Introduction
On 24 March 2026, the UK government announced the most significant reform to construction payment practices in over a generation. As part of its "Time to Pay Up" package, the Department for Business and Trade confirmed its intention to ban the withholding of retention payments under construction contracts.
If you work in construction as a main contractor, subcontractor, or specialist supplier, retentions will be one of the most familiar features of how you get paid. They are also one of the most contested. The proposed ban has been campaigned for by parts of the industry for years and is being received with a mixture of relief, concern, and practical questions about what replaces retentions as a mechanism for securing defect liability.
This article explains what retentions are, why the government wants to ban them, what the reform package actually contains, and what the likely implications are for commercial teams.
What Are Construction Retentions?
A retention is a percentage of a contract sum that is withheld by the paying party until certain conditions are met. In construction, the standard mechanism works in two stages.
The first stage is practical completion. At this point, half of the retention is typically released. If the contract uses a 5% retention, the paying party will have been holding 5% throughout the works, and releases 2.5% at practical completion.
The second stage is the end of the defects liability period (DLP), typically 12 months after practical completion. Once the DLP has expired and any notified defects have been rectified, the remaining 2.5% should be released.
In practice, retention rates range from 1.5% to 5% of contract value depending on the contract, the tier, and the parties involved. On a £2 million subcontract at 5% retention, that is £100,000 withheld from the subcontractor for potentially 18 months or longer.
Retentions exist, in theory, as security for the employer or main contractor against the risk of the contractor failing to complete the works or to return and rectify defects. In practice, they have operated very differently.
Why the System Has Been Broken for Decades
The case for retention reform is not new. The construction industry has been calling for change for years, and the problems with the current system are well-documented.
Insolvency risk. When a main contractor or employer becomes insolvent, retained funds held within their business become unsecured creditor claims. Subcontractors lose money they were owed for work they have already completed. According to government data, the late payment problem costs the UK economy £11 billion per year, with construction supply chains among the most severely affected.
Non-payment without grounds. In many cases, retentions are not released when they should be. The defects liability period expires. The contractor chases. Nothing happens. Without a formal dispute, the costs of recovery often exceed the value being pursued, particularly for smaller subcontractors. The leverage the main contractor holds is simply too great.
Cash flow as a business model. For some tier-one contractors, withheld retentions from across their supply chain have effectively functioned as a source of working capital. The money sits in the main contractor's account, earning interest, while the subcontractor waits for funds they have earned. This was never the intended purpose of retentions and the government has explicitly acknowledged it.
Impact on smaller businesses. Subcontractors and specialist contractors, who tend to be smaller businesses, are disproportionately affected. A 5% retention withheld across multiple live contracts can represent a substantial portion of a smaller company's working capital tied up indefinitely and at risk.
What the Government Has Announced
The retention ban forms part of a broader package of payment reforms announced on 24 March 2026 under the "Time to Pay Up" initiative.
The package contains three main elements relevant to construction:
1. A ban on the withholding of retention payments. The government has proposed to prohibit retention clauses in construction contracts. Consultation is underway, but the government has confirmed that the consultation is on how the ban will be implemented, not whether it should proceed. The political direction is clear.
2. A 60-day payment cap for large firms. All large businesses will be legally required to pay SME suppliers within 60 days. This applies across sectors but is particularly significant in construction, where payment terms of 90-120 days have been common.
3. Mandatory statutory interest on late payments. All commercial contracts will be required to include statutory interest set at 8% above the Bank of England base rate. This is non-negotiable and cannot be written out of contracts.
The reforms also significantly strengthen the powers of the Small Business Commissioner, giving the office the ability to investigate poor payment practices and issue multi-million-pound fines to persistent offenders.
When Will the Ban Come Into Force?
The ban is not yet law. It requires primary legislation, and no draft Bill has been published at the time of writing.
Legal analysis from construction law specialists suggests a realistic trajectory of legislation being introduced later in 2026, with a transition period of 12-24 months anticipated for commercial and contractual adjustment across the sector.
The government is also working with the Construction Leadership Council and the financial services sector to develop practical alternatives to retentions, including surety bonds and retention insurance products, before the ban comes into force.
The direction of travel is clear and the political commitment is explicit. Contractors and commercial teams should be planning for implementation, even while the legislative detail remains pending.
What Replaces Retentions?
This is the central question the industry is working through, and it is the right one to be asking now.
Retentions serve a function: they provide the paying party with some security that the contractor will return to rectify defects during the liability period. Remove the mechanism and something has to replace it.
Several alternatives are being considered and are already used in some contracts:
Retention bonds. A bank or insurer guarantees the equivalent of the retained sum on behalf of the contractor. If the contractor fails to return and rectify defects, the bond can be called. The contractor pays a premium for the bond, which is typically a fraction of the retention value. This is already common practice in some public sector frameworks.
Retention insurance. The contractor takes out insurance that covers the value of the retention. If a defect liability claim arises and the contractor fails to meet it, the insurance pays out. Less common than bonds but similar in principle.
Performance bonds. A broader instrument that can cover defect liability as well as other performance obligations. Often required on large or complex contracts already.
Improved defect management processes. Some commentators have argued that robust snagging, inspection, and defect management processes at practical completion reduce the need for financial security in the first place. If defects are identified and rectified at handover rather than left to a liability period, the risk the retention was supposed to cover is largely eliminated.
Not every alternative will suit every type of contract. The consultation process is expected to explore which mechanisms work for different contract sizes, types, and supply chain tiers.
What This Means for Commercial Teams
If you work in the commercial function of a main contractor, subcontractor, or specialist contractor, the implications of the retention ban are significant. Here is how to think about the likely impact across different areas.
Contract management. Standard form contracts including JCT and NEC will need to be amended to remove retention clauses. Bespoke contracts will need review. This is a significant task for commercial teams managing large contract portfolios.
Cash flow modelling. Main contractors who have factored withheld retentions into their working capital position will need to restructure their cash flow models. The funds they currently hold for 12-18 months across their supply chain will no longer be available. This is not a small adjustment for large contractors with significant supply chain spend.
Supply chain relationships. Subcontractors who have long operated in an environment where chasing retentions was an expected part of the commercial process will experience an improvement in cash position. For main contractors who maintain strong supply chain relationships, this is an opportunity to demonstrate a shift in approach.
Alternative security procurement. Someone needs to source, cost, and manage bonds or insurance in place of retentions. For main contractors, this may mean requiring subcontractors to provide bonds as a condition of award, which shifts the cost and administrative burden.
Payment application and certification processes. With retentions removed, the accuracy and timeliness of payment applications and payment certificates becomes even more important as the mechanism for commercial control. Rigorous interim valuation processes and prompt certification are the primary tools left.
StoneRise Commercial is designed around the full upstream and downstream payment lifecycle, including payment applications, variations, and subcontractor payment submissions. As the commercial landscape changes, having clear, auditable payment records is critical.
A Note on Industry Reaction
The reaction from the construction industry has been mixed, which is not surprising given how embedded retentions are in commercial practice.
Many subcontractor and specialist contractor organisations have welcomed the announcement. The Federation of Small Businesses and others who have campaigned for reform for years view this as long overdue.
Some main contractor voices have raised concerns. A ban on retentions, they argue, removes a genuine mechanism for managing defect risk and may lead to increased project costs as alternative security instruments are procured.
The consultation process is designed to work through these concerns. The government's position, as stated in the announcement, is that the consultation is on implementation, not on the principle of the ban itself.
Conclusion
Construction retentions are one of the most longstanding and controversial features of UK construction payment practice. The government's proposal to ban them is the clearest signal yet that the political will exists to address the structural imbalance they create in supply chain relationships.
The ban is not yet law, and the practical detail remains to be worked out. But the direction is clear and the timeline is realistic. Commercial teams that start preparing now, reviewing contract templates, modelling the cash flow implications, and understanding the alternatives to retention bonds, will be better placed than those who wait for primary legislation.
The construction industry has been waiting for this reform for a long time. The question now is not whether it will happen, but how well you are ready for it.
See How StoneRise Supports Construction Payment Management
Managing payment applications, valuations, and subcontractor payments in construction requires clear, auditable processes. Request a demo of StoneRise Commercial to see how construction businesses are managing their commercial workflows end to end.
FAQ
What is a construction retention? A retention is a percentage of a contract sum, typically 3-5%, withheld by the paying party as security against defects. In the standard model, half is released at practical completion and the remainder at the end of the defects liability period, usually 12 months later.
Why is the UK government planning to ban construction retentions? The government's proposal, announced on 24 March 2026 as part of the "Time to Pay Up" reforms, is aimed at preventing smaller contractors and subcontractors from losing retained funds to upstream insolvency or non-payment. Retentions cost the industry significant sums annually and have been widely criticised as a mechanism that benefits cash-rich main contractors at the expense of smaller supply chain businesses.
When will the construction retention ban come into force? The ban is not yet law. It requires primary legislation, and no draft Bill had been published as of early April 2026. Industry legal advisors anticipate legislation later in 2026 with a 12-24 month transition period. The government has confirmed that the consultation currently underway is on how the ban is implemented, not whether it should proceed.
What will replace retentions when they are banned? The government is working with the Construction Leadership Council and the financial services sector to develop alternatives. The most likely replacements are retention bonds (where a bank or insurer guarantees the retained amount) or retention insurance products. The consultation is expected to explore which mechanisms are appropriate for different contract types and supply chain tiers.
Does the retention ban affect all construction contracts? The proposed ban applies to construction contracts in England. Whether it extends to Scotland, Wales, and Northern Ireland will depend on whether those devolved administrations adopt the legislation, as late payment is a devolved matter.
What should main contractors do to prepare for the retention ban? Commercial teams should begin reviewing standard contract templates to understand where retention clauses are embedded, model the working capital implications of no longer holding retained funds, and explore the retention bond and insurance market. Starting this work before primary legislation is published puts you in a much stronger position than reacting to an implementation deadline.
