- within Compliance topic(s)
- with Senior Company Executives, HR and Inhouse Counsel
On 24 March 2026, the UK Government published the response to its 2025 Late Payment Consultation, which ran from 31 July to 23 October 2025. The response, entitled Time to Pay Up, sets out a package of measures designed to tackle what it describes as the "scourge of late payments" costing the UK economy £11 billion each year.
Of particular significance to the construction sector is the Government's proposal to ban the deduction and withholding of retention payments under construction contracts – a move that, if implemented, will fundamentally alter the way risk and performance are managed in the industry.
This article focuses on the proposed prohibition of retention payments (Measure 8 in the consultation response) and considers its implications for construction clients, contractors, and the wider supply chain.
Consultation on construction retention payments
The consultation which ran from 31 July to 23 October 2025 presented two options for the reform of retention payments:
- Option A: to prohibit the use of retention clauses in construction contracts entirely, making it unlawful for payers to deduct and withhold retention sums from payments to payees. Payers could choose to seek alternative forms of insurance or surety, but this would not be mandated.
- Option B: to allow the continued use of retention clauses but require any retention sums deducted and withheld to be protected, either by segregation in a separate bank account or through an instrument of guarantee such as an insurance product or surety bond.
Both options were proposed to be achieved through legislative amendment to the Housing Grants, Construction and Regeneration Act 1996 (HGCRA).
The Government's proposed ban on construction retentions
A significant majority of respondents (87%) favoured reform of the retentions regime, and of those, 53% indicated they could support either option.
Having considered the consultation responses, the Government has announced that it proposes to take forward Option A: to prohibit the deduction and withholding of retention payments under the terms of a construction contract.
However, it noted that "given the ambition of the policy", it "will consult further with interested parties on the impact of this measure before taking a final decision on implementation". Therefore, while the direction of travel is clearly towards prohibition, the precise legislative mechanism, scope, and transitional provisions remain to be settled.
Implications and the wider late payment package
The proposed ban on retentions sits within a broader package of late payment reforms. These include enhanced powers for the Small Business Commissioner, including powers to investigate, adjudicate disputes, and fine persistent late payers, as well as maximum payment terms of 60 days, mandatory statutory interest at 8% above the Bank of England base rate on late payments, a statutory deadline for disputing invoices, and requirements for board-level scrutiny and reporting of poor payment performance.
The proposed ban on retentions will, if enacted, represent the most significant change to the financial architecture of UK construction contracts in a generation. Clients, contractors, and their advisers will need to give early thought to several practical matters, such as:
- the development or procurement of alternative performance security mechanisms such as bonds or parent company guarantees;
- the review and amendment of standard-form and bespoke contracts to remove or replace retention provisions;
- the potential impact on project pricing, as contractors factor in the cost of providing alternative security; and
- the adequacy of existing contractual regimes for managing defects liability in the absence of retained funds.
The Government has indicated that it will legislate as soon as parliamentary time allows and will stay closely engaged with businesses throughout the legislative process. As noted above, further consultation on implementation is anticipated.
We will continue to monitor these developments closely as further details emerge on the legislative timetable and the form of the proposed ban.
Read the original article on GowlingWLG.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]
