UK Government proposes ban on retentions in construction contracts

As part of its wider overhaul of payment practices, the Department for Business and Trade has announced plans to prohibit the use of retention payments in construction contracts.

This forms part of the latest step in the UK Government’s crack down on unfair payment practices and is one of a raft of measures put forward in its response to a 2025 consultation on late payments.

What are retention payments?

A well-established practice in construction, retention payments typically involve the deduction of a percentage (often 5%) from payments owed to contractors and subcontractors. The withheld amount is released once the project is completed and any defects are rectified, usually after a specified defects liability period. While this system aims to incentivise quality and provide assurance to clients, it has been criticised for causing financial strain on contractors, particularly smaller firms. You can read more about retentions and previous attempts to reform the practice in our article here.

The UK Government’s proposal

The proposal would outlaw the practice of deducting and withholding retention payments across construction contracts. The stated aim is to improve payment certainty and promote financial resilience within the sector. Removing retentions is intended to simplify payment structures and ensure contractors receive the full value of their work as it is delivered, preventing loss through insolvency and late and non-payment. An outright ban was also seen as simpler for the industry to implement and enforce than the (less drastic) measure, which was also consulted upon but not progressed, to continue to allow retention clauses but to require sums deducted and withheld to be protected for the benefit of the payee.

Looking ahead

If implemented, the ban would represent a significant shift in standard contracting practice. While it may reduce long‑standing cashflow challenges for contractors, employers will still require assurance around quality and defect remediation. The industry will therefore need to consider alternative mechanisms, such as performance bonds, retention bonds, escrow arrangements or enhanced defects warranty drafting. (Some of these topics we have previously discussed in earlier articles – you can read more about performance bonds here and parent company guarantees here.)

In line with that, the response noted the consultation identified a need to create a larger and more sophisticated surety market to support the construction sector and its clients. This would be required if retentions are no longer a means of mitigating risk, which is likely to require the development of a range of solutions in order to meet the needs of both construction clients and the supply chain. The UK Government therefore said it will work with the financial services sector to identify ways of developing the surety market for the construction sector. It also said that to address concerns about build quality, it will work with the Construction Leadership Council and construction clients to develop practical approaches to minimising defects. How that will look in practice and what approaches will emerge remain to be seen.

The UK Government says it will take forward legislation to prohibit retentions under construction contracts. However, it is expected to consult further on the detailed framework before taking a final decision on implementation, and industry stakeholders should engage actively to ensure the final approach is workable for all tiers of the supply chain. This will need be considered alongside the other late payment measures put forward in the response, including maximum payment terms of 60 days in certain circumstances and a statutory time limit for disputing invoices, which will require alignment with the payment and adjudication regime under the Housing Grants, Construction and Regeneration Act 1996.

Conclusion

The discussion around prohibition of retention has long been a feature of the industry – a common view being “I’ll believe it when I see it”. It appears that we may well now be seeing it!

The proposed prohibition is a major development and has the potential to rebalance payment risk within the construction industry, but would its prohibition create an imbalance with employer protections? The prohibition would certainly require significant consideration for all stakeholders involved in most projects.

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

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