Retention Schedule Calculator

What is retention in Australian construction contracts?

Retention (also called retention money or security retention) is a percentage of each progress payment withheld by the principal or head contractor as security against defective or incomplete work. It is one of the most common forms of security in Australian construction contracts, alongside bank guarantees and insurance bonds.

Under standard form contracts (AS 2124, AS 4000, ABIC MW-1), retention is typically 5% of the value of work completed, up to a maximum of 5% of the total contract sum. On a AU$2 million contract, maximum retention is AU$100,000. Once this cap is reached, no further retention is deducted from subsequent progress claims.

How retention release works

Retention releases in two stages:

• At Practical Completion: 50% of the total retention is released. Practical Completion means the works are sufficiently complete for the principal to occupy or use them, even if minor defects remain on a defects list.
• At the end of the Defects Liability Period (DLP): The remaining 50% is released once the contractor has rectified all defects identified during the DLP to the superintendent's satisfaction. The DLP is typically 12 months but can be longer for specialised work.

Worked example: AU$1.8 million subcontract

An electrical subcontractor on a 14-month commercial project in Melbourne has a contract value of AU$1,800,000 with 5% retention.

• Maximum retention: AU$1,800,000 × 5% = AU$90,000
• Over 14 months of progress claims, AU$90,000 accumulates (5% withheld from each claim until the cap is reached)
• At Practical Completion (month 14): AU$45,000 released
• At end of DLP (month 26): remaining AU$45,000 released, assuming all defects rectified

The subcontractor has AU$90,000 tied up for 14 months and AU$45,000 tied up for 26 months. On a 10% profit margin, the entire profit on this contract (AU$180,000) is only twice the retention amount. If the subcontractor is running three similar projects concurrently, they have AU$270,000 locked in retention at any given time. That is working capital they cannot use for materials, wages, or new project mobilisation.

State-specific retention trust requirements

Several Australian states now require retention money to be held in trust, preventing head contractors from using retention as operating capital:

• Queensland: The Building Industry Fairness (Security of Payment) Act 2017 requires retention on projects valued over AU$1 million to be held in a project trust account. Head contractors who commingle retention with operating funds are in breach.
• Western Australia: The Building and Construction Industry (Security of Payment) Act 2021 introduced trust account requirements for retention money. The QBCC equivalent (Building Services Board) oversees compliance.
• NSW and Victoria: No mandatory trust requirements for retention as of 2026, but both states have considered reforms. The Murray Report (NSW, 2018) recommended trust accounts, and further legislative changes are expected.

These trust requirements exist because subcontractor retention was historically one of the first casualties when a head contractor became insolvent. The subcontractor had completed the work and earned the retention, but the money was gone.

Bank guarantees as an alternative to cash retention

Many contracts allow subcontractors to substitute a bank guarantee for cash retention. Instead of having 5% withheld from each payment, the subcontractor provides a bank guarantee for the equivalent amount. The cost of a bank guarantee is typically 1-2% of the face value per year, which means a AU$90,000 guarantee costs AU$900-1,800 annually. For subcontractors with adequate banking facilities, this is substantially cheaper than having AU$90,000 in cash tied up for 26 months.

The trade-off is that bank guarantees reduce the subcontractor's available credit facility. A subcontractor with a AU$500,000 bank guarantee facility running three projects at AU$90,000 each has used AU$270,000 of their facility, leaving only AU$230,000 for new projects. This is why retention management directly affects a subcontractor's capacity to take on new work.

Tracking retention in your accounting system

Neither Xero nor MYOB has a native retention tracking feature. Most construction businesses track retention in one of three ways: a separate retention liability account in the chart of accounts, a spreadsheet maintained by the project manager, or a construction-specific add-on. The challenge is reconciling the retention figure in the tracking system against the actual progress payments recorded in the ledger.

When a progress claim is processed in AP, the full claim amount is often recorded as a bill, with the retention portion either coded to a separate account or deducted manually. If the AP team processes the claim at face value and the project manager deducts retention separately, the ledger and the project records will diverge. For how AP automation handles this, see the construction progress claims guide (if published) or the subcontractor payment schedule generator.

Frequently asked questions

How much retention is typically held on construction contracts?

5% of each progress claim, up to a maximum of 5% of the total contract sum. Once the cap is reached, no further retention is deducted. Some smaller subcontracts specify 10%. The rate and cap are defined in the contract and should be confirmed before work commences.

When is retention released?

Half at Practical Completion and the remaining half at the end of the Defects Liability Period (typically 12 months after Practical Completion). The second release is conditional on all defects being rectified. If defects remain unresolved, the principal can withhold the retention or apply it towards the cost of rectification.

What happens to retention if the head contractor goes insolvent?

In QLD and WA, retention must be held in a project trust account, which protects it from the head contractor's creditors. In states without trust requirements (NSW, VIC, SA, TAS), retention is typically lost if the head contractor becomes insolvent, as it ranks as an unsecured debt. This is the primary argument for bank guarantees over cash retention.

Can I substitute a bank guarantee for cash retention?

Most standard form contracts allow it, but it depends on the specific contract terms. A bank guarantee costs 1-2% per year of the face value, which is usually cheaper than having cash tied up. The trade-off is that it reduces your available credit facility with your bank.