Retention Monies for Cost Plus Payment Claim

Retention Monies - Payment Claim Field Guide | Contracts Administrator

Retention Monies in Cost Plus Payment Claims

📅 Updated: January 2025 ⏱️ 8 min read 📋 Cost Plus Payment Claim Best Practices

⚠️ Compliance Warning

Mismanaging retention monies can lead to serious financial penalties, invalid claims, and protracted disputes. Accurate tracking and reporting are critical for compliance.

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1. Field Name and Definition

Retention Monies refers to amounts withheld by a principal from progress payments due to a contractor, serving as security for the performance of obligations under a construction contract. In a NSW Cost Plus Payment Claim, this field details any retention amounts withheld from the current or previous claims as per the contract.

This security provides assurance to the principal that funds are available to address incomplete or defective work without pursuing legal action, ensuring the contractor completes all work to the required standard and rectifies defects during the defects liability period.

3. Practical Guidance

Step-by-Step Instructions

  1. Review the Contract: Carefully identify the clauses that define the retention percentage, calculation basis, and conditions for release.
  2. Calculate Current Retention: Based on the contract terms, calculate the retention amount for the current claim period (e.g., 5-10% of the claimed amount).
  3. Maintain a Running Ledger: Keep a clear record of all retention amounts withheld from previous claims to track the cumulative total.
  4. Specify in the Claim: Clearly state the amount being withheld from the current claim as a separate line item.
  5. Document Releases: If any retention has been partially released (e.g., at practical completion), ensure this is documented and deducted from the total.
  6. State the Total Held: Present the cumulative retention amount held to date.

Where to Find This Information

  • The Construction Contract: The primary source for retention percentages and release conditions.
  • Previous Payment Claims: Essential for tracking cumulative retention withheld.
  • Project Financial Records: For a comprehensive history of payments and deductions.
  • Project Correspondence: For records relating to practical completion or defect rectification.

4. How to Present the Information Clearly

Clarity is crucial to prevent disputes. Presenting retention information in a structured, easy-to-understand format within your payment claim is a best practice. A tabular format is highly effective.

Recommended Tabular Format

RETENTION MONIES:
Previous retention held: $XX,XXX.XX
Current claim retention (X%): $X,XXX.XX
Total retention held to date: $XX,XXX.XX

Conditions for Release:
50% released at practical completion: $XX,XXX.XX
50% released after defects liability period: $XX,XXX.XX

5. Common Mistakes and How to Avoid Them

Mistake 1: Inconsistent Retention Rates

Error: Applying different retention percentages across various claims without a contractual basis.

Solution: Always refer back to the construction contract for the correct, agreed-upon retention rate and apply it consistently to all claims.

Mistake 2: Failing to Track Cumulative Retention

Error: Not maintaining an accurate running total of all retention money held over the project's life.

Solution: Use a ledger or automated system to maintain a clear and continuous record of all retention amounts withheld and released for each claim.

Mistake 3: Incorrect Calculation Basis

Error: Calculating the retention percentage on the wrong amount, for instance, by incorrectly including or excluding GST.

Solution: The contract should clarify whether retention is calculated on amounts inclusive or exclusive of GST. Adhere strictly to this contractual definition.

6. Risks of Inaccurate Reporting

Omitting or misreporting retention information carries significant risks that can jeopardise payment and create legal exposure.

Risk Type Impact Consequence
Legal Risks Claim Invalidity The payment claim may be deemed invalid if retention details are a contractual requirement for a claim.
Financial Risks Cash Flow Disruption Difficulty in tracking and recovering withheld funds can severely impact cash flow.
Dispute Risks Weakened Position Lack of clear documentation weakens your position in payment disputes and adjudication proceedings.
Strategic Disadvantages Erosion of Trust Poor financial administration can damage the commercial relationship between contracting parties.

7. Examples

Example 1: Standard Retention Scenario

RETENTION MONIES:
Contract retention rate: 5%
Previous retention held: $25,000.00
Current claim value: $100,000.00
Current claim retention (5%): $5,000.00
Total retention held to date: $30,000.00

Example 2: Retention at Practical Completion (50% Release)

RETENTION MONIES:
Previous retention held: $60,000.00
50% release at practical completion: -$30,000.00
Current claim value: $20,000.00
Current claim retention (10%): $2,000.00
Total retention held to date: $32,000.00

9. Frequently Asked Questions

Q1: When should retention monies be released?
A: The release schedule is dictated by the contract. A common structure is a two-stage release: 50% at practical completion and the remaining 50% at the end of the defects liability period.
Q2: Is retention money subject to GST?
A: No, retention money itself is not a separate taxable supply. It is a portion of a claimed amount that is temporarily withheld. GST applies to the full value of the work claimed, irrespective of the retention.
Q3: What happens to retention money if a head contractor becomes insolvent?
A: For NSW projects valued over $20 million, retention money must be held in a dedicated trust account, which protects it from being mixed with the head contractor's assets in case of insolvency. For smaller projects, such protection only exists if a trust is explicitly created in the contract.
Q4: Can a contractor provide a bank guarantee instead of having retention withheld?
A: Yes, many contracts permit the contractor to provide a bank guarantee or another form of unconditional undertaking in lieu of cash retention. This helps the contractor maintain better cash flow while still providing the required security to the principal.

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