Are Your Retentions Held on Trust? The Construction Contracts Act Regime After 5 October 2023 (NZ)

Steve Parker

Jun 9

7 min read

Updated: Jul 9

Since 5 October 2023, retentions withheld under a New Zealand construction contract are held on trust for the party they are withheld from — a structural change to where that liability sits, not a drafting tweak.

By Steve Parker · Trueworks · NZ construction contract analysis · 6 min

Quick answer: Since 5 October 2023, retentions withheld under a New Zealand construction contract are automatically held on trust for the party they are withheld from. The holder must keep them in a separate bank account used only for retentions, or hold a complying instrument, report on them at least every three months, and faces fines up to NZ$200,000 (and NZ$50,000 per director) for getting it wrong.

The Construction Contracts (Retention Money) Amendment Act 2023 came into force on 5 October 2023. It rebuilt the retention money provisions in Part 3 of the Construction Contracts Act 2002 (sections 18A to 18I). For anyone who has retentions held off their progress claims — most commonly a subcontractor working to a head contractor — the change moved retentions from "a number on a payment schedule you hope is still there" to "a sum the holder is legally obliged to ring-fence and account for." This post sets out what the regime now requires, and what a subcontractor and a head contractor each need to check.

What "held on trust" actually means

Under the amended Act, retentions are automatically held on trust from the moment the contract permits them to be withheld. The holder does not have to sign anything or open a named trust deed for the trust to exist — it arises by operation of the statute. That matters for one reason above all others: trust property does not form part of the holder's general assets. If the holder later fails, the retentions are not simply another sum in the pool that the holder's creditors fight over.

This is the single most important practical effect of the 2023 amendment. Before it, a subcontractor whose retentions had been spent on the holder's own working capital was, in an insolvency, an unsecured creditor — usually recovering a few cents in the dollar, if anything. The trust mechanism is designed to stop that outcome at its source by keeping the funds out of the holder's cashflow in the first place.

Where the retentions must now sit

The Act removes the holder's old ability to mix retentions with their own working capital. Retentions held as funds must be kept in a separate trust account at a New Zealand registered bank, used solely for retentions. The alternative is a complying instrument — an approved financial product such as a bond or insurance arrangement that protects the same sum. One or the other is mandatory; the holder cannot simply carry the liability on its own balance sheet.

For a head contractor, this is an operational obligation, not a paperwork formality: the account has to exist, it has to be a retentions-only account, and the movements in and out of it have to be traceable to specific contracts.

The reporting obligation

The holder must give the party owed retentions written information about them — as soon as practicable after an amount first becomes retentions, and then at least every three months until the trust ends. The records must identify the relevant bank account, the construction contracts the retentions relate to, and the payments into and out of the account. The record-keeping and reporting duties are enforced through their own offence provisions (sections 18FC and 18FD).

For a subcontractor, this is the practical lever the amendment hands you: you are now entitled to a regular, specific account of where your retentions sit. Silence is itself a breach. If the three-monthly information is not arriving, that is the first signal worth acting on — long before a project gets into difficulty.

What happens if the holder fails

Because the retentions are trust property, on the holder's receivership or liquidation they are intended to be available to the parties they were held for, rather than absorbed into the general estate. The 2023 changes were aimed at making it easier for a subcontractor to access retentions held on trust without first obtaining a court order — the gap that earlier insolvencies exposed, where the funds had been mixed away and recovering them meant litigation most subcontractors could not justify.

The protection is only as good as the holder's compliance, which is the honest qualification: a trust over funds that were never actually segregated is harder to give effect to than one over funds sitting in a proper retentions account. That is exactly why the segregation and reporting duties carry the penalties they do.

Offences and penalties

Failing to hold retentions in accordance with the regime is a strict liability offence. A company that gets it wrong is liable for a fine of up to NZ$200,000 per offence. Where the holder is a body corporate, each director also commits an offence and is liable for up to NZ$50,000 per offence — with a defence available to a director who took all reasonable steps to ensure the company complied. The separate record and reporting failures under sections 18FC and 18FD each carry fines of up to NZ$50,000.

Strict liability means intent is not the question — the duty is to comply, and the penalty attaches to non-compliance regardless of whether the breach was deliberate. For directors of head contracting companies, that personal exposure is the part most often underestimated.

No contracting out — and how it sits with NZS 3910

The retention provisions cannot be contracted out of. A clause in a subcontract that purports to waive the trust, the segregation, or the reporting duty has no effect to the extent it is inconsistent with the Act. This sits on top of, and overrides where they conflict, the retention mechanics in a standard form such as NZS 3910:2023 — the contract sets the commercial terms for how much is retained and when it is released; the Act now governs how that retained sum must be held and accounted for while it is withheld. A correctly run job satisfies both: the NZS 3910 release schedule and the statutory trust obligations are not alternatives.

What to check — the analyst view

For a subcontractor:

Are you receiving three-monthly written information identifying the account and the contracts? If not, that is a breach you can raise now.
Does the information name a retentions-only account at a NZ registered bank, or a complying instrument — not the holder's general account?
Do the amounts reconcile to the retentions shown on your own payment schedules?
Has anything in the reporting stopped or gone vague around a programme slippage or a change in the holder's circumstances?

For a head contractor:

Is the retentions-only account actually open, and are movements traceable to specific subcontracts?
Is the three-monthly information going out, on time, with the required detail?
Are directors aware of the personal-liability exposure and the "all reasonable steps" defence that depends on real controls being in place?

This is the kind of document-and-clause reconciliation Trueworks does as a neutral analysis — reading what the contract, the payment schedules, and the statutory duties actually require against what is in front of you, in writing, with the sections cited. See what Trueworks reviews at trueworks.co.nz.

FAQ

Do the retention rules apply to residential work? The Construction Contracts Act applies broadly to construction contracts in New Zealand, including much residential building work. The retention money regime applies where retentions are withheld under a construction contract the Act covers. Whether a specific arrangement is caught turns on the contract — which is exactly the kind of question worth checking against the Act rather than assuming.

My head contractor has not sent any retentions information. Is that a breach? The holder must provide the required information as soon as practicable after an amount becomes retentions and at least every three months. A holder that provides nothing is not meeting the reporting duty, which is enforced under sections 18FC and 18FD. Asking for the information in writing is a reasonable first step.

Does the trust protect me even if the head contractor spent the retentions? The trust arises by law, but giving effect to it is easier where the funds were actually segregated. If retentions were mixed into the holder's own working capital, recovery is harder — which is the precise problem the segregation duty and its penalties are meant to prevent.

How does this interact with a payment claim under the Act? Retentions and the payment claim regime are separate parts of the same Act. A retention release is still claimed and scheduled through the payment process; the trust rules govern how the withheld sum is held in the meantime.

About Trueworks

Trueworks is built by Steve Parker — two decades on the analytical side of New Zealand construction. Trueworks provides a defensible second opinion, in writing, with the codes, standards, and contract clauses cited: variation reviews, quote-checks, and contract-document analysis for builders, subcontractors, quantity surveyors, and architects. Trueworks reads the documents and reports what they say — it is an analyst, not a substitute for legal advice on a specific dispute.

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