The United Kingdom government has announced a definitive ban on the use of retention payments in construction contracts.
This article delves into the concept of retention, its historical background, the proposed reforms, and the potential impact on the construction industry.
What is Retention?
Retention has been part of the UK construction contracts for a long time. It started in the 19th century during the Victorian railway boom to protect against contractor insolvency and poor workmanship. Over time, it became common internationally, including many Commonwealth jurisdictions.
Put simply, retention means withholding a portion of the contract payment, usually 1.5% to 5%, from a contractor or subcontractor until the project is finished or a set defects period ends. This gives clients financial leverage to make sure the work is done properly and any problems are fixed.
Since its introduction, the concept has attracted criticism for the monetary strain it places on contractors and the discord it introduces into client-contractor relationships. We often hear complaints about how upstream parties treat retention as a discount.
The argument against retention is that it first arose decades ago in a very different construction market in which the contractor shortages were common, regulatory oversight remained limited, and the risk of poor workmanship was higher. Back then, retention served as a safety net for principals and main contractors. Today, the construction market is heavily regulated and more transparent. Further, the sums involved rarely cover serious defects. Nevertheless, it continues to tie up cash across the supply chain, placing pressure on smaller firms operating on tight margins.
The Proposed Reforms
The Department for Business and Trade (DBT) announced these measures on 24 March 2026. The intention is to safeguard smaller firms against financial losses arising from withheld payments.
Last year, the government initiated a consultation on two options: implementing a complete ban on retentions or mandating the use of third-party bank accounts to hold them. Ultimately, the government selected the more radical option.
The reforms do not stop at retention. Key measures include:
- 60-Day Payment Cap: All large firms will be required to pay smaller suppliers within 60 days;
- Strengthened Enforcement: The Small Business Commissioner will have new powers to investigate poor payment practices, adjudicate disputes, and issue fines worth tens of millions to persistently late payers;
- Mandatory interest on late payment at 8%: Statutory interest on late payments, set at 8% above the Bank of England base rate, will be required in all commercial contracts; and
- Transparency Requirements: Boards or audit committees of non-compliant companies will be required to publish explanations for poor payment performance and remedial actions.
Impact on the Industry
For subcontractors and small or medium-sized businesses (SMEs), these changes should be a relief. Eliminating retention and ensuring faster payments will improve cash flow and reduce the financial uncertainty that has affected smaller contractors for years.
However, retention has traditionally provided leverage to ensure defects are fixed promptly. Its removal might require alternative mechanisms such as bonds, stricter notice requirements, or other contractual safeguards. There is a real risk that disputes could increase as parties test what qualifies as “withholding” under the new rules.
The Likely Response from the Industry
Predictably, the initial response from the construction sector is likely to be a review and adjustment of the standard form of contracts. Employers may restructure payment schedules or implement new security steps to reduce risk. Contractors, meanwhile, will have to adapt to the loss of retention as both a compliance tool and a means of managing defects.
Smaller or less experienced clients may have difficulty upholding quality standards without the traditional safety net of retention. Industry bodies and legal advisors will play a vital role in guiding the sector through these changes and ensuring alternative mechanisms are effective and reliable.
A Time for Adaptation
These proposed reforms represent a major change in how construction contracts operate in the UK. Retentions, long seen as a keystone of contract security, may soon disappear. While the changes promise better cash flow and stronger protection for SMEs, the sector will need to adjust rapidly. Standard contracts, project management practices, and risk apportionment strategies will all need to evolve.
The government has indicated a 12 to 24-month transitional period to allow contractual adjustments, financial planning, and stakeholder engagement. How the industry handles this period will determine whether the reforms deliver a fairer, increasingly sustainable supply chain without undermining quality or project delivery.