Expert Witness Journal Issue 68 August 2026 - Flipbook - Page 60
stage or milestone payments, which legitimately
allows the paying party to determine in what
tranches money is released. Paying parties may
also give more weighting to payments at the
end of projects or o昀昀er completion bonuses to
incentivise contractors and sub-contractors to
ful昀椀l their obligations under the contract.
accounting records are required to be kept and
the contractor or sub-contractor are given a
right to inspect retention money records. New
Zealand o昀昀ers a working example that could
act as a blueprint for the government, and an
opportunity for the government to cherry pick
any successful elements and reconsider those
deemed unsuccessful.
Option 2: Mandatory protection of
retention sums
•
While this is not the option currently being
pursued, under this option, retentions would
continue as lawful, but would require any retention
sums that are deducted to be held in a separate bank
account for the bene昀椀t of the payee. Payers would
have a choice to either keep the retention sum in a
separate bank account or replace it through the use
of an instrument of guarantee such as insurance or
surety bond. For completeness we have included the
following points we think are worth noting.
•
Administration costs for guarantee instruments,
particularly on large projects where the amount
of a retention held can be signi昀椀cant, are
likely to be extremely high. The availability of
bonds and insurance is also impacted by wider
global issues and so political and economic
instability will impact on the a昀昀ordability of
these instruments. The extremely tight pro昀椀t
margins that employers and contractors work
in, might in some cases prevent this from being
an a昀昀ordable option in the same way it can be
una昀昀ordable for the supply chain.
Greater protection in insolvency but additional
administrative costs
Keeping retention sums segregated in a separate
bank account or protected would ensure that in
the event of insolvency, any retention money
held would be ringfenced and protected. The
result of this additional administration would
lead to associated costs for the inception and
administration of a separate bank account or
instrument of guarantee – but these would
lower overtime as the system normalised and
would be o昀昀-set against the reduce risk of
insolvency to project delivery. Any additional
costs would have to be considered as additional
costs to be borne by the paying party or both
the payee and payer.
•
Alternatives to retention
In the absence of retentions what are the alternatives?
Many of the risks that retention is meant to address
can be mitigated through:
Balances the interests of the parties
This o昀昀ers the best compromise when
considering the interests of parties to a
construction contract, along with the interests
of any funders and has been tried and tested
since 2023 in New Zealand. Third party funding
is vital to the construction industry and
investment is key for many projects. Funders
usually have a lower appetite for risk but will
want to be con昀椀dent that projects can be
delivered to a high standard. Alternative forms
of security are available, however these may not
always be appropriate and come at a cost that
the borrower/developer will usually end up
paying for.
•
•
better contractor due diligence and the selection
of good contractors – improved procurement
practices
•
proactive management of the works, defects
management and administration of the project
•
clearer standards, de昀椀nition of practical
completion and the utilisation of practical
completion checklists and
•
alternative security such as performance bond
or parent company guarantees (or the use of a
project bank account).
Alternative forms of security will not always be
suitable alternatives to a retention. The cost of a
performance bond will typically be o昀昀set by the
contractor required to procure one, as they will
price the cost of obtaining a bond into the contract
sum. In addition to this, most 昀椀rms have a limited
capacity to take out bonds and smaller companies or
ones without strong 昀椀nancial positions might have
to pay more to obtain a bond or might be unable
to secure one at all. The client/funder may wish
to fund this. A parent company guarantee, as an
alternative, can only be obtained where a parent or
ultimate holding company exists. However, if the
contractor is unable to ful昀椀l its obligations under
the contract due to insolvency, then the wider group
or parent may also be at risk, and if the parent or
holding company becomes insolvent the parent
company guarantee would be worthless.
Tried and tested method
As noted above, New Zealand has successfully
implemented measures to protect retention
money. Under the New Zealand legislation,
any retention money deducted must be held
on trust by the payer. In addition to this,
EXPERT WITNESS JOURNAL
A昀昀ordability and availability of
guarantee instruments
58
AUGUST 2026
