UK government to ban construction retentions and tighten late payment rules

The government has announced plans to ban retentions in construction contracts in the UK, make 60-day payment terms for large firms paying smaller suppliers a mandatory maximum, and introduce a requirement for all commercial contracts to include statutory interest at 8% above the Bank of England base rate on late payments (which reflects the default position from the Late Payment of Commercial Debts (Interest) Act 1998 that already provides for this rate but from which parties frequently contract out).

The Department for Business and Trade announced its plan on 24 March to ban the withholding of retention payments under construction contracts in what it describes as the "most ambitious legislation to tackle late payments in over 25 years".

The broader package of reforms aims to address late payment practices that the government says cost the UK economy £11 billion each year.

The Small Business Commissioner will also have new powers to investigate suspected poor payment practices, adjudicate over payment disputes and fine large companies that persistently make late payments to suppliers.

Why ban retentions now?

The practice of withholding retentions has been targeted by the government in a bid to improve cash flow and prevent smaller firms from losing money due to late or non-payment, particularly in the case of upstream insolvencies.

The announcement follows a public consultation on the "scourge of late payments" that ran from July to October 2025. That consultation explored two options for construction retentions: an outright ban or making it mandatory to hold retentions in third-party bank accounts. The government's announcement confirms that the more drastic option, an outright ban, has been chosen.

The ban raises significant practical concerns for the construction industry – and there is growing commentary on how the industry may seek to work around its imposition.

Quality and defects risk 

Retentions are currently a simple and relatively low-cost way for employers to encourage contractors to return and fix defects, as well as provide security for other issues (like contractor insolvency).

The British Property Federation has warned that “a retentions ban actively undermines the push for quality that the industry strives for and will just store up problems for the future”. It has also warned that removing retentions could reduce investor appetite, increase perceived investment risk, and leave smaller or one-off clients, who often have less leverage, particularly exposed to poor contractor performance.

Alternative security arrangements

If withholding funds as a retention is no longer an option, employers, developers and funders will need to consider alternative means of securing the prompt and accurate completion of obligations under a construction contract. This was acknowledged by the government in its response, which noted that consultation respondents frequently cited “a need to create a larger and more sophisticated surety market to support the construction sector and its clients if retentions are no longer a means of mitigating risk”.

Retention bonds represent one viable alternative, but come with notable drawbacks: they add cost to projects, raise concerns about whether the surety market could sustain such an expansion, and require contractors and subcontractors to provide counterindemnities and potentially security to sureties, which may offset the perceived cash flow benefits. Whether new or amended forms of security will emerge to plug the gap remains to be seen.

Avoidance through payment scheduling 

The government has recognised that parties higher up the contractual chain may seek to get around the ban by deferring contractual payment dates to later in the schedule. In practice, employers and main contractors could redesign milestone payments so that a greater proportion of the contract price becomes payable at practical completion or at the end of the defects liability period, replicating the economic effect of a retention.

Given that the government has recognised that the risk of circumvention of the ban is "material", anti-avoidance measures are likely to be considered when preparing the legislation that will be used to introduce the ban. The success of these measures, and how they will be interpreted and catered for, will be of keen interest to those in the industry.

A potential increase in disputes

The government has accepted that a significant change to retention practice may lead to a short-term rise in disputes, including adjudications, while the industry adjusts. Where employers previously used the threat of withholding retention as informal leverage during the defects period, they may now need to escalate disagreements through formal and potentially more costly dispute processes.

Osborne Clarke comment

The government has said that it will consult on how the ban will be implemented but has not yet provided detail or a timetable. It has also said it will work with the Construction Leadership Council and major construction clients to “develop practical approaches to minimising defects”, and with the financial services sector to help develop the surety market for construction.

In light of the proposed abolition of the practice of withholding retentions:

• Clients, developers and funders, particularly those concerned about the risk of contractor insolvency during construction or the defects period, should review standard contract forms, surety arrangements and risk allocation now, ahead of the formal consultation on the legislative form of the ban.
• Contractors and subcontractors should assess which alternative security instruments – such as performance bonds, parent company guarantees or retention bonds – their clients and counterparties are likely to require, and begin engaging with surety providers at an early stage.
• All parties should consider carefully any attempts to restructure payment schedules in a way that recreates the economic effect of retention, as any such arrangements may well fall within the scope of anti‑avoidance measures introduced alongside the new legislation.

It remains to be seen exactly if, when and how these various measures will be implemented, or if, following consultation, any exceptions or watering down will be introduced, including reverting back to the third-party bank accounts option.

Hermione Hodgson, trainee solicitor at Osborne Clarke, assisted in writing this Insight.