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Retention limits for trade contracts

It is not uncommon for Queensland commercial contracts to include retentions.

The retention provisions of the Queensland Building and Construction Commission Act 1991 (QBCC Act) are extensive and contractors need to be aware of their rights and responsibilities. 

What are retentions?

Retentions are amounts that are held to give financial protection to the builder for the trade contractors' performance of building works under a trade contract and to fix defects and any such work. 

Retentions may be in the form of cash (usually amounts held back from a progress claim) or an approved form of bond or other form of security. 

Limits on amounts retained

A trade contract is subject to a condition that, any time before the works reach practical completion, the total value of all amounts retained are not to be more than 5% of the contract price. 

This 5% limit does not apply to a retention for things paid for but not yet installed (an example is special equipment being brought from overseas that has been paid for but is still to be shipped to Australia or brought to site). This exemption is quite limited though. 

Limit on deductions

The builder is only entitled to retain up to 10% of any one progress payment. This does not affect the 5% limit on the total amount retained. 

Release on practical completion

The total amount retained after practical completion must not be more than 2.5% of the contract price. 

This 2.5% limit does not apply to an amount retained for a purpose other than the correction of defects (for example, an amount held back as part of a set-off claim). 

Right to substitute

Trade contractors have a right to substitute approved forms of security in place of cash retention. This will give trade contractors access to cash if they are able to replace cash retention with an acceptable non-cash alternative. To exercise this right, the trade contractor must lodge with the builder an equivalent value security (in the form of a government bond or a valuable instrument from an approved security provider) to take the place of the cash retention. This right may be exercised at the time the retention is made or at any later time. 

New requirements as at 17 December 2018

Statutory Defects Liability Period

Unless a trade contract agreement specifies otherwise, there is a statutory defects liability period of 12 months from the date of practical completion. 

Notification of defects liability period ending: Trade contract agreements

Under any trade contract where there are retentions or securities under that contract, the builder must notify the trade contractor if they are withholding the amounts from within 10 business days of the defects liability period ending (or within five business days after receiving notice if the defects liability period is linked to another building contract). 

Penalty for not releasing retention amount

It is a requirement that the party holding retention monies must release them in accordance with the building contract unless they have a “reasonable excuse”. Whilst most building contracts should provide for a date for a release of retention monies, where the contract is silent the final payment claim will need to be made within 28 days after the end of the last defects liability period. It is essential these timeframes are complied with as a failure to make the final payment claim within the required timeframe may result in the payment claim being invalid. 

A maximum penalty of 200 penalty units ($28,750 as of September 2022) or one year’s imprisonment may apply for failing to release a retention amount to the contracted party in accordance with the contract without a reasonable excuse. 

What is a reasonable excuse for a failure to pay a retention amount?

There is no explicit definition as to what constitutes a “reasonable excuse” for the failure to pay a retention amount, however, given that retention money is held to cover the cost of correcting defects in building work, it is likely that where there are ongoing issues relating to the rectification of defects in the performance of a building contract that this could be regarded as a reasonable excuse to refrain from paying the retention at that time. 

Moreover, the QBCC Act allows the withholding of retention to the extent it is the subject of a dispute or a subcontractor’s charge. 

To find out more, contact HIA's Contracts and Compliance team

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