Construction retention payments to be banned

Author: Hannah Wilkins

Key Contact: Phil Graham

On the 24th of March 2026, in what had been called "the toughest crackdown on late payments in over 25 years". The UK goverment outlined its intentions to ban the use of retention paymetns in construction contracts.

The Department for Business and Trade (DBT) ) identified its intention to bring forth new legislation to “prevent small firms from losing retentions to insolvency or non-payment”.  Its rationale, which has support from various sectors of the industry, is underpinned by its view that supply chains have historically been disproportionately affected by exploitation of the retention payment regime. This had led to the loss of substantial sums from upstream insolvency or retention abuse.  That feeling is one many within the supply chain will know well.

A familiar principle to the industry, retention payments have long been used to incentivise the proper completion of works. They also provide a form of contract security to address defects discovered during the life of a contract (including any defect rectification period), or a form of security against supply chain insolvency. Through retention a portion of the contract value (often, although not exclusively, in the region of 5%) is retained from interim payments to the receiving contractor during the construction period.  The release of retention is often structured around the completion triggers for the contracted work, whether at the point of completion and/or any applicable defect rectification period.

A 2025 government consultation was carried out regarding implementing a complete ban on retentions or mandating the use of a third-party bank account (the project bank account regime) as a method to provide security over retentions. Industry feedback broadly favoured the more radical ban, with the DBT concluding that a ban on retention payments is “easier for the industry to understand, to legislate for, and to enforce”.

Proposed legislative measures

The new legislation proposed also intends to implement measures around the following principles:

• Commercial contracts will be required to include statutory interest on late payments, set at 8% above the Bank of Englande base rate.
• Large firms will face a maximum 60-day payment term (reduced to 45 days after five years) when paying smaller suppliers. Further clarification of the statutory definitions of “large” and “smaller” firms is expected.  The current exemption that allows businesses to agree to longer terms as long as they are not grossly unfair will be removed. Limited exceptions will apply for contracts where:
  • Both paries are larger compnaies;
  • the purchaser is a smaller party;
  • goods or services are being imported or exported.
• Small Business Commissioners will be granted powers to investigate payment practices, adjudicate disputes, and issue fines against persistent late payers.
• A time limit will be placed on raising disputes on invoices.

Advice for Employers and Contractors

Whilst the DBT has proposed a 12–24-month transitional period prior to full implementation, the implementation of these measures is a topic which is likely to require early consideration by those affected by it.  Contractual adjustments, financial planning, stakeholder engagement, and developing alternative assurance mechanisms are all likely to be key considerations in the months ahead.

Those traditionally utilising the perceived benefits of the existing retention regime (developers, employers, funders, main contractors for example) would be wise to undertake early consideration of how they intend to manage both the transition, alongside the new commercial and legal landscape which the retention payment ban will introduce.  Alternative methods of risk management will certainly be a key consideration where by way of an evolution of payment provisions, the structuring of security arrangements or a revised approach to construction management.  For example:

• One immediate response to the new legislation is likely to be an increased consideration of existing alternative security mechanisms such as performance bonds or parent company guarantees.  Already a challenging market, the performance bond regime is likely to come into sharp focus with parent company guarantees receiving increased interrogation.
• One can foresee a stricter approach to the assessment of interim payments, milestones and therefore project cashflow.  Whilst the proposals may remove the challenge of post completion retention release, there is potential for questions of defects, work value and payment to negatively impact the interim payment regime, creating scope for increased debate between parties in this area.
• The absence of retention is likely to increase focus upon the determination of contract completion.  This may require employers and main contractors to refine the definition of practical completion, introduce enhanced inspections/testing, and employ stricter thresholds for what may be deemed as acceptable defects or snags. Whilst a more exacting approach to determining completion may provide avenues for alternate protection, the stricter interpretation of “completion” carries significant implications for all parties to the construction process.

Whilst these are only some of the implications of the change to the statutory regime, it is clear that the consequence of a significant alteration to the existing payment regime will be a shift change in the existing contracts terms. This will require employers and contractors to seek alternative methods of risk mitigation.

The takeaway

To ensure enhanced and ongoing protection, all those impacted by the changes would be wise to act in a proactive and prudent fashion sufficiently in advance.  The DBT itself expects that implementing the new retention policy will lead to a temporary increase in disputes requiring resolution via adjudication.  Clear, precise, and unambiguous contract provisions will be critical in minimising the scope for disputes. When disputes do arise, it is essential to obtain comprehensive legal guidance for navigating not only adjudication strategy, but early dispute resolution.