Retention has long been a feature of construction contracts in the housebuilding sector, intended to provide security against non-performance, incomplete works and defects.

Typically, a certain percentage of the contract sum is withheld from the contractor(s) and released in stages at practical completion and once snagging and defects have been rectified. For housebuilders this mechanism motivates contractors to ensure that finished homes meet contractual and regulatory standards.

For many in the industry however, retentions are seen as problematic – as explored in our previous article here. In the housebuilding sector particularly, where projects rely heavily on small and medium-sized businesses (SMEs), retentions can represent a financial burden on the contractor(s) in the form of cashflow pressure and greater exposure of the contractor(s) to the risk of housebuilder insolvency. With reform now firmly on the UK Government’s agenda, significant change could be on the horizon.

Reform attempts and transparency measures

Several legislative attempts have been made to reform the system – from the Construction Industry (Protection of Cash Retentions) Bill 2017 to the more radical Construction (Retentions Abolition) Bill in 2021–22. None, however, progressed to a second reading in the UK Parliament. In Scotland, a 2019 consultation stopped short of recommending an outright ban but acknowledged the need for long-term change.

More recently, progress has come through transparency obligations. From March 2025, the amended Reporting on Payment Practices and Performance Regulations require qualifying entities to report:

• whether they apply retentions and at what percentage;
• the mechanisms and timescales for release; and
• whether subcontractors are subject to stricter terms than main contractors.

Qualifying entities are companies and limited liability partnerships which exceed two of the following thresholds on their balance sheet dates:

1.  turnover of more than £54 million;
2.  balance sheet total of over £27 million; and/or
3.  more than 250 employees (save for companies in their first financial year, which are not considered qualifying).

For the housebuilding sector, this represents the first time that retention practices will be visible across supply chains; a move designed to encourage fairer and more accountable behaviour.

Current government proposals

The most significant development came in July 2025, when the Department for Business and Trade launched a consultation on late payment reforms. At the heart of this consultation are two options on retention in construction contracts:

1. a prohibition on retention clauses altogether – the UK Government’s stated preference; or
2.  mandatory protection of retention sums – for example, through segregated accounts, bonds or insurance products.

The consultation, which closes on 23 October 2025, follows the creation earlier this year of the UK Retention Deposit Scheme –  a voluntary mechanism allowing funds to be placed into segregated accounts with Bank of England backing and regulated by the Financial Conduct Authority.

What this means

For housebuilders, either reform option will have significant consequences. An outright ban would remove retentions entirely, forcing housebuilders to consider alternative performance security, such as bonds or guarantees. A requirement for mandatory protection would mean putting in place new systems for accounting, administration and contract management. Both approaches represent a cultural and financial shift for the industry and although the reforms are likely to improve fairness and cashflow resilience for SMEs, they may also increase the cost and complexity of contractual arrangements.

Benefits and risks

The potential benefits of reform for contractors are clear: improved cashflow, reduced insolvency risk and improved transparency.

However, there are also risks. Housebuilders would lose a traditional security against non-performance, incomplete works or defects, and reliance on bonds or insurance may add both cost and administrative burden. Housebuilders may also face tighter cashflow if sums are locked into protected schemes. The outcome will therefore depend heavily on how reforms are designed and implemented.

Next steps

We will be keeping a close eye on developments as they emerge. Meantime housebuilders should consider the potential implications for their business and whether they want to make representations as part of the consultation.

In anticipation of some curtailment on the ability to use retentions housebuilders could also explore alternative security instruments such as bonds or 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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