Retention Trust and Project Bank Accounts
Retention trust accounts and project bank accounts (PBAs) are the two main ring-fencing solutions to the construction payment problem. Both attack the same root cause: that subcontractor money — whether a withheld retention or a progress payment — sits inside an upstream contractor’s general bank account, where it is used as free working capital and is lost to subcontractors if that contractor becomes insolvent. Ring-fencing removes the money from the contractor’s reach.
Retention Trust and Project Bank Accounts [opposes] Contractor Insolvency and Subcontractor Risk Retention Trust and Project Bank Accounts [relates] Construction Retention Payments
A retention trust requires withheld retention money to be held on trust in a separate account so it survives the holder’s insolvency and is paid to the subcontractor it belongs to rather than to general creditors. New Zealand is the lead example — and a cautionary one: its 2015 trust regime failed because contractors simply did not comply, and only the 2023 reform (labelled accounts at a registered bank, quarterly reporting, offences for non-compliance) gave the trust real force. A project bank account goes further: it is a ring-fenced account from which the client pays the main contractor and subcontractors directly and simultaneously, bypassing the main contractor’s hands entirely. The UK Government has used PBAs on a large share of public projects.
New Zealand [supports] Retention Trust and Project Bank Accounts Retention Trust and Project Bank Accounts [opposes] Pay-When-Paid Clauses
Both tools have real limits. PBAs are administratively heavy, difficult to set up, and the UK Cabinet Office has declined to mandate them, saying they are “not always suitable or cost-effective” — uptake has stalled and a 2019 bill to mandate them for public authorities did not progress. Retention trusts depend entirely on enforcement, as New Zealand’s first failed attempt proved. The vault treats ring-fencing as the middle option in the reform spectrum between doing nothing and the outright retention ban chosen by the UK Late Payment Reform 2026 — better than nothing, but only as strong as its compliance regime.
Retention Trust and Project Bank Accounts [contradicts] UK Late Payment Reform 2026
Connections
- Construction Retention Payments — money these tools ring-fence, source: 2023
- Contractor Insolvency and Subcontractor Risk — risk ring-fencing mitigates, source: 2023
- New Zealand — lead test case for retention trusts, source: 2023
- UK Late Payment Reform 2026 — chose abolition over ring-fencing, source: 2026