The UK Government has announced its intention to move forward with a ban on retention (a sum withheld from interim payments, to be used to remedy any unfixed defects, typically 3% or 5%) in construction contracts. This marks a significant shift for an industry where retention has long been a contentious but embedded practice.  

For contractors, subcontractors, and employers, the proposals could reshape cashflow, risk allocation, and commercial strategy across the supply chain. 

Does this affect you? 

If you operate anywhere within the construction industry, from main contractor to specialist subcontractor, these proposals could directly impact how you structure contracts, manage cashflow, negotiate terms, win work, secure payments, and mitigate financial risks. 

Having confirmed its intention to prohibit retention payments, the Government is now consulting on how the legislation will be introduced. With a proposed 12–24‑month transition period expected once the law is enacted, businesses across the construction sector will need to start considering how their payment practices, supply chain arrangements and contract structures may need to evolve.  

What do the new changes include?  
  • A strict 60-day maximum cap on payment terms when large companies are paying smaller suppliers; 
  • Mandatory interest on late payments – all commercial contracts are required to include a statutory interest set at 8% above the Bank of England base rate; 
  • A ban on retentions in construction contracts; and  
  • A time limit for raising disputes on invoices 

The UK Government has called the announcement the “toughest crackdown on late payments in over 25 years” I and is giving the Small Business Commissioner new powers to allow them to investigate.  

Key Concerns? 

Despite the mostly positive news for the payee, concerns include: 

  • A ban may lead to non‑compliance of remedying defects, whether deliberate or accidental and could temporarily increase adjudication disputes while the industry adjusts. 
    • Employers argue that retention is their only low‑cost leverage for ensuring defects are remedied, meaning alternative methods will be needed if it is removed. 
  • Loopholes remain a concern, as parties could withhold funds under different labels instead of calling them “retention,”  
  • Alternative security mechanisms, such as bonds, stricter notice requirements, or early use of Liquidated Damages may become more common.  
Things to look out for 

With the consultation outcomes set to reshape established payment practices, organisations should begin reviewing their contracts, supply chain arrangements, and risk strategies. If you need guidance on what these proposals could mean for your projects, our team is here to help. Get in touch with our experts here.  

The HF Construction & Procurement department have discussed the proposal internally and have seen potential flaws with it. We think that by removing retention payments it will likely result in it being harder for contractors to obtain completion certificates, due to clients no longer having the safety net of retention. As a result of this, clients will be more inclined to withhold completion certificates until they are satisfied that the project is defect free.   

Instead of having disputes about retention release, we may see more disputes over completion and handover. One potential way to stop this from occurring is by using retention bonds. Given the crisis in the middle east continues to unfold, which may lead to an economic downturn globally, parties to contracts will naturally want to tighten the purse strings a little, and while many will struggle to get money in the door, so this provides more possible pros and cons, depending on which side of the contract you might sit. 

Until this comes to pass officially, retention payments in Construction Contracts are still going to be extensively used across these isles. 

If you need help in relation to retention payments or with any other construction contract issue, get in contact with stephen at: stephen.mceknna@hf.law

To help answer any of your questions, we are hosting lunchtime webinar on Understanding Retention & Unpacking Recent Developments. Register here, to learn more about this highly discussed topic in the industry.