Retentions reform and the UK new late-payment crackdown - What this means for construction projects

1.1          A 60‑day statutory payment cap

All large UK businesses will be legally required to pay SME suppliers within 60 days, creating the toughest late‑payment rules in the G7.

1.2          Mandatory statutory interest

Contractual terms must now include non‑negotiable statutory interest at 8% above base rate. This is substantially higher than many contractual rates agreed between parties.
The press release from the Department for Business and Trade gave the example of a £10,000 debt paid 60 days late — and confirmed that the debt in that scenario would attract £193.15 in mandatory interest and £100 in compensation.

1.3          Enhanced Small Business Commissioner powers

The Small Business Commissioner will gain the power to:

·         Investigate poor payment practices,

·         Adjudicate payment disputes, and

·         Impose multi‑million‑pound fines on persistent offenders.

1.4          Ban on retention payments

The Government proposes to ban the withholding of retentions under construction contracts. This is a massive departure from one of the most commonplace mechanisms used in the UK construction market.
The ban aims to prevent SMEs from losing retention funds due to insolvency or simply non‑payment. Consultation will focus on how the ban is implemented — not whether it should happen.

Although the Government has now committed politically to banning retention payments, confirming that retentions will be prohibited and that consultation will focus only on how the ban is implemented rather than whether it should proceed, the reform is not yet legally in force. It still requires primary legislation, and no draft Bill has yet been published. A realistic trajectory is legislation being introduced later this year, with a 12 – 24 month transition period anticipated for commercial and contractual adjustment across the sector. That said, there remains understandable scepticism about how quickly and smoothly a full ban can be implemented, given the deeply embedded, systematic use of retentions across construction, energy, infrastructure and engineering projects of all sizes. In short: politically, yes — it is coming; legally, not yet — but expected; practically, the sector should prepare while recognising the scale of change required.

Retentions have long been used as a form of security for employers, intended to incentivise proper performance and provide a fund to address defects if a contractor fails to return to site to address defects or becomes insolvent. In theory, this mechanism supports quality assurance. In practice, however, it has become one of the most contested features of UK construction. Specialist contractors frequently experience delayed release of retention, disputed sums and, in the worst cases, complete loss of retention where an upstream party enters insolvency. The Government has explicitly acknowledged that retentions are often treated as “free working capital”, a practice that places disproportionate strain on smaller firms.

These pressures have intensified under the enhanced regulatory environment created by the Building Safety Act 2022 (the BSA). While some argue that improved competency, oversight and technical rigour that comes with the BSA should reduce concerns around defects, the reality is that defects on construction and engineering projects can be wide‑ranging, and the Act does not eliminate the risk of defective work. Furthermore, many construction projects such as commercial buildings, energy projects etc., are not caught by the BSA. Retention’s original purpose — to ensure funds are available if defects arise and the contractor fails to engage — therefore remains relevant, but the mechanism is increasingly seen as ill‑suited to achieving that aim.

Beyond regulatory change, the financial fragility of the retention system has been highlighted by a series of high‑profile contractor collapses. Carillion’s failure in 2018 left an estimated £800 million in unpaid retentions within the supply chain, a watershed moment that exposed the vulnerability created by the absence of ring‑fencing. Subsequent insolvencies reinforced this risk. Buckingham Group’s collapse in 2023, with debts of around £300 million, resulted in further unrecoverable retention balances for subcontractors. The 2024 insolvency of ISG — one of the UK’s largest public‑sector delivery partners — added billions of pounds of disrupted work and again left subcontractors unable to recover withheld sums. Together, these failures show that retention funds are neither protected nor insulated from upstream insolvency, leaving those lower in the contractual chain significantly exposed.

Price inflation and supply‑chain disruption have also intensified the cashflow strain associated with withheld retentions. As contractors face rising material and labour costs, the removal of retention deductions should relieve some of the immediate financial pressure, improving resilience where supplier prices increase mid‑project.

It is therefore unsurprising that retention reform has repeatedly returned to the political agenda. The Government’s 2026 proposal to prohibit retention clauses outright represents the most decisive move yet, but the idea itself is far from new. The practice has been questioned for decades — from the Banwell Report in 1964 calling for abolition, to the Latham Report in 1994  querying whether traditional payment practices (including retentions) remained fit for purpose. Numerous private members’ bills have sought either to abolish retentions or require them to be held in statutory trust funds, and consultations have consistently examined whether they should be retained, regulated or replaced. The most recent consultation, held between July and October 2025, explicitly invited views on whether retentions should be abolished or whether protection mechanisms such as segregated accounts should be mandated. Industry bodies have also long pressed for change: Build UK and CECA’s 2018 “Roadmap to Zero Retentions” set a target of eliminating the practice by 2025.

In short, while the 2026 reforms mark the closest the UK has come to a ban, the pressure to reform retentions has deep historical roots. Long‑standing structural issues — compounded by repeated major contractor failures — have made clear that the current system no longer offers the protection it was designed to provide.

1.1          JCT

JCT contracts are drafted with the assumption that retention will be used. Traditionally:

·         3–5% is withheld,

·         50% released at Practical Completion,

·         the balance released after the Rectification Period upon certification by the CA/EA.

Often those using JCT subcontracts will also replicate the retention mechanism.

Impact: The JCT suite will need significant amendment to accommodate a statutory ban, and employers will need alternative security provisions.

1.2          NEC4

Retention is optional but commonly adopted via Contract Data and released on issue of the Defects Certificate.
Impact: NEC’s flexibility helps, but secondary security measures will become essential.

1.3          FIDIC

Retention is standard unless replaced by a performance security/bond.

Impact: UK‑based FIDIC users will need to revise Particular Conditions and consider alternative security models. With FIDIC being regularly used in the international market, this will be another ‘quirk’ of UK law for oversees clients that needs to be fully understood and advised upon when drawing up the contracts.

5.1        Employers / Clients

For employers, retentions have historically played a central role in project security. Without them, employers may worry about ensuring contractors return to fix defects. Key implications include:

·       Greater reliance on alternative security, such as performance bonds, defects bonds, parent company guarantees or latent defects insurance.

·       Enhanced quality assurance requirements during delivery, not just during close‑out.

·       Potentially more cautious certification of Practical Completion, given the loss of retention as leverage.

·      Tighter defect‑notification and rectification processes requiring more active contract management.

Nevertheless, stronger and more resilient supply chains ultimately benefit clients, reducing the risk of contractor failure mid‑project.

5.2        Main Contractors

Main contractors often withstand retention impacts better than SMEs, but they still rely on it as a tool for managing subcontractor performance and mitigating downstream risks.

Without the ability to retain, contractors will need:

·         Improved quality‑control processes

·         Reliable subcontractor bonds or guarantees

·         Revised cashflow models

·         More proactive subcontractor management during defects periods

Contractors may also benefit from smoother final‑account settlement and fewer retention disputes.

5.3        Subcontractors / Specialists

Subcontractors stand to gain the most. It has been ‘dreamt up’ with small subcontractors in mind.

A ban should:

·         Free up significant amounts of working capital

·         Reduce exposure to upstream insolvency

·         Improve liquidity and investment capacity

·         Reduce adversarial final‑account negotiations

However, subcontractors would be wise to continue to scrutinise contract amendments to ensure retention‑like mechanisms are not introduced under different labels.

5.4        Consultants, Contract Administrators and Employer’s Agents

The ban directly affects the daily work of CAs and EAs, who currently administer retention deductions and releases.

In the new environment, consultants will need to:

·       Adopt stronger inspection, snagging and quality‑control processes

·        Issue more precise and enforceable defect notices

·        Carefully advise employers on alternative security structures 

·        Take a more rigorous approach to certifying Practical Completion

This shifts the emphasis from financial leverage at the end of the project to quality assurance throughout delivery, which aligns closely with the direction of the Building Safety Act.

5.5         Interaction with Bonds and the Surety Market

If retention disappears, demand for bonds may rise — particularly:

·       Performance bonds,

·       Defects liability bonds,

·       Subcontractor bonds,

·       Specialist‑trade guarantees.

The market may respond with:

·       Increased premiums,

·       Stricter underwriting criteria, and

·       Evolving product structures tailored to replace retention risk.

Bonds are not a like‑for‑like substitute and appropriate contractual drafting will need to reflect this.

Even before legislation is enacted, organisations may wish to consult their advisors and consider some practical steps:

Employers

·      Review standard security packages / update market research on bonds / speak to brokers/advisors.

·      Work with your consultants to strengthen defect‑management procedures.

·      Ensure contracts anticipate retention‑free regimes.

Contractors

·      Getting ready to remove or revise retention clauses in subcontract templates.

·      Engage with surety providers early.

Tighten downstream quality control by requiring subcontractors to submit proof of work (e.g. timestamped photos) before payment.

Subcontractors

·      Monitor contracts for disguised retention mechanisms.

·      Plan for improved cashflow and working‑capital management.

·      Be ready for closer monitoring on quality control.

Consultants / CA / EAs

·      Report on any issues with the works as they arise.

·      Update Practical Completion and defects procedures.

·      Advise clients on security options.

·      Enhance inspection, snagging and documentation practices.

The proposed ban on retentions, combined with the wider late payment reforms, represents a transformational shift for UK construction. If delivered effectively — and supported by clear legislation and guidance — it has the potential to:

•       Improve supply chain stability

•       Reduce insolvency risk

•       Enhance quality through better upfront processes

•       Simplify final account administration

•       Create a fairer and more sustainable commercial environment.

Taken together, the Government’s proposals mark a significant shift in how retention, payment and defects disputes will be managed. Much will depend on the legislative detail and its implementation, and there remains understandable scepticism about whether the reforms will materialise as promised. If and when enacted, however, they will require sector wide adjustment and could meaningfully reshape long standing commercial practices.