The Contractor’s Bond, cash retention, bond in lieu of retentions and the Principal’s Bond do different jobs at different stages. What each one covers, what is held when and where the gaps are.
On a large roading job I’m working on, the contractor was offered a bond in lieu of retentions. On paper it looked like the better deal. They would get their full payment each month and give the client a bank bond instead of cash.
They turned it down. When they read the bond form properly, the bond would sit in place until Final Completion. On that job one separable portion has a 24 month defects period. Cash retention, on the other hand, starts coming back at Practical Completion and steps down again as each defects period ends. So the cash option actually freed up their security sooner.
It’s a good example of how bonds and retentions get lumped together as the same thing, when under NZS 3910 they do different jobs at different stages of a contract.
Percentages are of each security’s full amount. Retention assumes the NZS 3910 default, where half of the total retention is the defects portion.
| Stage | Contractor’s Bond | Cash retention | Bond in lieu of retentions | Principal’s Bond | Who is exposed |
|---|---|---|---|---|---|
| 1. Contract signed | Due within 2 Months. No payment until it’s in | 0% held. Builds from the first payment | Due within 2 Months | 100% in place from acceptance | Little. No money paid out yet |
| 2. Construction | 100% held | Builds up with each payment until it reaches the cap in Schedule 1 | 100% held | 100% held | With no Contractor’s Bond, the Principal only has the retention built so far, which is small early on. With no Principal’s Bond, the Contractor carries all the payment risk |
| 3. Practical Completion | 100% released within 5 Working Days | 50% released. 50% still held | 0% released. 100% still held | 100% held | The Principal’s security drops sharply. The bond is gone and only half the retention is left (or the full bond in lieu) |
| 4. Defects period | Gone | 50% held | 100% held | 100% held | A big defect or the contractor going broke: the Principal has only what’s held and chases the rest as a debt |
| 5. End of defects period | Gone | Remaining 50% released, less the cost of any open defects | 100% still held | 100% held | Only the amount held back for open defects |
| 6. Final Completion | Gone | Anything held back released. 0% held | 100% released | 100% held until final payment | Nothing held. The contract is the only remedy |
| 7. Final payment | Gone | Gone | Gone | 100% released within 5 Working Days | Nothing held either way |
Release timing: under NZS 3910:2023 the Independent Certifier issues each retention release within 7 Working Days of the date, whether the Contractor claims or not. Under 2013 it came with the next progress payment. The last part came 10 Working Days after Final Completion. Some clients change the split, for example holding three quarters as the defects portion instead of half.
Worked example (illustration only). On a $10 million job with a 10% Contractor’s Bond and the default retention scale, the Principal holds a $1,000,000 bond and $200,000 of retention (the default cap) during construction. At Practical Completion the bond is released and $100,000 of retention comes back. The Principal’s security falls from $1,200,000 to $100,000 in one step.
| Contractor’s Bond | Cash retention | Bond in lieu of retentions | Principal’s Bond | |
|---|---|---|---|---|
| Protects | Principal | Principal | Principal | Contractor |
| Against | Contractor failing during the build | Defects not fixed | Defects not fixed | Principal not paying |
| How it’s called | Standard form reads as conditional (Principal must show a default and a loss). Some clients use on demand forms | No call needed, the cash is held on trust | As for the Contractor’s Bond | As for the Contractor’s Bond |
| Paid for by | Contractor (bank fee) | Contractor (cash flow) | Contractor (bank fee) | Principal (bank fee) |
| Better for the client because | Big cover for the worst case, a contractor failing mid job | Cash already in hand | Stays at 100% until Final Completion, no cash to manage | It isn’t. Cost with no benefit |
| Better for the contractor because | It ends at PC | Half comes back at PC | Full payment every month | Real cover if the client can’t pay |
| Watch for | On demand wording and the drop in cover at PC | Small on big jobs because of the cap | Held to Final Completion, so poor value with a long defects period | Rarely offered by public clients |
A Contractor’s Bond and retention are not alternatives. The bond covers the build. Once the PC Certificate is issued for the whole works it can’t be called and has to be released. After that, the only security the Principal holds is retention. Only a bond in lieu of retentions replaces the cash.
The default Schedule 1 scale is 10% of the first $200,000, 5% of the next $800,000 and 1.75% above that, capped at $200,000. The cap is reached once work passes about $9 million. So on a $40 million job the retention is still $200,000, which is under half a percent.
That’s intentional. Retention is there to make sure defects get fixed, not to cover a contractor going broke. On a big job the real protection comes from other places: prequalification and financial checks at tender, only paying for work done, liquidated damages, set off against money owed and a Contractor’s Bond if the client wants one.
This is the part people most often get wrong. The bond amount is the most the bank or insurer will pay. It isn’t a cap on what the contractor owes.
Say a contractor fails at 60% complete on a $10 million job, with a 10% bond and $147,500 of retention held. If finishing the job costs $2 million more than the remaining contract sum, the bond and retention cover $1.15 million. The client is still about $850,000 short and has to claim it back through set off, the contract dispute process or adjudication. If the contractor is in liquidation, most of that will be lost.
The same applies the other way round with a Principal’s Bond. It pays what the client actually owes, up to the bond amount and no more.
A conditional bond only pays out once the client shows there’s been a real default and a real loss. An on demand bond pays out on a written demand. Any argument happens afterwards.
The bond forms in NZS 3910 (Schedules 3, 4 and 5) don’t use either term. They say the surety is bound for the sum, give the bond’s purpose as securing performance and only list the conditions for releasing it. There’s no wording like “on demand” or “without proof”. Compare that with the warranty form in the 2013 edition, which does say “on demand”. My reading is that the standard forms work as conditional bonds.
Plenty of councils swap in their own forms instead. Those say the bank pays on written demand, without looking into whether the contractor is actually in default. If a client wants an on demand bond, it needs to put its own form into the special conditions. Either way, read the bond that’s actually issued, because banks often use their own wording.
Under 2013, retention was released as part of the next progress payment after each milestone. Most of us got used to releasing it when the claim came in.
Under 2023, clause 12.3.4 requires the Independent Certifier to issue a Payment Schedule releasing retention within 7 Working Days after each release date, whether the contractor has claimed or not. If you wait for the claim, you can miss that deadline. Put the release dates in the diary for each separable portion.
Retention is also now trust money under the Construction Contracts Act. 2023 writes those rules into the contract.
Getting these right at tender is much easier than arguing about them after something has gone wrong.
BlueWave provides contract administration, independent review and Schedule 1 set up on NZS 3910 contracts across the Bay of Plenty. If you’re setting up a contract and weighing these choices, happy to have a chat.
Contract administration, independent review and Schedule 1 set up on NZS 3910 contracts across the Bay of Plenty. If you are weighing up bonds and retentions on a new contract, get in touch.
Common questions
A Contractor’s Bond is a bank or insurer’s promise that covers the Principal during construction and is released within 5 Working Days of the Practical Completion Certificate. Retention is cash held back from each payment to cover defects and is released in steps through to Final Completion.
By default, the part above the defects portion (half) at Practical Completion, the rest at the end of the defects period less any open defects and anything held back at Final Completion. The Independent Certifier issues each release within 7 Working Days of the date, whether or not the Contractor claims.
No. It gives full payment every month, but under the standard form it is held until Final Completion, while cash retention starts coming back at Practical Completion. On a job with a long defects period the cash can free up sooner.
The standard bond forms in Schedules 3, 4 and 5 have no on demand wording and read as conditional, so the Principal has to show a default and a loss. Some clients replace them with their own on demand forms. Always read the bond actually issued.
The default Schedule 1 scale caps total retention at $200,000, which is reached once work passes about $9 million. Retention is meant to secure defects, not a contractor failure, so on large jobs the protection comes from prequalification, paying for work done, liquidated damages, set off and a Contractor’s Bond if required.
Have a specific question
This page is general guidance. For a question about your own contract, use the free tool or get in touch directly.