What retention actually is
Retention money is the slice of every progress payment your client holds back as security against defects. Standard residential and commercial contracts in Australia retain 5% of each progress claim until practical completion, then 2.5% (half the retention) for a defects-liability period of six to twelve months after that.
On a $200,000 contract, that's $10,000 held back during construction and $5,000 sitting in someone else's account for a year after you've finished the job. On a builder doing four jobs of that size a year, you're permanently $20,000 to $40,000 light on working capital that you've already earned.
The trade industry has accepted this for decades because the alternative — clients with no security against defects — would push contract prices up across the board. But it's a brutal cashflow tax on small operators, and the regulators have started noticing.
How the NSW retention trust framework works
In 2015 NSW became the first state to require head contractors to hold retention money in a separate trust account. The rule has been progressively expanded. As of the most recent settings, head contractors on construction projects above $20 million must hold retention money in a dedicated trust account with an authorised deposit-taking institution (ADI).
The mechanics:
- Retention money has to be paid into the trust account within 5 business days of being retained.
- The head contractor has to keep a ledger of every deposit, withdrawal, and interest accrual.
- The ledger must be provided to the subcontractor at least every 3 months (or every 6 months if agreed in writing).
- Penalties for non-compliance run to $22,000 per breach.
In November 2024 the NSW Government floated dropping the threshold from $20 million to $10 million, which would catch significantly more subcontract chains. That proposal is still working through consultation as of mid-2026.
What the trust framework gives a subcontractor is certainty that the money still exists. Before the trust regime, retention money was a general-purpose creditor claim against the head contractor — if the head contractor went insolvent (and 2,636 of them did in 2024), your retention vanished into the unsecured-creditor pool with everyone else's. After the trust framework, the money is ring-fenced. You're a beneficiary of a trust, not an unsecured creditor.
That's the upside. The downside is the threshold: at $20 million (or even $10 million), almost no residential renovation work is caught. A typical $200,000 builder is operating well below the line, and the head contractors retaining your money have no statutory trust obligation.
What it actually costs you
Run the numbers on a real $200,000-a-year builder doing four jobs of $50,000 each:
- 5% retention during construction = $10,000 held back across the four active jobs at any one time.
- 2.5% defects retention for 12 months after practical completion = a further $5,000 sitting out for a year per job. With staggered job finishes, that's roughly $10,000 to $15,000 in defects retention at any given moment.
- Total working capital tied up: $20,000 to $25,000.
If your business runs on a 15% net margin, that working capital represents the entire annual margin on one of your four jobs. You did the work. You earned the money. And it's sitting in someone else's bank account.
Reporting from broker firms like Switchboard Finance has tracked this gap for years — they describe retention as one of the top three drivers of "profitable insolvency" in the trade sector, where a builder has been making money on every job but runs out of cash because too much of it is held back at any one time.
Workaround #1: Bank guarantee in lieu of cash retention
Most contracts allow a builder to substitute an unconditional bank guarantee for cash retention. The guarantee is a letter from your bank promising to pay the client up to the retention amount if you fail to fix defects. You keep your cash. The client keeps their security.
The catch:
- The bank wants security from you (often a property charge or cash cover) before they'll issue the guarantee.
- Establishment fees run 0.5% to 1.5% of the face value per year for the duration the guarantee is on issue.
- On small contracts the establishment fees often outweigh the cashflow benefit. A $5,000 guarantee at 1% annually for 18 months costs $75 — fine. A $50,000 guarantee at 1.5% for the same period costs $1,125 — material.
Bank guarantees work well for builders doing $500k-plus contracts and have a banking relationship that already extends to commercial facilities. For the $200k residential renovator, they often don't make economic sense.
Workaround #2: Milestone escrow instead of retention
The second workaround restructures the problem. Instead of completing the entire job and retaining 5% across it, you break the job into milestones, hold the milestone payment in escrow until each milestone is signed off, and dispense with cash retention entirely.
The logic: retention exists because the client needs security against defects. If every milestone is signed off as it's completed — with photo evidence, written acceptance, and a final practical-completion sign-off — the security retention is meant to provide already exists in the milestone structure itself. The defects-liability period still applies; it's just no longer paired with a cash holdback, because the client's protection comes from the milestone evidence trail and any warranty bond or trade insurance you carry.
This is the model Stagex is built around. The client funds each milestone into escrow before work starts. Stagex releases the milestone payment to you when the client signs off on the evidence. You finish the job with zero cash tied up in retention, the client has a complete documentary record they can rely on if anything goes wrong, and the defects-liability obligations are managed separately through your existing warranty regime.
Compared to the bank guarantee:
- Cost: 1.6% per milestone released, vs 0.5%–1.5% per year for a bank guarantee plus establishment fees.
- Set-up: minutes, vs weeks for a bank facility.
- Security: the client's funds are in a regulated trustee account from day one, not promised by a head contractor who may or may not survive the year.
Which one to use
If your jobs are above $500,000 and you already have a commercial banking relationship, bank guarantees are still the cleanest substitute for cash retention. They're well understood, every commercial client will accept them, and the per-job cost is small relative to contract value.
If your jobs are between $20,000 and $500,000 — which is where most residential renovation, fit-out, and specialist trade work sits — milestone escrow is the more economic answer. You pay only when you get paid. The total cost over a job is comparable to a credit card processing fee. And the audit trail it generates is the same trail SOPA, BIF Act, and the various retention trust frameworks all assume you're producing.
The retention cashflow trap isn't solved by waiting for the threshold rules to drop further. It's solved by no longer letting your money be retained.
Sources
- Retention money held by head contractors — NSW Government
- Building and Construction Industry Security of Payment Act 1999 (NSW) s 12A — AustLII
- NSW Government proposes to reduce retention trust account threshold to $10 million — Norton Rose Fulbright
- Retentions Trust Account — Master Builders Association NSW