Construction Retention Ban: What the Bill Means

The End of Construction Retentions? What the New Commercial Payments Bill Means for the Industry

For decades, retention has been a familiar—and frequently controversial—feature of construction contracts. Contractors and subcontractors routinely see a percentage of money deducted from interim payments and held, sometimes for years, as security against defects.

That system now looks set for fundamental change.

The Government’s Commercial Payments Bill proposes to ban retention clauses in construction contracts as part of a much wider package of reforms aimed at tackling late and unfair payment practices.

For contractors and subcontractors, the reforms could represent one of the most significant changes to construction payment legislation since the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”).

Importantly, however, retentions have not yet been banned. The Commercial Payments Bill is still progressing through Parliament. As at 1 October 2026, it has completed Report Stage in the House of Lords and is scheduled for Third Reading on 20 October 2026. The legislation may therefore still be amended before receiving Royal Assent.

What Is Changing Under the Commercial Payments Bill?

The Bill proposes a number of substantial changes to commercial payment practices, with specific provisions directed at the construction industry.

Perhaps the most significant is the proposed prohibition on contractual retentions.
Under the current version of the Bill, the Construction Act would be amended so that, following a transitional period, a contractual provision permitting one party to deduct or retain money by way of retention would be void.

The prohibition is intended to extend beyond simply inserting the word “retention” into a building contract. It applies to retention clauses contained within construction contracts and related agreements concerning sums payable under those contracts.

The intention is clear: businesses should no longer be able to use contractual mechanisms which effectively allow them to finance projects by withholding money properly earned further down the construction supply chain.

Why is the Government targeting retentions?

Retention has traditionally been justified as security to encourage contractors and subcontractors to return and rectify defects.

However, the system has long been criticised within the construction industry.

For specialist contractors in particular, retention can mean that substantial sums of money remain outstanding long after their work has been completed. Difficulties can arise where release depends upon completion of the main contract or expiry of a defects period over which the subcontractor has little control.

There is also the familiar problem of businesses simply failing to release retention when it becomes due, leaving contractors to decide whether the amount justifies the cost of pursuing it.

The Government’s consultation found substantial support for reform. Respondents highlighted unjustified late payment, partial payment and non-payment of retentions and the consequent effect on working capital and investment within the construction supply chain.

Will existing retentions disappear immediately?

No. The present Bill provides for a two-year transition period, and the Government has confirmed that implementation will take place through commencement regulations following Royal Assent.

The Government has also said that it intends to work with the Construction Leadership Council, construction clients and other stakeholders during the transition, including developing alternative forms of surety.

Existing construction businesses should therefore not assume that retention clauses in their current contracts have suddenly become unenforceable.

The precise contractual position will depend upon the legislation ultimately enacted, the commencement provisions and when the relevant retention clause was agreed.

What happens if retention is withheld unlawfully?

The proposed legislation contains a particularly significant remedy.

Where a retention debt arises after the transition period, the current Bill proposes an implied contractual entitlement to a fixed additional payment.

That payment would be the higher of £40 or 50% of the retention debt.

That would be in addition to any entitlement to statutory interest and late-payment compensation.

For example, if £10,000 of retention were unlawfully withheld, the proposed fixed sum could therefore amount to a further £5,000, in addition to the underlying £10,000 retention and potentially interest and statutory compensation.

This provision could materially alter the commercial calculation involved in withholding retention after the new regime takes effect.

The Bill goes much further than retentions

The proposed reforms should not be regarded simply as a “retention ban”.

The Commercial Payments Bill represents a broader attempt to change payment culture across UK business.

Among its proposals are mandatory statutory interest on qualifying late payments at 8% above the Bank of England base rate, stronger remedies where payment disputes are raised late or without sufficient information, and substantially increased powers for the Small Business Commissioner.

Of particular importance to the construction industry, the current Bill also proposes limits on how far the final date for payment can be pushed beyond the contractual due date.

For relevant construction payments, the present draft provides for a maximum period of 30 days for public authorities and 60 days for other purchasers, calculated from the day after the payment due date.

A contractual provision attempting to establish a final date for payment outside the permitted period would be void, with the relevant provisions of the Scheme for Construction Contracts potentially being implied instead.

The reforms could therefore require contractors throughout the supply chain to reconsider their standard payment terms.

A new adjudication role for the Small Business Commissioner

Another potentially important development is the proposed expansion of the role of the Small Business Commissioner.

The Bill would allow the Commissioner to operate an adjudication scheme for certain contractual payment disputes between small suppliers and larger businesses, with binding interim decisions.

This would sit alongside the existing statutory adjudication regime available under the Construction Act.

The interaction between the two regimes will therefore be an important area to watch as the Bill progresses and the detailed rules are developed.

What Will Replace Construction Retentions?

That may prove to be one of the most important practical questions.

Retention has historically provided employers and main contractors with readily available financial security where defects arise.

Removing cash retention does not remove the underlying commercial desire for security.

The Government has recognised this and intends to work with the construction and financial-services sectors on alternative forms of surety.

We may therefore see greater use of retention bonds, performance bonds, parent company guarantees and other forms of contractual security.

Contractors should consequently pay close attention to attempts to introduce alternative mechanisms which, although not described as “retention”, may transfer significant financial risk or impose additional costs.

What should construction businesses do now?

There is no need to remove existing retention provisions overnight. The Bill has not yet become law and its provisions will not take immediate effect.

Nevertheless, employers, developers, main contractors and subcontractors should start considering the implications now.

Businesses which routinely deduct retention should review their standard contracts and consider what alternative security they may require once the prohibition takes effect.

Contractors and subcontractors should review their existing retention schedules and ensure that sums which are already due for release are being actively pursued rather than allowed to remain outstanding indefinitely.

Both paying and receiving parties should also review their standard payment provisions. The proposed reforms extend considerably beyond retention and could render some commonly used payment terms ineffective once the legislation comes into force.

A major change in construction payment culture

The Construction Act transformed payment practices when it introduced statutory payment notices, restrictions on conditional payment and the right to adjudicate at any time.

The Commercial Payments Bill has the potential to represent another substantial shift.

For specialist contractors and subcontractors, abolishing cash retention could release significant amounts of working capital that have historically remained trapped within the construction supply chain.

For developers and main contractors, however, the change will require careful consideration of how defects and performance risks are secured without relying upon money belonging to contractors further down the supply chain.

The detail remains important. The Bill has not yet completed its Parliamentary passage and commencement will involve transitional arrangements.

What is already clear is that businesses throughout the construction industry should be preparing for a future in which traditional cash retentions may no longer form part of the construction payment landscape.

Fairmont Law Construction Law Department

Fairmont Law advises contractors, subcontractors, developers and construction professionals on construction contracts, payment disputes, retentions, variations, adjudication and enforcement.

If you are experiencing difficulties recovering retention or other outstanding construction payments, or would like advice on how the proposed payment reforms may affect your contracts, please contact our Construction Law Department.

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