Government Plans Ban on Retentions in Construction Payment Reform

The Government has announced plans to ban the use of retention payments in construction contracts as part of a wider crackdown on late payments across the industry.

Under the proposed reforms, the withholding of retentions would be prohibited, aiming to prevent smaller firms from losing significant sums due to insolvency or non-payment further up the supply chain.

Initial consultation feedback indicates strong industry support for a full ban, rather than alternative mechanisms such as project bank accounts. However, concerns have been raised around ensuring the legislation is robust enough to prevent circumvention, as well as the cost and availability of alternative forms of financial security.

A transition period of between 12 and 24 months is expected, allowing businesses time to adapt contract terms, financial planning and assurance processes.

The proposed changes form part of a broader package of payment reforms, which includes strengthening the powers of the Small Business Commissioner. The role would be expanded to investigate poor payment practices, adjudicate disputes, and issue substantial fines to companies that consistently fail to pay on time.

Further measures include a proposed 60-day cap on payment terms for large firms when paying smaller suppliers, alongside mandatory interest on late payments. All commercial contracts would be required to include statutory interest set at 8% above the Bank of England base rate.

The proposed ban has been welcomed by many specialist contractors, who argue it will improve cashflow, strengthen business resilience, and create a fairer supply chain.

However, some clients and industry bodies have raised concerns, warning that retentions can play a role in ensuring quality and compliance. They argue that without a suitable alternative, a full ban could increase the risk of defects going unresolved and shift additional risk onto clients.

The Government is expected to consult further on the implementation of the reforms, with a focus on ensuring a balanced and workable approach for all parts of the construction industry.