Article focus: This article explains the purpose of retention money in construction contracts and compares the key commercial principles under FIDIC 1999 and NZS 3916, including release triggers, New Zealand statutory requirements, and practical considerations for Quantity Surveyors and Contract Administrators.
Retention money is a percentage of money withheld from each interim payment certificate under a construction contract. It is primarily used as security to ensure that the contractor completes the works properly and rectifies defects during the defects liability period.
In many construction projects, retention is commonly set at around 5% of the value of each payment claim, although the actual percentage and maximum retention limit must always be confirmed from the contract conditions, contract data, appendix to tender, or specific conditions of contract.
Retention protects the employer or principal by retaining a small portion of the contractor’s payment until the works are properly completed. It also encourages the contractor to:
Retention should never be treated as a penalty or a general cash reserve. It is money withheld for a specific contractual purpose and should be managed accordingly.
Under the FIDIC 1999 Red Book, retention is addressed under Clause 14, which deals with contract price and payment.
The deduction of retention is usually made from interim payments. The retention percentage and maximum retention amount are normally stated in the Appendix to Tender or Contract Data.
The release of retention is primarily addressed under Sub-Clause 14.9 – Payment of Retention Money.
Generally, the first half of retention is released following the issue of the Taking-Over Certificate. This confirms that the Works, or a section of the Works, have been taken over by the Employer.
The second half is normally released after the expiry of the Defects Notification Period, provided that the Contractor has completed the required defect rectification works.
Where sectional completion applies, retention may be released proportionately for the completed section, subject to the contract wording.
Interim Payment Certificates
Retention is deducted from interim payment certificates until the maximum retention amount specified in the Appendix to Tender or Contract Data is reached.
Taking-Over Certificate Issued
The first half of the retention money is generally released once the Works or a Section of the Works has been taken over by the Employer.
Defects Notification Period Expires
The remaining retention money is normally released after the Defects Notification Period expires, provided defects have been rectified and contractual obligations have been fulfilled.
Consider a project comprising two apartment buildings under a single contract. If Building A achieves Taking-Over while Building B remains under construction, retention associated with Building A may be eligible for partial release based on the value of the completed section, subject to the contract provisions.
NZS 3916 is commonly used in New Zealand for Design and Construct contracts. Retention serves the same commercial purpose as under FIDIC by providing security for contractor performance and defect rectification.
Under NZS 3916, retention is generally administered through the payment provisions of Clause 12. The retention percentage, maximum retention amount, and release mechanism are typically specified in the Specific Conditions of Contract.
In practice, retention under NZS 3916 is commonly released in stages.
The first release typically occurs at Practical Completion, subject to the contract conditions. Once the Practical Completion Certificate is issued, the contractor is generally entitled to release of the portion of retention that is no longer required as defects liability security.
The final release normally occurs following the expiry of the Defects Notification Period, provided the contractor has completed outstanding defect rectification works or the principal has deducted any properly assessed amount for unresolved defects.
Progress Payments
Retention is deducted from progress payments in accordance with Clause 12 and the Specific Conditions of Contract until the specified retention limit is reached.
Practical Completion Certificate Issued
Part of the retention money is typically released once Practical Completion has been certified, subject to the contract conditions.
Defects Notification Period Expires
The remaining retention money is generally released following completion of defect rectification works and expiry of the Defects Notification Period, less any properly assessed deductions.
Although the commercial principle is similar to FIDIC, the terminology differs. FIDIC refers to the Taking-Over Certificate and Defects Notification Period, whereas NZS 3916 generally refers to Practical Completion, Defects Notification Period, and Final Completion.
In New Zealand, retention money is also affected by the Construction Contracts Act 2002.
Retention money withheld on commercial construction projects must generally be held on trust for the benefit of the contractor. The party withholding retention has specific obligations regarding record keeping, transparency, and the protection of retained funds.
Retention money should not be treated as normal working capital. If retention is used to remedy defects, it must be applied strictly in accordance with both the contract and statutory requirements.
| Topic | FIDIC 1999 Red Book | NZS 3916 |
|---|---|---|
| Retention Provision | Clause 14 | Clause 12 - Payment Provisions |
| First Release Trigger | Taking-Over Certificate | Practical Completion Certificate |
| Final Release Trigger | End of Defects Notification Period | End of Defects Notification Period / Final Completion |
| Retention Details | Appendix to Tender / Contract Data | Specific Conditions of Contract |
| Purpose | Security for defects and completion | Security for defects and completion |
The exact retention percentage, maximum amount, and release mechanism must always be checked against the signed contract documents and any project-specific amendments.
Retention money is often a relatively small percentage of the contract value, but it can become a significant commercial issue at project completion.
Understanding the contractual release mechanisms under both FIDIC 1999 and NZS 3916 helps project teams manage cash flow effectively, reduce disputes, and ensure that retention fulfils its intended purpose as a performance security mechanism rather than becoming an unintended financial burden.
For Quantity Surveyors, Contract Administrators, and Project Managers, the key is to understand the contractual trigger for release, verify the specific contract conditions, and ensure that retention is managed fairly and transparently throughout the project lifecycle.
Proper management of retention protects both the principal and the contractor while supporting successful project delivery.