Retentions and Cash: The Builder's Hidden Working Capital
A virtual CFO on construction retentions as a funding line: how they accumulate, the ledger nobody keeps, the NSW trust threshold, and pricing jobs for…
Every builder knows retentions exist and almost none treat them as what they are: a funding line the business carries, often for years, at its own cost. Money earned on completed work sits held by the party above while the builder holds money back from the parties below, and the net position is real cash the business has financed into existence. This is a virtual CFO’s account of retentions as working capital: how they accumulate, the ledger to keep, and how to price for the cost. It is strictly about retentions; the work-in-progress side of construction finance is a separate subject.
Published: July 2026
Retention is money withheld from a payment as security that the work will be completed and defects fixed. On a construction job it usually runs at a defined percentage of the contract value, commonly up to 5 per cent, sometimes structured as a 10 per cent deduction from each progress payment up to a cap. It is held through the build and released in stages: part at practical completion, the balance at the end of the defects liability period, which can be twelve months or more after the work is done.
That timing is the whole problem. The builder has done the work and incurred the cost, but a slice of the payment is held back, sometimes for a year or two, as security. Across multiple concurrent jobs, those held slices accumulate into a substantial sum that the builder has effectively lent, interest-free, to the parties above. And because the builder holds retention from its own subcontractors in turn, the real exposure is the net of what is held from the builder and what the builder holds from others. That net figure is working capital the business is financing, whether or not anyone has ever named it. This connects directly to the live construction work-in-progress and 13-week cashflow work, and is a natural 90-Day Number focus for a builder.
The reason retentions stay invisible is that most builders do not keep a retention ledger. The amounts are buried in project accounts, released erratically, and never pulled together into a single view. The discipline that changes everything is a retention ledger that tracks, across the whole business, three things: retention held by project, the scheduled release date of each amount, and the risk attached to each release (whether it is likely to come back clean or be disputed).
Built properly, the ledger answers questions the builder could not previously answer. How much cash is held in retentions right now, across all jobs. When each tranche is due for release, so the cashflow can anticipate it. Which releases are at risk because of a defects dispute or a shaky counterparty. A builder with this ledger can forecast retention releases as a real cashflow line and chase overdue releases deliberately, rather than discovering forgotten retentions years later, if at all. The ledger is the single highest-value piece of finance infrastructure a retention-heavy builder can build.
Once the ledger exists, retention releases belong in the near-term cashflow forecast. A scheduled release in six weeks is a cash inflow the builder can plan around; a release at risk is a gap to prepare for. Folding retention releases into the 13-week cashflow turns them from a vague future benefit into a scheduled, chased, forecastable line, which is exactly how they should be treated given how much cash they represent. The same forecast shows the outflow side: retentions the builder must release to its own subcontractors on their schedule.
There is a regulatory layer worth understanding factually, without straying into legal advice. In New South Wales, head contractors on projects valued at $20 million or more must hold subcontractor retention money in a dedicated trust account with an authorised deposit-taking institution, paying it in within five business days of retaining it and providing the subcontractor a ledger of the account at least every three months, under the Building and Construction Industry Security of Payment Regulation 2020. A proposed reduction of that threshold to $10 million was consulted on but not adopted, so the figure remains $20 million.
The economic point for most SME builders is the flip side of that threshold: below $20 million, the trust requirement does not apply, so the retention the builder holds from its subbies is not ring-fenced and the retention held from the builder is not protected by the trust scheme either. Either way, the working-capital reality is unchanged: retentions are cash the business finances. Knowing whether a given project sits over or under the threshold tells the builder which compliance regime applies; it does not change the underlying funding cost, which exists at every project size. Anything beyond these factual lines, how the rules apply to a specific contract, is a question for a construction lawyer, not a virtual CFO.
The final move is to treat retention as a cost of the job and price for it. If a builder holds, on average, several hundred thousand dollars in retentions for a year or more, that money has a financing cost, whether the business funds it from an overdraft (an explicit interest cost) or from its own capital (an opportunity cost). A builder who prices every job on margin without accounting for the retention it will carry is quietly under-pricing, because the retention drag is a real cost the margin should cover.
The fix is not complicated: estimate the retention a job will generate and the period it will be held, apply a financing cost to that held amount over that period, and include it in the job’s pricing. It is usually a modest addition per job, but across a book of work it is the difference between a margin that survives the retention drag and one that is quietly eroded by it.
Take a builder turning over $12 million a year. At any given time it is holding, net, around $600,000 in retentions: money held from it on completed and in-progress jobs that it has financed while waiting for release, offset partly by what it holds from its own subcontractors. Most of that $600,000 sits held for twelve months or more.
Financed at, say, an 8 per cent cost of funds, that $600,000 carries a financing cost in the order of $48,000 a year, quietly consumed and never priced into any job. The retention ledger surfaces the $600,000 and its release schedule; the 13-week forecast anticipates the inflows; and the pricing adjustment spreads that $48,000 across the year’s jobs so the margin actually covers it. Before the work, the retention drag was an invisible $48,000 leak; after it, it is a costed, forecast, chased line. That transformation, from invisible to managed, is the entire point of treating retentions as the working capital they are.
What are retentions in construction?
Money withheld from a payment as security that work will be completed and defects fixed, usually a percentage of the contract value (commonly up to 5 per cent) held through the build and released in stages, part at practical completion and the balance after the defects liability period. Because the work is done but the cash is held back, retention is effectively an interest-free loan from the party who earned it.
Why are retentions a working-capital problem?
Because the builder has incurred the cost of the work but a slice of the payment is held, sometimes for a year or two. Across concurrent jobs these held slices accumulate into a substantial sum the builder has financed, net of what it holds from its own subcontractors. That net figure is working capital carried at a real cost, whether funded by overdraft or by the business’s own capital.
What is a retention ledger?
A single view, across the whole business, of retention held by project, the scheduled release date of each amount, and the risk attached to each release. It lets a builder see how much cash is held in retentions now, when each tranche is due, and which releases are at risk, so releases can be forecast and chased rather than forgotten. It is the highest-value finance infrastructure a retention-heavy builder can keep.
What is the NSW retention trust threshold?
In New South Wales, head contractors on projects valued at $20 million or more must hold subcontractor retention money in a dedicated trust account with an authorised deposit-taking institution, under the Security of Payment Regulation 2020. A proposed reduction to $10 million was not adopted, so the threshold remains $20 million. Below it, the trust requirement does not apply, though the working-capital cost of retentions exists at every project size.
Should I price my jobs for retention cost?
Yes. If you carry hundreds of thousands in retentions for a year or more, that money has a financing cost, explicit if funded by overdraft, an opportunity cost if funded by your own capital. Estimating the retention a job generates and the period held, applying a financing cost, and including it in pricing stops the retention drag from quietly eroding your margin. It is usually a modest addition per job that matters across the book.
Is this the same as work-in-progress?
No. Work-in-progress is about revenue and cost recognised on jobs in progress; retentions are specifically the money held back as security after work is billed. They are related parts of construction working capital but distinct subjects, and this guide is strictly about retentions. The WIP side is covered separately.
Can a virtual CFO build my retention ledger?
Yes. A retention ledger, folded into your cashflow forecast, with a pricing adjustment for the financing cost, is a defined deliverable and a natural 90-Day Number for a builder. The output is a model you own that turns retentions from an invisible drag into a forecast, chased, and priced line. Questions about how the trust rules apply to a specific contract go to a construction lawyer.
Sydney Virtual CFO is a Sydney-based virtual CFO service for founders running $2M to $15M businesses across SaaS, ecommerce, professional services, construction, and other low-volume, high-value industries. We deliver fixed-scope CFO engagements with a named deliverable on day 90: a 13-week cashflow forecast, a fundraise-ready financial model, a unit economics build, or a board reporting pack you can run on your own.
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This content is general information only, written for Australian founders running businesses in the $2M to $15M revenue range. It does not constitute tax, financial product, investment, or legal advice and should not be relied on as such. The work referenced is led by a Chartered Accountant (CA ANZ), but Sydney Virtual CFO is not a licensed tax agent, not a licensed financial adviser, and not authorised to provide personal financial advice. Tax obligations, accounting treatments, fundraise terms, and statutory requirements depend on your individual circumstances. For advice specific to your business, contact the team directly or consult a registered tax agent, licensed financial adviser, or qualified lawyer. Information was current at the time of publication and may change without notice. We review and update guides periodically.
