Retentions are trust money, account or no account

Before October 2023, retention money in New Zealand was supposed to be held on trust, and everybody knew what happened when a head contractor went under: the retentions were gone, because nobody had ever separated them from working capital.

The Construction Contracts (Retention Money) Amendment Act 2023 rewrote subpart 2A of the Construction Contracts Act 2002 from 5 October 2023 to close that. The change is not a tightening of an existing duty. It is a change in when the trust comes into existence and what happens if you ignore it.

The trust exists before anyone does anything

Section 18B(1) sets the scene: the subpart applies where a commercial construction contract allows one party ("party A") to withhold an amount that would otherwise be payable — typically out of the progress payment set by a payment claim — to another ("party B") as security for party B's performance.

Then s 18B(2):

"A retainable amount becomes retention money at the time at which the construction contract allows party A to withhold payment of the amount from party B."

And s 18B(3) removes every excuse:

"The retainable amount becomes retention money in accordance with subsection (2) whether or not party A — (a) has withheld any amount from party B: (b) has complied with section 18D: (c) has calculated the retainable amount (as long as it is capable of being calculated): (d) has prepared, or given to party B, a payment schedule or other record of an amount being withheld: (e) has paid any amount owing to party B under the contract."

Section 18C(1) then creates the trust:

"Retention money is trust property, held on trust by party A for party B, and party A must deal with it in accordance with this subpart."

And s 18C(2): "The trust is created, by operation of this section, when the amount becomes retention money."

Section 18C(4) closes the last two gaps: where party A holds retention for two or more parties, "the retention money held for each of them is the subject of a separate trust", and "the retention money is trust property whether or not party A complies with this subpart."

Read together, this means an unopened trust account is not the absence of a trust. It is a breached trust.

When it stops being trust property

Section 18C(3) lists four exits: the money is paid to party B; party B gives up any claim to it in writing; it is used to remedy defects; or it "otherwise ceases to be payable to party B."

The defects exit has three conditions, all of which must be met:

"(i) the use of the money for that purpose is permitted by the contract; and (ii) any provisions of the contract relating to the use of the retention money are complied with; and (iii) at least 10 working days before using the money for that purpose, party A gives party B written notice setting out — (A) party A's intention to use the retention money for that purpose; and (B) details of the defects to be remedied."

Ten working days, in writing, with the defects specified. Deducting from retention at the end of a job without that notice is a use of trust property outside s 18C(3).

The account

Section 18D(1): "Party A must deposit retention money into a bank account that complies with section 18E as soon as practicable after it becomes retention money", and 18D(2) requires it to stay there until it ceases to be trust property.

Section 18E(1) requires the account to be "at a registered bank in New Zealand" and to comply with subsection (2) or (3). Under subsection (2), a complying account is one where:

"(a) the account holder is party A in their capacity as trustee of the retention money; and (b) the account is used solely for the purpose of holding retention money (and any interest earned on it …) that is held by party A — (i) for party B under a particular construction contract; or (ii) for party B under 2 or more construction contracts; or (iii) for 2 or more persons (each being a party B) …; and (c) party A has informed the bank that the account is for the purpose of holding retention money that party A holds on trust under this Act."

Paragraph (c) is the one that is missed. Opening an ordinary business savings account and calling it "retentions" does not satisfy s 18E(2)(c). The bank has to be told what it is.

Interest belongs to party A: s 18D(5) provides that "Interest earned on retention money is not part of the retention money and is the property of party A (unless the construction contract provides otherwise or section 18G applies)."

The alternative: a complying instrument

Section 18D(3) allows party A not to hold cash "to the extent that there is a complying instrument in force in relation to the payment of an equivalent amount to party B". Section 18FB defines what qualifies. This is the route for a head contractor that would rather provide an insurance-backed instrument than lock up cash — but the records requirements in s 18FC(4) then become substantial, including evidence "that the premium or other money that is, or that may become, payable to the issuer for the instrument has been fully paid by party A".

The penalties, and who they land on

Section 18DA(1):

"If party A fails to comply with section 18D, — (a) party A commits an offence and is liable on conviction to a fine not exceeding $200,000 for each offence; and (b) if party A is a body corporate, each of its directors also commits an offence and is liable on conviction to a fine not exceeding $50,000 for each offence."

"For each offence" is not decoration. The duty attaches to each amount that becomes retention money.

There are defences, in s 18DA(2) and (3): that party A "took all reasonable steps to ensure that party A complied with section 18D", that a director "took all reasonable steps to ensure that party A complied with that provision", or, for a charge of misusing retention money, that the defendant "acted in good faith and honestly and reasonably believed that the use of the money was permitted by section 18C(3)(c)."

Each of those defences is an evidence problem. "All reasonable steps" is provable with a documented process and records; it is not provable from memory.

The records and the three-monthly report

Section 18FC requires party A to keep accounting and other records of all retention money held for party B, including details of all bank accounts, details of any complying instruments, and — where money is in a bank account — records that identify the account as a retention money account, identify the contracts the money is retained under, and "include details of all payments into and out of the account". Section 18FC(5) requires those records to be made "available for inspection by party B at all reasonable times and without charge." Non-compliance: a fine not exceeding $50,000 for each offence.

Section 18FD requires party A to give party B information:

"(a) as soon as practicable after an amount becomes retention money; and (b) at least once in every 3 months until the retention money trust ends under section 18C(3)."

The required content includes the total retention money held under each contract between the parties, the account details for any bank account holding it, instrument details for any complying instrument, "a statement that party B may inspect the accounts and records that party A is required by section 18FC to keep", and anything else prescribed by regulations. Section 18FD(6): "Party A must not give information under this section that is false or misleading."

Account details are specific: where party A holds the account, the name of the bank and the branch, the name of the account, "the balance in the bank account that is held for party B", and, where separate ledger records are required under s 18E(4), the name of each ledger record relating to party B and its balance.

Which contracts are covered

Subpart 2A applies to commercial construction contracts (s 18B(1)) — not the residential building contracts that carry their own separate disclosure and written-contract regime. Section 18B(4) also excludes a retainable amount where "party A chooses not to retain the amount and has paid it to party B" or where "the total retainable amount under the contract is less than the de minimis amount prescribed in regulations."

There is a transitional limit too: the subpart "does not apply to a construction contract that was entered into before 31 March 2017" unless it is renewed for a further term on or after that date, in which case it applies only to retention withheld during the further term.

We have not quoted a figure for the de minimis amount because it is set by regulations rather than by the Act, and the regulation should be read in its current form before anyone relies on it. If your total retention on a contract is small, that is the provision to check.

A dispute about whether an amount ever became retention money, or about a proposed defects deduction, is a dispute about an amount payable under the contract like any other — it can be referred to adjudication the same way a disputed progress claim can.

What to do, on both sides of the contract

If you withhold retention:

• Open a complying account and tell the bank what it is — s 18E(2)(c) is a content requirement, not a formality.
• Deposit as soon as practicable after the contract allows the withholding, not when you get around to it.
• Keep a ledger per party B, per contract, with every payment in and out.
• Put the three-monthly report in the calendar for every live retention.
• If you intend to use retention on defects, send the ten-working-day notice with the defects listed.

If retention is withheld from you:

• You are entitled to the s 18FD information as soon as practicable and every three months. Ask for it if it does not arrive; the absence of it is itself a signal.
• You may inspect the s 18FC records "at all reasonable times and without charge".
• Keep your own record of what has been retained on each claim. The report you receive should reconcile to it, and a discrepancy is worth raising before, not after, the head contractor's position deteriorates.

---

Checked on 29 August 2026 against the Construction Contracts Act 2002 as at 5 October 2023 on the New Zealand Legislation website, incorporating the Construction Contracts (Retention Money) Amendment Act 2023 (2023 No 12). The de minimis amount and several record-keeping details are set by regulations made under the Act and are not quoted here. This describes the legislation and is not legal advice.

What Zirko does: it keeps invoices and quotes against the project they belong to, so what has been claimed and what has been certified on each claim is recorded rather than remembered. What Zirko does not do: it does not operate trust accounts, does not calculate retention balances, and does not produce the three-monthly report required by s 18FD.