Managing the Cash Flow Strain of Retention Money

Every builder knows the frustration of retention money as it's a common practice in the construction industry. You’ve done the work, met the milestones, and submitted your payment claim, but a slice of your payment stays locked away until months down the track.

Retention clauses are meant to protect the client, but for builders and subcontractors, they can tie up thousands of dollars in already-earned income. In Queensland, where most commercial contracts withhold between 5% and 10%, that can add up to serious cash flow pressure if you’re juggling multiple construction projects at once. Retention is typically withheld for construction work performed under the contract.

Introduction to retention money in construction projects

Retention money is a fundamental part of construction projects, acting as a form of financial security to ensure that contractors and subcontractors meet their contractual obligations. Under most construction contracts, the principal contractor or project owner withholds a portion of each progress payment, typically between 5% and 10% of the contract value. This withheld amount, known as retention, is only released once the contractor has completed all required work to the agreed standards and within the specified timeframe.

For contractors and subcontractors, understanding how retention works is essential. The retention amount can represent a significant portion of the contract, and its delayed release can impact cash flow and the ability to meet ongoing financial commitments. Project owners rely on retention as a safeguard, ensuring that any defects or incomplete work are addressed before the final payment is made. By being aware of how retention is structured in contracts, all parties can better navigate payment schedules, avoid misunderstandings, and ensure timely payments throughout the life of the project.

The real cash flow impact

On paper, retention money might seem minor; just a small percentage held back until project completion. But in practice, it can be a silent drain on cash flow and liquidity.

5% to 10% might not sound like a lot, but consider a builder managing five projects worth $1 million each. They could have $500,000 in retention withheld at any given time. That’s money that could otherwise cover wages, supplier payments, or new project deposits. The cost of having such a large sum tied up can significantly impact your ability to manage project expenses and minimise financial risks.

When those funds are trapped for six to twelve months, it can:

• Force you to dip into overdrafts or private funds.
• Delay payments to subcontractors or suppliers.
• Limit your ability to bid for new work.
• Create year-end tax and GST liabilities on income you haven’t yet received.
• Lead to financial mismanagement if you fail to track the opening balance of your retention accounts.

Retention money impacts more than just timing, it can compromise business viability. Many builders underestimate how much working capital is locked in retention and fail to plan for the gap. It is crucial to track the balance of retention funds throughout the project lifecycle to ensure accurate financial management and compliance.

Withheld payments due to retention can disrupt business operations and make it difficult to plan for future projects.

Retention in Queensland: What you’re up against

Under Queensland’s Building Industry Fairness (Security of Payment) Act 2017, for certain types of construction contracts, retention money is treated as trust money once withheld. This law forms part of a legislative scheme designed to enhance construction industry security by regulating how retention payments are managed. That means the retained amount must be held in a retention trust account, which is a type of retention account.

This provides protection for subcontractors but also adds admin and compliance for builders managing multiple projects. For builders, the main points are:

• Trust accounts are mandatory for most commercial contracts over $1 million.
• Retention funds must be held in a dedicated account, not used for operations.
• Records and reconciliation must be kept for audits by the QBCC.
• Regular review of contract terms and compliance requirements is essential to ensure legal and financial obligations are met.

Even with these safeguards, retention can create cash flow challenges. Whether you’re the one withholding or waiting to receive it, it’s vital to plan how those withheld retention payments, held for security purposes, affect your overall cash position. Queensland’s construction industry security scheme is similar in intent to the regulatory framework implemented in Western Australia, though each state’s scheme has its own requirements.

How retention and the defects liability period affect your cash flow

Retention creates a mismatch between your profit and cash position. On your books, you’ve earned the revenue, but in your bank account, it’s missing. The practice to retain money is intended to protect the interests of the project owner until all contractual obligations are fulfilled, distinguishing between funds you have earned and those withheld as retention.

Here’s where it hits hardest:

• GST and tax timing. You may owe GST and income tax on progress claims that include retention, even though the cash hasn’t come in yet.
• Seasonal strain. Retentions often build up during busy months, leaving a cash crunch during quieter periods or end of financial year.
• Stacking effect. As projects accumulate, each with its own defects-liability period, your available working capital keeps shrinking.

While retention is unavoidable, there are things you can do to manage the impact before it derails your operations.

Defects liability period and retention amounts

The defects liability period (DLP) is a crucial stage in construction projects that begins after practical completion. During this time, contractors are responsible for fixing any defects or issues that arise in the completed works. To ensure these obligations are met, a portion of the payment (called retention money) is withheld until the end of the DLP.

Typically, the retention amount is set as a percentage of the contract value, depending on the contract terms. This retention percentage is designed to motivate contractors to address any outstanding defects promptly and to provide assurance to project owners that the work will meet the required standards. However, if not managed carefully, retention amounts can create cash flow challenges for contractors, especially when multiple projects are underway or when the DLP is extended. Disputes can also arise if there is confusion over the release conditions or if defects are not resolved to the satisfaction of all parties. Clear contract terms and proactive management of retention during the defects liability period are essential to minimise disputes and maintain healthy cash flow.

Strategies to manage retention-related cash flow

1. Price with retention in mind

When quoting, treat retention as money you won’t see for at least 12 months. Retention is often linked to the contractor's performance, such as achieving practical completion or meeting specific quality standards. Adjust margins to cover the lag so you’re not relying on withheld funds to stay afloat.

2. Track retentions

It can be helpful to set up a “Retention Receivable” account in your accounting software to record things like:

• Contract name and client.
• Amount withheld.
• Expected release date.
• Any conditions (e.g. practical completion, defects period).
• Note: Head contractors must ensure compliance with trust account requirements when tracking retentions.

Head contractors are responsible for maintaining accurate retention records for all subcontractors.

This helps you forecast when cash will actually hit and chase overdue retentions before they fall off the radar.

3. Forecast cash flow based on when money actually arrives

Don’t assume that because a project is profitable, the cash will be there. When planning your cash flow, factor in that retention payments may not come through for 6-12 months. The amount claimed in your progress claims may differ from the cash actually received due to retention being withheld. This helps you see the difference between what you’ve earned on paper and what’s available in your bank account.

4. Negotiate better terms

There might be opportunities to negotiate better terms regarding retention money.

• Offering a bank guarantee or retention bond. Bank guarantees can serve as an alternative to cash retention, providing financial security to the principal while allowing you to keep your working capital free. This can improve cash flow for contractors and still ensure project completion and quality benchmarks are met.
• Clarifying release triggers. Clearly define contract conditions, milestones, and timeframes that must be met for the release of retention money. This helps avoid disputes and ensures timely payments.
• Building a track record. Builders with consistent defect-free delivery often have more leverage to reduce retention rates on repeat contracts.

5. Align tax and GST planning

Talk to your accountant about whether you’re reporting GST and income tax on a cash or accrual basis. Misaligned timing can create unnecessary tax strain. Builders on an accrual basis often owe tax on retentions they won’t see for months. A tweak in reporting can ease that pain.

6. Consider cash flow finance options

For larger projects or ongoing retention delays, progress claim finance or invoice finance can help bridge the gap. These facilities advance a portion of your claim value upfront, allowing you to maintain operations while waiting for retention release.

We're here to help

Retention money doesn’t have to create constant cash flow stress. With the right systems and planning, it can be managed just like any other part of your project finances.

We work with builders and subcontractors across Queensland to:

• Map retention schedules across all active projects so both builders and subcontractors know exactly when funds will be released.
• Model cash flow under different scenarios, including delayed releases or overlapping projects, to prevent surprises and ensure timely pay to subcontractors.
• Ensure compliance with QBCC requirements so your records stay clean and audit-ready, and the process to hold retention money is managed according to contractual obligations.
• Align GST and income tax timing with your cash flow, avoiding liquidity crunches.
• Advise on funding and structure options to keep your working capital strong while retention funds are tied up.

Our goal is to help you take control of retention, turning it from a frustration into a predictable, planned part of your business cash flow.

Retention money is designed to protect clients, but it can cripple a builder’s cash flow if mismanaged. With strategic foresight, you can price correctly, plan for the delay, and track it with precision. Quality work is essential in reducing retention disputes and ensuring prompt release of funds to subcontractors.

By treating retention as a predictable financial factor (not an afterthought), you can keep projects funded, staff paid, and your business growing, even when part of your hard-earned income is still sitting in someone else’s account.

Need help navigating retention and cash flow?

At Bonerath & Co., we work with Queensland builders and subcontractors to forecast retention schedules, structure compliant trust accounts, and improve cash flow resilience. If you are facing a retention dispute, our team can assist you with preparing and submitting an adjudication application to help resolve payment issues.

If you’d like help tightening up your systems, or understanding how retention is affecting your bottom line, please get in touch with our team today. We can also have your construction contract reviewed to help minimise retention-related risks and prevent future disputes.

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