retention to final certificate or to the certifier’s sign-off (rather than PC) extend your exposure and should be pushed back.

Statutory and contractual limits by state

Retention law varies across Australian states and territories. The table below covers the key rules applicable in 2026.

QLD: Statutory caps under the QBCC Act

For commercial building contracts (builder to subcontractor), the Queensland Building and Construction Commission Act 1991 Part 4A imposes strict retention caps (verified 2026-05-08, HIA, Retention limits for trade contracts, QLD):

Stage	Maximum retention
Before practical completion	5% of contract price (no more than 10% of any single progress payment)
After practical completion	2.5% of contract price

Failing to release retention without reasonable excuse is an offence carrying up to 200 penalty units or one year imprisonment. As of September 2022, 200 penalty units was $28,750.

From 1 March 2025, QLD project trust accounts (which include a retention trust account) apply to eligible contracts over $3 million. From 1 October 2025, the threshold dropped to contracts over $1 million (verified 2026-05-08, Broader Net Cast in 2025 for QLD Project Trust Accounts, HWL Ebsworth).

NSW: Trust account obligations for large projects

In NSW, the Building and Construction Industry Security of Payment Act 1999 s 12A requires head contractors to hold retention money in a dedicated trust account for projects valued over $20 million (verified 2026-05-08, NSW Government, Retention money held by head contractors).

The trust account must be held with an authorised deposit-taking institution (ADI). The head contractor must:

Notify the ADI in writing that the account is a retention trust account
Notify the Secretary (Dept of Fair Trading NSW) within 14 days of opening
Provide a ledger statement to each subcontractor at least every 3 months (or by agreement, minimum every 6 months)
Only withdraw by the contract terms or written agreement

Non-compliance: fines up to $22,000 for corporations.

Most residential work in NSW falls well below the $20 million threshold. The trust-account rules are a commercial/multi-residential concern, not a standard house build issue. But subcontractors on large jobs should confirm the account has been set up before retention accumulates.

WA: Retention trust scheme from February 2023

In Western Australia, the Building and Construction Industry (Security of Payment) Act 2021 (WA) introduced a retention trust scheme that applies to construction contracts over $20,000 (excluding GST) entered into from 1 February 2023 (verified 2026-05-08). The scheme applies to commercial construction contracts; residential building contracts under the Home Building Contracts Act 1991 (WA) have separate arrangements.

Head contractors must establish a trust account within 10 business days of entering the contract (or within 20 business days of the contract value exceeding the threshold). The trust account must be maintained with an ADI.

VIC: Trust reforms anticipated

Victoria has signalled retention trust reforms. As of the time of writing, compulsory retention trust accounts for commercial construction work are anticipated following broader security of payment reform. Residential contracts in VIC are not currently subject to mandatory retention trust requirements. Check current VBA and Consumer Affairs Victoria guidance before advising on specific projects.

Other states

SA, TAS, NT, and ACT do not currently have specific statutory retention percentage caps or trust account mandates equivalent to NSW or QLD for residential work. Retention terms are governed by the contract. Standard practice (5% two-stage release) applies.

Claiming retention under the SOP Acts

In every state and territory, the Security of Payment Acts give contractors and subcontractors a fast-track adjudication pathway for unpaid progress payments. Retention money that has become due and payable (because the release trigger has been met) can be claimed as a progress payment and pursued via SOP adjudication if the payer refuses to release (verified 2026-05-08, NSW SOPA adjudication, Adjudicate Today).

The adjudication process is rapid (decisions typically within 10 business days in NSW) and avoids litigation. Key point: the claim is only available once the release trigger has been met under the contract. Retention that is not yet due cannot be adjudicated.

State	Act
NSW	Building and Construction Industry Security of Payment Act 1999
VIC	Building and Construction Industry Security of Payment Act 2002
QLD	Building Industry Fairness (Security of Payment) Act 2017
WA	Building and Construction Industry (Security of Payment) Act 2021
SA	Building and Construction Industry Security of Payment Act 2009
TAS	Building and Construction Industry Security of Payment Act 2009
NT	Construction Contracts (Security of Payments) Act 2004
ACT	Building and Construction Industry (Security of Payment) Act 2009

Alternatives to cash retention

Cash retention bites cashflow, especially for subbies with thin margins. Several alternatives are recognised in standard contracts and, in some states, available by statute:

Retention bond (insurance-backed) An insurance company issues a bond guaranteeing payment up to the retention amount if the contractor defaults on defects. Allows the contractor to receive full progress payments without cash being withheld. Common on larger commercial work.

Bank guarantee (unconditional) The contractor’s bank issues an unconditional undertaking to pay the retention amount on demand. More conservative from the payer’s perspective; widely accepted on commercial projects.

Government bond / approved instrument In QLD, trade contractors have a statutory right under the QBCC Act to substitute an approved form of security (government bond or approved security instrument of equivalent value) in place of cash retention (verified 2026-05-08, HIA, Retention limits for trade contracts, QLD).

On residential work, cash retention is the norm. Builders and trades can still negotiate to offer a retention bond at contract stage; acceptance depends on the other party’s preference.

How to negotiate the retention clause

Before signing, check these four things:

1. Rate: get below 5% if possible For trades with low defect risk (e.g. concrete flat work with a solid track record), push for 2.5% or 3%. On larger jobs, negotiate a step-down: 5% until slab, then 2.5% for the remainder.

2. Release trigger: must be objective and in writing The clause should state exactly what triggers each release: “within 10 business days of [practical completion certificate / certifier confirmation / both parties signing off on the defects list].” Vague language like “on completion to the client’s satisfaction” hands the payer indefinite control.

3. Defects liability period: confirm the length For residential, the DLP commonly runs 13 weeks (HIA standard) to 6 months. Shorter is better for the builder. Confirm the DLP is defined in the contract rather than defaulting to statute (statutory defaults vary; check the relevant state Building Act).

4. Cap the post-PC hold If the contract mirrors QLD’s approach, the post-PC retention should be no more than half of the original held amount. Push for an explicit cap (e.g. “retention after practical completion shall not exceed 2.5% of the contract price”).

For the client side Retention is the client’s main financial lever for defect rectification. Releasing the first tranche at PC is reasonable once the builder hands over a clean occupation certificate and keys. Hold the second tranche firmly until the defects list is cleared.

What can go wrong

Common retention-related pain points:

No written release trigger: the client sits on retention indefinitely because the contract says “when the client is satisfied.” Rewrite before signing or use a SOP adjudication to force release once the trigger is met.
DLP expires with outstanding defects, builder disappears: if the builder fails to rectify and goes into liquidation, the retention may be all that’s available. Ensure the contract allows the client to use retention to fund rectification by a third party.
Retention accumulated but not in trust: on large NSW or WA jobs, check the head contractor has set up the required trust account before substantial retention builds up. A head contractor in financial difficulty may have mixed retention funds.
Retention held against subbies in QLD over the 5% cap: the QBCC Act cap is strictly enforced. Builder deducting more than 5% pre-PC or more than 2.5% post-PC is exposed to penalty.
Subcontractor failing to claim released retention: once the DLP expires and defects are cleared, the subcontractor must serve a valid payment claim to trigger release. Failing to claim leaves money on the table.
“Final certificate” trap: some contracts tie retention release to issuance of a final certificate by the certifier, not just practical completion. If the certifier is slow or the principal is obstructive, this extends the hold-back period. Negotiate for PC to trigger the first release, not the final certificate.

References

NSW Government: Retention money held by head contractors (verified 2026-05-08)
Building and Construction Industry Security of Payment Act 1999 (NSW) s 12A (verified 2026-05-08)
HIA: Retention limits for trade contracts, QLD (verified 2026-05-08)
QBCC: Retentions and securities (verified 2026-05-08)
HWL Ebsworth: Broader Net Cast in 2025 for QLD Project Trust Accounts (verified 2026-05-08)
DLA Piper: Security of Payment in Australia (verified 2026-05-08)
Adjudicate Today: NSW Security of Payment and Adjudication 2026 (verified 2026-05-08)
Home Building Act 1989 (NSW) (verified 2026-05-08)