Construction retentions and payment claims: managing cash flow

In construction, you usually pay for materials and labour weeks before you're paid for the work. Add retentions held back on every claim, head contractors who stretch their payment runs and variations that sit in dispute, and it's easy to see why good builders and subbies run short of cash while their order books are full.

The numbers show the strain. Centrix reported 755 construction company liquidations in the year to May 2026, and RNZ reported 768 in the year to March 2026. This guide explains how payment claims, payment schedules and the retention rules under the Construction Contracts Act 2002 work, how to use them to protect your cash flow, and how fundU can fund the gap with a loan secured on property rather than on the project.

Why is cash flow so tight in construction?

Because money flows down the contract chain slowly and in lumps, while costs go out steadily every week. A subcontractor is often three or four steps away from the client's money, and every step adds delay.

The typical pressures are:

• Upfront costs. Materials, plant hire and wages are paid before the first payment claim is even due.
• Monthly claim cycles. Most contracts pay on monthly progress claims, with payment due weeks after the claim is made.
• Retentions. A share of each payment is held back as security for defects, sometimes for months after practical completion.
• Disputed variations. Extra work gets done on site but paid late, reduced or argued over.
• Head contractor failure. When a party above you fails, payments stop and retentions can be caught up in the collapse.

Knowing your rights under the Construction Contracts Act 2002 won't fix all of that, but it gives you strong tools to get paid on time.

How do payment claims work under the Construction Contracts Act?

A payment claim is a formal request for payment under a construction contract. You can make a payment claim for any amount you believe is due under the contract, and every claim must include the prescribed notice, known as Form 1, which explains the payer's obligations.

A valid payment claim should:

1. Be in writing and identify the construction contract it relates to.
2. Identify the work, and the period, the claim covers.
3. State the amount claimed and the due date for payment.
4. Show how the amount was calculated.
5. Include Form 1.
6. Be served properly on the payer, with a record of when and how.

Missing Form 1 or failing to serve the claim properly gives the payer an easy argument. Build a standard claim template that includes everything, and use it every time.

What is a payment schedule and when is it due?

A payment schedule is the payer's written response to your payment claim, stating the amount they're prepared to pay, which could be nothing. It must be sent by the date agreed in the contract or, if no date was agreed, within 20 working days after the payment claim was served.

If the scheduled amount is less than the claimed amount, the schedule must explain how it was calculated, why it's less than the claim and the reasons for not paying the full amount. It must also state which payment claim it relates to.

The consequences for the payer are significant:

What the payer does	What the claimant can do
Sends no payment schedule in time	Go to court to recover the claimed amount as a debt, refer the matter to adjudication, or both
Sends a schedule but doesn't pay the scheduled amount by the due date	Go to court to recover the unpaid amount as a debt, refer to adjudication, or both
Schedules less than claimed, or nothing	Refer the dispute about how much is owing to adjudication

Adjudication under the Act is a fast-track process for construction disputes. The adjudicator's decision is binding and enforceable in court. For a subcontractor with a strong claim, that's a practical way to get paid without a long court case.

Keep a simple claims diary: the date each payment claim was served, the date the payment schedule is due, and the payment due date. When a date passes without a schedule or payment, you'll know your options immediately rather than weeks later.

How do retention money rules work in New Zealand?

Retention money is part of a payment held back by the payer as security that the subcontractor will finish the work and fix defects. Withholding retentions is not a legal requirement, but a party that chooses to withhold them must meet the requirements of the Construction Contracts Act.

Strengthened retention requirements came into force on 5 October 2023, making it easier for subcontractors to access retention money without a court order. They apply to commercial construction contracts, not to contracts with homeowners or residential occupiers. The key rules are:

• Held on trust. Retention money must be held on trust, without being mixed with other money or assets.
• Separate account. Cash retentions must be held separately in a bank account with prescribed ledger accounts.
• Limited use. Retentions can only be used to rectify a subcontractor's non-performance, and the subcontractor must be given ten working days' notice before they're used for remedial work.
• Reporting. The party holding retentions must give each subcontractor a written report quarterly and promptly after each transaction, and provide accounting details promptly and free of charge on request.
• Release. Retention money must be paid once the subcontractor has completed the work, performed all contractual obligations and remedied any notified defects.

If you're a subcontractor, ask for those reports and check them against your own records. If you're a head contractor, getting the trust account and reporting right protects you as well as your subbies.

What if you're the head contractor holding retentions?

Then retentions are not working capital, even though they sit with you. Because the money is held on trust for your subcontractors, it can't be used to pay wages, suppliers or tax, however tight things get.

That changes how a head contractor needs to plan cash flow:

• Budget without the retentions. Treat retention money as already paid away the moment you withhold it.
• Set up the trust account properly from day one. Use a separate bank account with ledger accounts for each subcontractor, and reconcile it monthly.
• Diarise the reporting. Quarterly and transaction reports to every subcontractor are easy to forget when a site is busy.
• Match your own claims to your subbies' claims. If your client pays you late, you still have to meet your own payment schedule obligations downstream.

If your cash flow only works by using retentions, it's a sign you need proper working capital, not a shortcut.

How much cash do your retentions tie up?

Often more than owners realise. A retention on one job looks small. Across a dozen jobs at different stages, it can add up to the equivalent of several weeks of wages sitting in other people's accounts.

Work it out with a retention register:

1. List every current and recently completed job.
2. Record the retention held on each, from your payment schedules and the quarterly reports.
3. Note the release condition for each: practical completion, end of the defects period or remedy of notified defects.
4. Add an expected release date and a follow-up date.
5. Total the retentions due in the next 30, 60 and 90 days.

Update it monthly. The register tells you how much cash is locked up, when it should come back and which head contractors need a reminder. It's also exactly the kind of evidence a lender finds useful when looking at your exit plan.

How can builders and subbies protect their cash flow?

Most of the protection comes from tight paperwork and firm habits rather than from law. Head contractors pay the subbies who make it easy to pay them, and who follow up when they don't.

• Price for the cash flow, not just the job. Factor in the claim cycle, retentions and the gap before first payment when you quote.
• Negotiate retention terms. Ask for lower retentions, a cap, or earlier part release at practical completion.
• Claim on time, every time. A late claim is a late payment.
• Get variations in writing before doing the work. Undocumented variations are the most common source of disputes.
• Check who you're working for. Look up head contractors on the Companies Office register. Watch for warning signs like stretched payment runs or unexplained reductions.
• Limit concentration. Relying on a single head contractor for most of your work puts your whole business on their balance sheet.
• Keep GST and PAYE current. Construction businesses on tight cash often let tax slip, and penalties add up quickly.

If a customer has simply stopped paying, our guide on late-paying customers and cash flow has a step-by-step chasing timetable.

When does funding make sense for a construction business?

Funding makes sense when you're owed money you'll definitely receive, but not soon enough to cover wages, materials and tax. Retentions due in three months and progress claims working their way through a head contractor's system are a timing problem, not a profitability problem.

Banks can be cautious with construction businesses, particularly after a tough couple of years for the sector. A property-secured loan works differently. fundU lends against conventional property, such as your home, a rental property or a commercial or industrial building, not against the project itself. That means the funding doesn't depend on the head contractor, the site or the stage of the build.

It can be used to:

• Cover wages and materials while progress claims and retentions come through.
• Clear GST and PAYE arrears that built up during a slow payment period.
• Mobilise for a large new job before the first claim is paid. Our guide on funding a big contract covers this in detail.
• Pay out expensive short-term facilities taken on to survive a bad debt.

Our property developer and builder loans page explains how we work with builders and trades, and our construction and trades page covers the wider sector.

Example scenario

A civil and drainage subcontractor in Christchurch was working for four head contractors across several commercial projects. The owner's retention register showed about $210,000 held across completed and near-complete jobs, with most of it due for release over the next four months. At the same time, one head contractor had moved to longer payment runs, and GST was two periods behind.

fundU provided a $180,000 second mortgage over the owner's home, which was worth about $1.1 million with a bank mortgage of around $480,000. The funds cleared the GST, brought the aggregate and plant hire accounts up to date and covered wages for the next two months. The loan was set up with capitalised interest, with no scheduled monthly repayments during the term, and the exit was repayment from retention releases and progress payments as they arrived. This is an illustrative example, not a real customer.

Key takeaways

• Every payment claim needs Form 1 and should clearly set out the contract, the work, the amount and the due date.
• A payer must send a payment schedule by the agreed date or within 20 working days, or you can go to court, adjudication or both.
• Retentions must be held on trust and, if in cash, in a separate bank account, with quarterly reporting to subcontractors.
• Keep a retention register and a claims diary so you know what's owed and when.
• Price jobs for the cash flow cycle, not just the margin.
• A property-secured loan can bridge retentions and slow claims without depending on the project or the head contractor.

Keep your cash moving while the claims come in

If retentions and slow progress payments are squeezing your business, fundU can help. We're a direct private lender offering $20,000 to $1m secured on New Zealand property, and our own team makes the decisions. Find out more about our working capital finance or builder loans, then see if you qualify. It takes a couple of minutes, won't affect your credit score, and a lending specialist will call you back. You can also call us on 09 875 4577.