UK Government consults on ending retentions

In December 2024 we reported on new legislation requiring large companies in the construction industry to report on certain payment practices and policies, specifically the proportion of retention sums withheld from suppliers. This was one of several government measures introduced to improve payment practices in the UK and increase transparency, benefiting the supply chain.

On 31 July 2025 the UK Government announced its latest set of plans to consider options to reform or ban cash retentions in construction contracts as well as other measures to improve cashflow. This is part of a wider set of plans to “fix the fundamentals” which are adversely impacting the supply chain.

The government vows to bring in what it hails as the most significant legislation in over 25 years to end the scourge of late payments which costs the UK economy almost £11bn per year and closes down 38 UK businesses every day. This comes over 60 years after the seminal Banwell report in 1964 on the same industry issues, followed by inquiries, case law, new statutory requirements and remedies, and a plethora of charters, commitments and codes in almost every succeeding decade since – all acknowledging the importance of cashflow and the need to tackle retentions.

Just over a decade after the Construction Act 1996 the government again acknowledged that the practice of holding retentions undermined efforts to promote integrated supply chains and damaged cashflow. However, retentions remain an entrenched part of the construction industry and contracting.

The 2022 Construction Playbook also advocated prompt, fair, effective, transparent and increasingly digitised payment practices. Ring fenced project bank accounts from which payments are made directly and simultaneously to all members of a supply chain and championed in the Playbook may improve prompt payment (including prompt release of retention) in appropriate cases.

In 2025, the government is consulting on retention and payment practices more widely, seeking views on a package of legislative measures to ensure the supply chain is paid fairly and on time, including specific proposals on the use of retention clauses in construction contracts. It acknowledges that retention payments can often be subject to late, partial or non-payment for the supply chain, or permanently lost through upstream insolvency; and that payment release mechanisms often do not relate to the completion of a supplier’s work. It is accepted that the wider industry generally operates on low profit margins, and that structural change may need to be considered due to a current lack of rigour, particularly around ring-fencing retention monies, to prevent them being used for working capital.

Proposed amendments to the Construction Act 1996

The government is consulting on proposed amendments to Part 2 of the Housing Grants, Construction and Regeneration Act (the Construction Act 1996):

• either prohibiting the use of retentions; or
• while allowing retention clauses, introducing requirements to protect retention funds deducted and withheld from insolvency and late or non-payment.

Either proposed measure aims to prevent the non-payment of retentions due to upstream insolvency of the payer, and to reduce unjustified late, partial or non-payment of retentions due to poor payment behaviour from the payer.

Proposal to prohibit the use of retention clauses in construction contracts

The government is proposing to amend the 1996 Act to make it unlawful for payers to deduct and withhold retention sums from payments to payees. Payers could choose to seek alternative forms of insurance or surety, but this would not be mandated. The measure would be implemented for new construction contracts after a prescribed date, which would also provide a transitional period for payers to adjust to the new requirements including management of working capital.

Proposal to protect retention sums deducted or withheld under retention clauses in construction contracts

This is the less drastic of the two proposals and would still allow the use of retention clauses in construction contracts; but would require any retention sums withheld to be protected using an amendment to the Construction Act 1996 for the benefit of the payee. Payers would have a choice of either:

• segregating the retained sums in a separate bank account; and/or
• protecting the sums through an instrument of guarantee (insurance / surety bond).

This proposal would be implemented for new construction contracts after a prescribed date, and there would also be a transitional period.

Key features of the retention protection proposals are that:

1. they would only be applicable to the use of retention clauses in construction contracts (as defined by Part 2 of the Housing Grants, Construction and Regeneration Act 1996);
2. they would follow the convention that where the construction contract makes no such provision for the required protection measure, the Scheme for Construction Contracts will imply relevant terms;
3. a single retention sum is only permitted to be deducted and withheld from the final payment in respect of works/services until the expiry of the applicable rectification period;
4. monies will be automatically segregated and held for the benefit of the payee when deducted and withheld;
5. the market will deliver provision of any bank account or instrument of guarantee;
6. a single bank account may be used with separate ledger records for each payee and each contract;
7. the retention sum is automatically released unless the required notification is made;
8. Any interest earned on the retention sum is owned by the payee;
9. The payer will be required to keep accounting and records for all retention sums held for the payee, and make these available for inspection within a reasonable period of time and without charge;
10. the payer will be required to report to the payee on all retention sums held and the mechanism(s) of protection; and
11. any disputes about the amount and timing of the release of retentions payments will be dealt with by existing dispute resolution processes

Thereby unpicking a host of retention clauses commonly included in conventional construction contracts [for projects of all sizes]; and importing the type of structural and cultural change needed to reform [transform] poor embedded payment practices and embrace those found in more collaborative and transparent contracts.

The government asks a number of specific questions on its retention protection and other payment proposals, including their design, operation, and potential unintended consequences. Responses are requested to be submitted by 23 October 2025.

There will undoubtedly be resistance to an absolute ban on retention. The less drastic option of retention protection measures may be considered more palatable and easier to adjust to by clients, the supply chain and the security market.

The hard work of drafting the required amendments to the Construction Act will begin in the new year following on from the consultation.

How we can help

Construction company insolvencies in England and Wales reached their highest level in July 2024 since the pandemic. With payment issues costing the industry millions each year, retention remains a key concern so having clear, robust contract terms and conditions, especially on costs and payments, is essential. We help draft, negotiate and manage the complexities of construction contracts to ensure compliance, cost control and early identification of potential payment issues to avoid disputes. If you require any assistance, please contact the authors. [see: Backing your business: our plan for small and medium sized businesses 31 July 2025]

consultation – Late payments: tackling poor payment practices