Report stage completed, third reading next: Construction prepares for the retention ban

In April 2026, we considered the Government's proposal to ban cash retentions in construction contracts and the practical question of what the industry might use instead. The latest update published confirms that the proposed ban is moving rapidly towards the statute book.

Report stage concluded in the House of Lords on 15 September 2026, and the Bill is now scheduled for third reading on 20 October 2026. Many expect the Bill to become law during 2027, although its implementation timetable has not yet been confirmed. The proposed retention ban remains intact and continues to command broad support. The position has therefore moved on materially since our April note: the immediate question is no longer simply whether retentions will be abolished, but how the new regime will work in practice.

Report stage did not materially dilute the ban: the retention-related amendments were withdrawn or not moved. The principal development was ministerial clarification about how alternatives may operate in practice.

What's changed since April 2026?

We now have draft legislation that has been considered and debated in the House of Lords. Rather than creating a standalone retention regime, the Bill proposes to amend Part II of the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”) by introducing new sections 113A to 113F. The proposed retention ban is therefore being built directly into the existing Construction Act payment framework.

The ban would not take effect immediately. The Bill provides for a two-year transition, intended to give parties some time to adjust their contracts, pricing and arrangements for defects security. Nor would retentions already deducted under existing contracts automatically become payable when the new restrictions commence. Instead, the Bill would allow certain existing retention arrangements to continue for a limited period, subject to an ultimate deadline for release. It also appears designed to prevent parties from prolonging an otherwise protected arrangement by varying the underlying contract after commencement.

The Bill also introduces the concept of a "related agreement" within the new retention provisions to be inserted into Part II of the Construction Act. The prohibition on retention is not confined to “construction contracts” as defined in the Construction Act: it also extends to a clause in any “related agreement” relating to sums payable under that contract. That wording appears intended to prevent parties from sidestepping the ban by moving the retention mechanism into a side agreement.

That extension may also be particularly significant for hybrid contracts, including many energy projects. Under the Construction Act as it currently operates, the adjudication and payment regimes (that we all know and love!) apply only to the parts of a hybrid contract that concern "construction operations"; excluded operations fall outside the statutory regime. The intended retention provisions, as currently drafted, arguably operate more broadly. They may prevent parties from allocating the retention to an excluded element of the works or placing it in a related agreement. The point is not free from doubt – at least not yet – and the meaning and effect of "related agreement" will require close scrutiny. I expect this will feature in adjudications to come…

The focus is shifting from policy debate to practical implementation

That said, the direction of travel is not new. Build UK's Roadmap to Zero Retentions set an industry ambition of eliminating cash retentions by the end of 2025, arguing that they were neither an appropriate nor proportionate means of ensuring quality and fair payment.

Others remain concerned. Real Estate UK has argued that retentions provide an important incentive to address defects and support quality and accountability, and wrote to members of the House of Lords who have spoken on the issue. It is clear from the recent debate that the Government maintained that retentions do not reliably secure quality and that the industry should instead move towards alternative forms of surety and improved quality management.

At Report Stage, the business and trade minister, Lord Leong, confirmed that ordinary payment through a bank or escrow provider would remain permissible, but that money held by a third party as security for performance could itself amount to a prohibited retention. Speaking for the Government, he also identified performance bonds, retention bonds and warranty bonds as potential alternatives and confirmed that the Government would work with surety providers and industry ahead of implementation.

Will the ban change the way completion is managed and certified?

As we discussed in our April note, a ban on retentions may change the approach taken in practice when deciding whether practical completion has been achieved. Completion has often been certified despite significant snagging, incomplete works or defects, with the retained sum providing some comfort that those matters will be addressed.

Without that post-completion leverage, some project managers may take a more robust approach to certification and be less willing to accept lengthy snagging lists. That would not alter the contractual test for practical completion, but it may affect how readily completion is certified while material issues remain unresolved. This would be consistent with the Government’s stated aim of encouraging improved quality management alongside alternative forms of security.

Parts of the industry already operate in that way. Certain specialist healthcare facilities and other highly regulated environments have little or no appetite for certifying completion while issues remain unresolved, instead adopting a “zero defects” approach as far as practicable.

It remains to be seen whether that mindset becomes more widespread. If it does, the abolition of retentions may influence project behaviours far beyond the payment provisions themselves.

Retention debt: A new battleground for adjudication?

For those of us involved in construction disputes, the proposed provisions on unauthorised retentions raise a different set of questions.

Once the prohibition applies, a sum retained in breach of it would become a “retention debt” under the Bill. The Bill also provides for a separate fixed sum (a financial penalty). The immediate issues will include when each amount becomes payable and how it can be enforced. Neither is expressly within the Construction Act’s notified-sum regime, so it should not be assumed that the familiar payment notice and pay less notice machinery will determine liability. Section 108 gives a party the right to refer a dispute “arising under” a construction contract to adjudication. In practice, many construction contracts require compliance with applicable legislation, so we anticipate that an unlawful retention may also amount to a breach of contract and provide a route into adjudication. Arguments may nevertheless arise over how the new liabilities should be framed and how they interact with the existing payment machinery. Those questions are likely to be tested in early disputes.

The financial consequences are potentially significant. In addition to payment of the retention debt, the Bill entitles the payee to a fixed sum equal to the greater of £40 or 50% of that debt. The retention debt may also attract statutory interest at 8% above the Bank of England base rate. On a major project, those liabilities could be substantial, particularly where a large retention remains unpaid for any length of time. They are intended to make continued use of prohibited retention arrangements financially unattractive.

The Bill's wider payment reforms may also generate related adjudication issues. Following Report Stage, the proposed maximum periods remain 30 days where the purchaser is a public authority and 60 days for other purchasers. Those limits will necessarily compress the final date for payment: payment must be made no later than 30 or 60 days, as applicable. The Government resisted extending the public-authority period on the basis that doing so would undermine the Procurement Act 2023 and delay payment to suppliers. The House also agreed a government amendment requiring consultation within five years and giving the Secretary of State power, by regulations, to shorten, but not increase, those periods. For construction contracts, the practical question will be how those statutory longstop periods interact with the existing sequence of due dates, final dates for payment, payment notices, default notices and pay less notices. A late default notice could, in some cases, compress the remaining timetable and prompt disputes about when payment became due and whether any withholding was effective.

The legislation is unlikely to answer every procedural question. The detail will instead be worked out through adjudications, court decisions and developing industry practice.

Looking ahead

With implementation possible in 2027 and long lead-in periods for many construction, infrastructure, engineering and energy projects (including those already moving through the negotiation of pre-construction services agreements) the practical message is clear: start reviewing standard forms and live project pipelines now.

Parties should identify payment periods that may exceed the new limits, test whether their default and pay less notice timetables still work, map existing retentions against the transitional milestones, and scrutinise proposed alternatives, including bonds, guarantees, escrow structures and more exacting completion criteria. The task is not simply to find a new label for retention, but to develop a workable and proportionate approach to defects security that will stand up under the new regime.

We will explore these issues further at our upcoming Commercial Payments Bill webinar, including what the reforms may mean for managing defects risk in practice. The ban may remove a familiar form of security, but it will not remove the underlying risk. The question is: how that risk should be managed instead? Watch this space.

For more information or if you have any questions, please get in touch with our construction and engineering team.

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