Government to ban the use of retentions in construction contracts 

For decades, the withholding of a retention payment has been a common feature of construction contracts across the UK and is provided for in many standard forms including JCT and NEC. Contractors have worked under a system in which a percentage of their agreed contract sum was withheld by clients and main contractors as security against defective work.

For contractors lower down the supply chain, that has long meant operating with money earned but never reliably received, with a risk of losing the retention entirely if an upstream party became insolvent. On 24th March 2026, however, the Government announced it intends to ban retention payments across the construction sector which will if enacted, fundamentally reshape how risk is allocated, priced and managed across the construction industry.

What is a retention?

A retention clause allows a paying party to withhold a portion of the contract sum until specified conditions are met. The amount to be withheld in a construction contract is typically between 3% and 5% with half the retention to be paid at practical completion and the remainder to be paid at the end of the defects liability period when agreed snagging items have been completed In theory, it provides an incentive for the contractor to return to site and remedy defects. In practice, the mechanism has transferred financial risk down the supply chain, with specialist subcontractors often carrying the largest burden and suffering adverse consequences from a lack of cash flow.

A serious problem for contractors and sub-contractors is also insolvency exposure. Retention money is commonly not ring-fenced or protected in any way. It sits as an unsecured debt, and when an upstream contractor or client becomes insolvent, those sums are frequently lost. For smaller firms operating on tight margins across complex supply chains, the consequences can be severe.

Government late payment consultation – time to pay up

The Government has looked at retention payments in the construction industry as part of its consultation on late payments, and the Government has acknowledged that urgent reform is needed as late payments cost the UK economy £11 billion each year.

The announcement on 24th March that retentions will be banned followed a consultation that ran from July to October 2025 and presented two options. Option A was a complete ban on retention clauses, making it unlawful to deduct and withhold retention sums. Option B would have allowed retentions to continue but required those sums to be protected, either through a segregated bank account or through a surety bond or insurance instrument.

The Government has chosen Option A. Its stated rationale centres on ease of enforcement and a preference for removing the practice entirely rather than regulating it.

A significant majority of respondents to the consultation, 87%, supported reform of the regime, and of those, 53% indicated they could support either option. The Government has opted for an outright ban but recognises that this is a significant change for the industry and will be consulting further on its implementation. The necessary legislative changes are expected to be made via an amendment to the Housing Grants, Construction and Regeneration Act 1996.

The wider payment reform package

The retention ban forms part of a broader set of measures announced under the Time to Pay Up initiative, which the Government has described as the most ambitious payment legislation in over 25 years. Those measures include a new 60-day cap on payment terms with strictly limited exemptions to ensure that smaller businesses are paid in a maximum 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 significantly enhanced powers for the Small Business Commissioner to investigate payment practices, adjudicate disputes and impose substantial fines on persistent late payers.

What does this mean for construction contracts?

Clients and main contractors will need to think carefully about how project financing, payment schedules and performance security interact under the new framework.

It will be important to consider how to manage performance risk and defects liability without retentions. Retention has historically given clients a straightforward means of withholding payment pending satisfactory completion. In its absence, alternative security will be required. Performance bonds, parent company guarantees and defects insurance are the most likely substitutes. Each carries its own cost, and those costs may feed into contract negotiations. There is a risk that the burden does not disappear but is redistributed, with contractors seeking to price the cost of providing alternative security into their tender figures, passing it back up the chain in a different form.

For contractors and subcontractors, the reform should materially improve cashflow at every tier of the supply chain and eliminates the risk of losing retention to upstream insolvency. However, contractors will need to be prepared to negotiate around the security alternatives that clients seek to introduce, and to understand the legal and commercial implications of the bonds or guarantees they are asked to provide.

JCT, NEC and other standard form contracts all contain retention provisions that will cease to be permitted once legislation is in place. The revision of those provisions across a live project portfolio, at different stages of procurement and construction, will require early and coordinated attention.

A long-awaited change

The campaign to reform retention practices in UK construction stretches back decades. Multiple private members’ bills, industry consultations and government reviews have addressed the issue without producing legislative change. and the announcement of 24th March 2026 therefore represents a substantive step forward.

The practical work of developing alternative security mechanisms, revising standard and bespoke contracts and renegotiating the terms on which performance risk is managed will fall to clients, contractors and their legal advisers. However, it is not clear at this stage how these items will be managed as the Government have not confirmed the detail of the legislation. The Government recognise following their consultation that their proposal is ambitious and that there will be a need to create a larger and more sophisticated surety market to support the construction sector and its clients if retentions are no longer available to mitigate risks for the client.

The Government has stated that respondents to the consultation mainly supported a 12-24 month transition period, but that given the complexities of the proposed retention ban for the industry they would be consulting further and also working with the Construction Leadership Council and construction clients to develop practical approaches to minimising defects. The Government also intends to liaise with the surety sector, so we will be watching with interest as to further government announcements to see how best to approach the proposed new legislation in terms of construction project and contract management.