The Commercial Payments Bill: Key changes for UK Construction
June 2026This article explores the recently introduced Small Business Protections (Late Payments) Bill (formally known as the Commercial Payments Bill) which is set to bring major changes to the construction sector and more broadly, to Small and Medium-sized Enterprises across the UK.
We previously commented on the background to the Commercial Payments Bill and government’s proposed late payment reforms in our March 2026 article.
Following the King’s Speech last month, the government has stayed largely aligned with its proposed changes. The Bill seeks to enact what will be a significant shake-up to long-established practice in one of the UK’s largest industries.
We set out the main legislative and commercial changes below.
Maximum payment terms
With limited exceptions, commercial contracts will be subject to a maximum payment period of 60 days. Any provision in a contract allowing for payment after 60 days from performance (or certification in some cases) will be void, and in that scenario (or where the contract does not provide for payment terms) a maximum payment period of 30 days will be implied, unless a compliant payment term is further agreed by the parties.
Where the purchaser is a public authority the maximum payment period will be reduced to 30 days, other than in respect of specific contracts governed by payment terms set out in the Procurement Act 2023.
Further exceptions from the maximum payment terms will also apply where both parties are ‘large undertakings’ (which the Bill has not yet defined) or where the purchaser is the smaller party. Although the Bill is clearly intended to protect smaller undertakings, this exemption may be open to manipulation depending on how the ‘size’ of an undertaking will be determined.
Mandatory late payment interest
Commercial contracts will be subject to mandatory late payment interest at a minimum of 8% above the Bank of England base rate (which at the time of writing is 3.75%). Businesses will no longer be permitted to agree a lower rate of interest and any contract term that seeks to reduce or remove this will be void.
Deadline for disputing invoices
Most invoice disputes will need to be raised at least eight days prior to the payment due date. If a dispute is raised later than this, or insufficient detail is provided to understand the dispute, the Bill imposes fixed financial penalties of the higher of £40 or 1% of the contract price (or where part of the invoice is disputed, 1% of the disputed sum).
Given that the Construction Act already creates strict mechanism for disputing invoices, this section of the Bill will not apply to payment disputes concerning construction contracts.
Businesses will need to ensure that they have robust internal procedures for reviewing invoices and, if necessary, raising and managing disputes promptly within these timeframes.
Ban on withholding retentions under construction contracts
Perhaps the most significant part of the Bill for businesses operating in the construction sector is a wholesale ban on deducting and withholding retention payments under construction contracts under Section 113C of the Bill. Section 113D covers variations of pre-existing retention clauses.
Although discussions around the impact and treatment of construction retentions have been ongoing for some time, a majority of construction contracts in the UK currently allow a fixed percentage of the contract sum to be ‘retained’ by the paying party as a form of protection or security. These retentions are intended to provide protection against incomplete and defective works and to incentivise prompt completion of works. Inevitably, however, retentions increase cash flow pressures on contractors and subcontractors and mean that supply chain parties may also lose retained sums in the event of upstream insolvency.
Section 113A(1) of the Bill currently defines “Retention practices” as the practice by which one party to a construction contract “deducts or retains sums of money” equating to the sum due to the other party until any condition for release or partial release of the sums is met. At first glance, that wording seems sufficient to capture standard retentions as described above but may also impact, for example, on provisions allowing sums to be withheld for the non-provision of collateral warranties or performance security.
The Bill recognises that this reform will be a significant shift for the industry and includes a transition period of two years from commencement, where retention clauses may continue to be agreed and varied. A ‘hard stop’ has been set at three years after commencement and termed the ‘last retention day’, at which point all retention clauses will become void, and sums retained during the three-year period must be paid within the timescales provided in the Bill.
The Bill also proposes penalties for failing to pay retention sums within the relevant timeframes, being the greater of £40 and 50% of the retention sum.
Given the government had previously floated the idea of enhanced regulation of retentions rather than an outright ban, it is notable that the Bill includes a full ban and was published without further industry consultation on that proposal. We expect significant engagement from major industry bodies as the Bill progresses through Parliament, as well as from the financial services sector, given previous discussion around the availability of performance security as an alternative to traditional retentions.
The practical implications of restricting retention practices remain uncertain, particularly given ongoing market and insolvency risks across the sector. The reforms may influence future contractual and commercial arrangements, including increased reliance on alternative security mechanisms such as performance bonds or parent company guarantees. We may also see more creative drafting approaches around ‘incentive payments’ and other mechanisms as parties seek to manage the impact of the Bill.
Stay tuned for our upcoming article, where we dive into the proposed retention changes and whether they will drive the intended industry practices or behaviours.
Expansion of the Small Business Commissioner’s powers
The Small Business Commissioner will gain additional investigatory and adjudication powers, along with broad enforcement powers to act against larger businesses with persistent poor payment practices, including the ability to impose financial penalties.
An adjudication scheme will be introduced and administered by the Commissioner, where small businesses may refer a relevant payment dispute to it for determination. The relevant adjudicator’s decision will be binding unless and until the dispute is further decided through legal proceedings (or arbitration, if relevant).
What now?
Whilst the Bill has made its way to Parliament quicker than many expected, it still has a long way to go before it eventually receives Royal Assent and becomes law. The Bill had its second reading in the House of Lords on 9 June 2026, but given the breadth of changes there may be further clarifications and amendments proposed by the Houses of Parliament. We will closely monitor the Bill’s progress and provide future updates.
Looking forward, the Bill will have wide reaching implications for all parties engaged in the construction sector, including consultants, contractors and employers alike. For those that have standard contracts or amendments to industry forms, these will need to be updated to account for the changes in relation to payment, interest and retentions. Parties should be mindful of their statutory rights in contract negotiations, particularly where counterparties seek to include provisions that conflict with the changes introduced by the Bill.
Please contact the authors or Beale & Co’s Contracts and Project Advisory Team should you wish to discuss your contract terms, governance or payment processes and broader risk management strategies in anticipation of any of the potential legislative changes covered above.
Includes contributions from Kayleigh Rhodes
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