Retention: held, capped, released in halves

Retention is the security a principal holds against a contractor, and a head contractor holds against a subcontractor. Under AS 4000 it is deducted from each progress claim, accumulates to a limit, and is released in stages. The mechanics are ordinary. The tracking is where money goes missing.

How it accrues

Retention is a percentage of the certified value of work, deducted each cycle. Two numbers govern it.

• The deduction rate. A percentage taken from the value certified in each progress claim.
• The cap. A maximum, expressed as a percentage of the contract sum, beyond which no further retention is deducted.

Deduct on the certified value, not the gross claim, and stop deducting once the cap is reached. A schedule that keeps taking retention past the cap overstates the hold and understates what the contractor is owed.

Release in two halves

The usual pattern releases retention in two tranches. The first half falls due at practical completion, when the works are handed over. The second half falls due at the end of the defects liability period, once the contractor has made good the defects notified during it. Miss either date and the money simply sits, because retention is rarely paid without being claimed.

It flows through the payment claim

Releasing retention is a payment event like any other. The release is claimed in a progress claim, which is also a payment claim under the Security of Payment Act, and the principal answers with a payment schedule. That means retention release runs on the same business-day clock as every other claim, and an unanswered claim for retention can head to adjudication like any other unpaid sum.

GST on release

Retention was deducted from net certified values, so on release GST of ten per cent applies to the amount released as part of the taxable supply. Keep the release net and add GST on the claim, rather than treating retention as a GST-free balancing figure.

Track it or lose it

The commonest retention loss is not a dispute. It is a second-half release that nobody claimed because the defects date passed unnoticed on a job that finished two years ago. Hold the two release dates against the job from day one, and the money comes back on time rather than after a phone call you should not have had to make.