UK late payment reforms and what they mean for construction contracts, projects, and cash flow

On 24 March 2026, the government released its consultation outcome report, “Late payment consultation: time to pay up – government response” [1], announcing additional reforms designed to tackle late payment practices and their impact on the UK economy. Several of the proposed measures directly impact the construction industry, influencing how contracts and subcontracts are to be negotiated and administered in the future. We outline below the changes that construction companies should monitor and prepare to act upon.

Key takeaways

The announcement raises several significant changes construction businesses should prepare for including:

• Proposed ban on withholding of retention paymentsunder construction contracts. A further consultation on implementation is expected given the impact on the sector, signalling another shift towards improving cash flow and reducing financial strain caused by deducted or withheld sums. It intends to prevent smaller businesses from losing retentions due to non‑payment or insolvency.
• A strict maximum 60‑day payment period (with limited exceptions), aimed at reducing the extended payment terms observed between larger businesses and smaller suppliers. The proposed exemptions seek to preserve freedom of contract, enabling parties to remain competitive and negotiate appropriate arrangements.
• A fixed statutory deadline for disputing invoices, limiting opportunities for tactical or late stage disputes intended to avoid or delay payment. If this deadline is missed, compensation will become payable. This measure is anticipated to align with existing payment notice mechanisms for construction contracts.
• A mandatory statutory interest rate on every late commercial contract payment (proposed at 8% above the Bank of England base rate), supported by strengthened reporting obligations.
• Enhanced reporting duties for large companies, including a requirement for relevant boards to publish commentary on payment performance and outline actions to improve this. Additional audit or assurance measures on the associated reporting may also reinforce accuracy and accountability.
• Expanded powers for the Small Business Commissioner (SBC), enabling the SBC to investigate suspected non‑compliance, adjudicate disputes, enforce obligations and impose “proportionate” but significant fines on persistent late payers. The SBC will be entitled to recover the costs of investigations and adjudications.

Note that other annual reporting and streamlining proposals consulted upon will not be taken forward due to negative feedback and concerns surrounding the impact on transparency and accuracy of data.

Implications for the construction industry

Late payments are estimated to cost the UK economy around £11 billion each year and contribute to the closure of approximately 38 businesses every dayThe government’s proposed reforms aim to tackle these issues by promoting fair and prompt payment practices, improve cash flow and increase protection across the supply chain; while reducing associated stress, risk and administrative burdens with late payments.

The government intends to consult further and legislate to give effect to these legal and commercial reforms, subject to Parliamentary time. Alongside this, the government and SBC aim to drive broader behavioural change by encouraging businesses to adopt best practice, including via the Fair Payment Code.

There will be clear financial and reputational consequences for those organisations with poor payment practices and performance. Enhanced reporting obligations and greater transparency around interest on overdue payments, combined with the SBC’s expanded powers, will place increased scrutiny on how companies manage and engage with their suppliers. Importantly, payment practices and compliance will become a matter of board‑level accountability, rather than solely an operational or project specific consideration.

Preparing for change

Beale & Co will continue to closely monitor these developments and the progress of the retention implementation consultation.

In the meantime, you may wish to review existing reporting obligations and payment terms or practices to prepare for the forthcoming changes. The reforms will inevitably influence future negotiations, payment administration and the approach taken to managing or resolving payment disputes.

Contracts, both upstream with clients (as the party being paid) and downstream with suppliers (as the paying party), may need to be adapted as the measures are finalised and implemented. For example, it may prove helpful to create bespoke contracts for certain supplier entities, such as SMEs, to support compliance with the requirements.

It is also possible that parties may seek to redesign contracts to address payment structures and security arrangements or review existing quality assurance and defects rectification processes. It appears the government plans to collaborate with stakeholders, such as the Construction Leadership Council, to develop practical approaches, as well as the financial services sector to explore ways of developing the surety market. Internal audits may also help to identify bottlenecks in processes linked to certification, valuation, and approvals or potential issues that may breach new requirements or deadlines unless adequately managed.

Once the reforms take effect, we may see contractors and subcontractors seeking to use the dispute resolution mechanisms or low value adjudication schemes to enforce tighter payment procedures and recover statutory interest and compensation on overdue sums. Accurately understanding and administering agreed payment schedules and notices, and doing so on time, will be even more critical to reducing the risk of such claims.

Should you require tailored advice on the current payment landscape or assistance reviewing your contract terms or payment practices, please contact our London Construction team leads:

[1] Late payment consultation: time to pay up – government response, updated 24 March 2026

[2] Statistics quoted in the Ministerial foreword to the government response (above) / Late payments research: impact on the UK economy