The UK government’s plans to ban retention payments in construction contract

The UK government is proposing a ban on retention payments in construction contracts – a significant shift that could reshape cash flow and risk allocation across the industry.

Retention is a longstanding contractual mechanism in the construction industry whereby a specified percentage of monies otherwise due to a contractor is withheld by the paying party as security against defective work or non-completion.

Retention sums are ordinarily released in two tranches: the first upon practical completion and the second at the expiry of the rectification period, which is commonly six or 12 months.

Despite its prevalence, and its inclusion in widely used standard forms of contract such as JCT and NEC, the practice has attracted sustained criticism for restricting cash flow throughout the supply chain and exposing subcontractors to significant financial risk, particularly in cases of upstream insolvency.

Context and reasons for the decision

The issue of retention reform has been the subject of prolonged government scrutiny. In October 2017, the Department for Business, Energy and Industrial Strategy published a consultation on cash retention under construction contracts, which closed in January 2018.

That exercise revealed broad consensus that existing fair payment measures were insufficient, with 82% of respondents considering them ineffective. It also highlighted that 87% of respondents considered unjustified non-payment of retentions to be a significant or very significant problem.

In July 2025, the government launched a further Late Payment Consultation, which ran until October 2025 and received 867 responses. On 24 March 2026, the government published its response, entitled ‘Time to Pay Up’, describing late payments as a “scourge” costing the UK economy £11bn each year. Of the consultation respondents who expressed a view, 87% were in favour of reforming the retention regime.

The government confirmed its intention to pursue an outright ban on the deduction and withholding of retention payments under construction contracts, rather than the alternative option of permitting retentions subject to protection through deposit schemes or guarantees. Construction firms accounted for 17.1% of all insolvencies in England and Wales in January 2026, consistently the highest of any sector, a statistic that underlines the urgency for reform.

The proposed alternative

The government’s chosen approach, Option A from the consultation, is a prohibition on retention clauses in construction contracts, to be achieved through legislative amendment to the Housing Grants, Construction and Regeneration Act 1996.

The Commercial Contracts Bill (also described as the Small Business Protections Bill) has now had its first reading in the House of Lords. The Bill inserts new sections 113A–F into the 1996 Act, setting out a widely drawn definition of retention practices designed to cover and prohibit the forms in which they are commonly encountered. The Bill includes transitional provisions: retention clauses will remain effective for two years following the provisions coming into force, with clauses agreed during or before that period continuing for up to three years.

Parties who breach the ban face a fixed sum penalty of the higher of £40 or 50% of the retention debt, together with statutory interest at 8% above the Bank of England base rate.

The government hasn’t mandated a specific replacement mechanism but has indicated it will work with the Construction Leadership Council and the financial services sector to develop the surety market. The industry is likely to see increased use of performance bonds, retention bonds, parent company guarantees, escrow arrangements and insurance-backed defect warranties.

Wider implications for the industry

The proposed ban will have far-reaching consequences. For employers and developers, retentions have long been the most straightforward and cost-effective means of incentivising contractors to return to site to remedy defects after handover. Without that financial hold-back, employers may scrutinise practical completion more rigorously, potentially raising the bar for certification and increasing the risk of disputes over whether completion has been unreasonably withheld.

The post-completion dynamic will also change. Whereas the current model typically involves withholding sums as a negotiating lever, the new regime will require employers who have already paid in full to pursue recovery through formal routes such as adjudication. Alternative security mechanisms carry their own costs and complexities: bond costs have risen in recent years, bonds may be difficult for smaller contractors to obtain, and call on bonds are frequently contested.

Contract prices may increase as contractors factor in the cost of providing alternative security, and standard form contracts will require amendment. The British Property Federation has cautioned that “a complete ban on their use is a sledgehammer to crack a nut and will undermine the ability of those funding new construction to ensure that buildings are defect-free”.

With the legislative detail still to be finalised and a further consultation on implementation anticipated, the industry should use this period to review contracting practices, risk allocation strategies and available security arrangements.