Countdown to a retention ban: the UK Government takes the next step

Following on from our March note on the UK Government’s proposed ban on retentions here, we find ourselves – rather more quickly than anticipated – writing about retentions again. 

The UK Government’s proposed ban on retentions moved a step closer with the introduction of the Small Business Protections Bill (formally, the Commercial Payments Bill) in the House of Lords on 19 May 2026.

The UK Government’s own press release referred to the Bill as “the toughest crackdown on late payments in a generation”, setting the tone for its approach.

The Bill includes a ban on retention at sections 11 to 17, through the introduction of new sections 113A to 113F of the Housing Grants, Construction and Regeneration Act 1996 (the “Act”). The ban not only catches the construction contract itself, but also related agreements, so potentially, depending on the final wording, any side arrangements linked to the construction contract.

There is provision that businesses that continue to withhold money through prohibited retention arrangements could be fined 50% of the retention debt, while unpaid retentions will accrue interest of 8 per cent above the Bank of England’s base rate.

Timescale

The timeframe for implementation has not been finalised, and there may yet be further consultation on timing. What we do know is that there will be transition arrangements following the provisions coming into force:

• Existing retention clauses will remain effective for two years.
• Any retention clause agreed during the two-year transitional period, or already in place before the provisions came into force but varied during the two-year transitional period, will continue to be effective for the three years following the provisions coming into force (with release of the retained sums at the end of that three-year period).
• No new retention clauses may be agreed after the two-year period following the provisions coming into force. Such clauses will be void.
• Variations to pre-existing retention clauses will also be void, unless the variation has the effect of making the retention more favourable to the payee.

When (and not ‘if’) the ban comes into force, this will mark a huge change in approach for the UK construction industry. Further consultation had been anticipated on alternative methods of performance security. It is fair to say, though, that there is still a question mark over what will replace retentions in practice. The most obvious alternative is a performance bond, but bonds remain expensive, and project budgets would need to allow for them or for the wider use of latent defects insurance, project bank accounts or escrow arrangements.

Lawyers may also find themselves busy poring over the legislation for workarounds.

The proposed ban is not without its critics. There has been market comment that it may push small-to-medium sized contractors with no parent company, no access to a reasonably priced bond facility, or insufficient cash flow to place money into an escrow account out of the market, or reduce the number of tenderers. There has also been comment from the British Property Federation that “a complete ban … is a sledgehammer to crack a nut” and from others that the ban may disproportionately impact small-to-medium sized contractors – essentially those that the legislation (and the Act) is trying to protect.

However, the ban is progressing, and how the construction industry adapts will be the real test of its effectiveness. For the time being, our recommendation would be to review existing retention arrangements, open discussions with clients and contractors on alternative performance security measures, and consider what tenderers may realistically be able to offer on future projects.

If you would like to discuss anything raised in this article, please get in touch with Kathleen McAnea or your usual Burness Paull contact.

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