Retention is a long-established form of performance security and feature of UK construction contracts, whereby the client (or upstream contractor) will withhold a certain percentage of the contract sum from the contractor (or sub-contractor) until practical completion and/or the expiration of the defects liability period.

The rationale is to provide security against non-performance under the terms of the main contract/sub-contract including defective works. You can read our previous article on retention here.

However, for many in the industry, especially small and medium sized businesses (SMEs) with limited bargaining power and tighter cashflow, retentions are problematic. With an estimated sum of around £3.2 billion to £5.9 billion held in retention annually (in England), research such as that from the Pye Tait Consultancy and the BEIS report illustrate several key issues:

• Permanent loss of retention money due to insolvency: A significant portion of retention funds are held in the main bank accounts of clients or upstream contractors, rather than in protected, or ring-fenced accounts. Where the client or an upstream contractor becomes insolvent, these sums may be lost permanently, leaving main contractors/subcontractors out of pocket. We have seen in recent years how retentions held by insolvent clients/upstream contractors can exacerbate financial pressures for those lower tier players, sometimes even threatening their own solvency.
• Misuse and lack of awareness of statutory provisions: Despite Part II of the Housing Grants, Construction and Regeneration Act 1996 prohibiting certain conditional payment obligations, there remains a lack of understanding across the industry. For example, some clients/contractors continue to make the release of retention conditional on the performance of obligations under separate contracts which breaches clause 110(1A) of the 1996 Act. These practices can create uncertainty and disputes, leaving main contractors/sub-contractors being denied their money, despite having fulfilled their obligations under the relevant contract.
• Late payment, partial payment or no payment at all: Delayed or withheld retention payments are widespread, and research has shown that many SMEs experience many months delay before their retentions are released, with some never receiving them at all. The effect is that retention often operates as a cashflow risk for the supply chain, pushing them towards, in extreme cases, insolvency.

Previous reform attempts

Several attempts have been made over the years to legislate for change:

• the Construction Industry (Protection of Cash Retentions) Bill 2017 proposed securing retention monies in a statutory scheme;
• the Construction (Retention Deposit Schemes) Bill 2017–19, which sought to introduce mandatory deposit arrangements, and
• the Construction (Retentions Abolition) Bill 2021–22, which went further, proposing to outlaw retention clauses entirely.

None, however, progressed to a second reading in Parliament.

In 2019, the Scottish Government launched its own consultation and created a short-life working group to examine the issue. The conclusion was not to recommend an outright ban but to signal a long-term ambition to see a substantial reduction in the use of retentions.

Transparency measures

The most recent change has come through transparency obligations. The Reporting on Payment Practices and Performance (Amendment) Regulations 2025, came into force in the UK on 1 March 2025. These Regulations extended existing reporting requirements. Qualifying entities entering into “qualifying construction contracts” must now disclose to the UK government via their online portal:

• the use and percentage of retentions;
• mechanisms for release, including staged release provisions, and
• whether subcontractors are subject to more onerous retention terms than main contractors.

These disclosures are to allow greater visibility of how retentions are applied in practice; aiming to improve accountability and encourage fairer behaviour across the supply chain.

Current proposals

On 30 July 2025, the Department for Trade and Business launched a consultation on late-payment reforms. As part of measures to reduce late payments and unfair practice around retention payments, two options have been proposed:

1. a prohibition on retention clauses altogether, which the UK Government has indicated is its preferred option, or
2. mandatory protection of retention sums, either by holding them in segregated accounts or securing them through bonds or insurance.

The consultation will close on 23 October 2025.

What this could mean for the construction industry

Although reform may be welcomed by many, in particular smaller main contractors and sub-contractors, if it does go ahead, the industry will need to adapt.

While an outright ban would represent a significant shift, requiring alternative mechanisms for performance security, the mandatory protection alternative would still change how retention sums are managed and accounted for.

Either outcome would have particular implications for contract drafting, project financing and supply chain practices. Supporters of reform will point to potential improvements in cashflow, reduced insolvency risk and fairer treatment of SMEs. However, others will caution that removing retentions could reduce a client’s/main contractor’s power to ensure defects are rectified and may increase reliance on alternative security instruments that bring their own costs and concerns.

Looking ahead

After years of deliberation, there is a sense that retention reform may now be on the horizon. The new reporting regime already brings greater transparency, and the current consultation signals a possibility of fundamental change.

For now, the industry will need to wait and see what the UK Government’s approach is after the consultation responses. We will be keeping a close eye on developments as they progress and will report further in due course. However, at this stage, it appears that any reforms would apply only to new construction contracts entered into after a prescribed date. Even so, they could mark a significant shift in the way construction contracts are structured and operated.

With that possibility in mind, it may also be timely for those in the industry to think about the alternative forms of performance security already in use, such as bonds and guarantees - you can read more on these here and here.

If you would like to discuss anything raised in this article, please get in touch with Gavin Paton or Emma Kelly, or your usual Burness Paull contact.

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