Managing post‑completion risk in a no‑retention world

If passed, the Commercial Payments Bill could represent one of the most significant interventions in construction payment practices in decades, with the proposed abolition of retentions set to reshape how employers manage risk, security and cash flow.

Currently, retentions are widespread in UK construction and are a core part of employers’ security arrangements. The Commercial Payments Bill, if passed, would ban retentions entirely, and force employers to shift to alternative forms of security that may be more expensive or less flexible. The Bill also introduces maximum payment periods throughout the supply chain, mandatory statutory interest on late payments and expanded enforcement powers for the Small Business Commissioner.

The Bill only completed its second reading in the House of Lords on 9^th June, and remains subject to consultation and amendment. However, the policy direction is clear enough for employers to start thinking seriously about what it would mean in practice. The upcoming consultation will be a key opportunity for employers and contractors to shape the final legislation.

Abolition, not tighter regulation

The Bill proposes a complete ban on retention clauses in construction contracts through amendments to the Construction Act. This is a major policy departure: the intention is not to regulate retentions more tightly, but to remove them altogether.

The draft legislation defines retentions broadly as the practice of withholding part of sums otherwise payable until contractual obligations are met or a defects period expires.

A key concern raised in the Lords’ debate was the risk of circumvention and the possibility that parties may attempt to recreate retentions through alternative contractual structures. The final regime may therefore focus on substance over form.

Transition period

A phased approach is proposed:

• Two years from the legislation’s commencement: parties may continue to agree new retention clauses or vary or use existing ones.

• Three years from the legislation’s commencement: retentions agreed before commencement and during the transition period would have to be released by statutory deadlines linked to a “last retention day” three years after commencement.

Projects expected to run beyond this period will need to consider whether their current security arrangements are adequate.

What replaces retentions?

For many employers, retentions are not simply a payment mechanism but a familiar, low‑cost form of performance security, particularly where there are concerns about defects coming to light during the rectification period or about the contractor’s financial strength.

If retentions are prohibited, the construction industry is likely to see increased reliance on alternatives such as:

• performance bonds
• parent company guarantees
• latent defects insurance, and possibly other insurance products that may come to market in response to the change in law
• escrow arrangements
• enhanced defects obligations in contracts
• more robust contractor due diligence

Penalties for unauthorised retention deductions

After the transition period, it is anticipated that any attempt to withhold sums as a “retention” will trigger a statutory penalty. The Bill introduces an implied term entitling the payee to the higher of £40 or 50% of the retention debt plus statutory interest and late payment compensation. Whilst £40 is a price employers might be content to pay to preserve retention, the reality is that the penalty is likely to be much higher because it is the higher of the two figures that is payable.  

Support and criticism

Support for the ban is strongest among SME contractors and sub-contractors, who argue that retentions can operate as a cash-flow choke point, are sometimes released late, and are sometimes lost entirely when a contractor becomes insolvent.

However, opponents of the ban argue that retentions remain a practical and effective risk‑allocation tool in a sector uniquely exposed to defects that come to light some time after completion. Employers would emphasise the need for practical leverage to ensure defects are rectified.  Some alternative forms of security may add cost and administration, and may not offer equivalent protection throughout the defects period.  Bonds have been notoriously difficult to procure in recent years, particularly for SMEs, and they come at a significant cost. That additional cost is likely to be reflected in the contract price. Smaller contractors who may struggle to obtain a bond, parent company guarantee or sufficient cash for an escrow arrangement instead may end up simply missing out on securing the work.   

The current drafting of some aspects of the Bill also raises potential uncertainty, including whether the proposed penalty mechanism will fully catch retentions embedded in payment notices and where the boundary will fall between prohibited retentions and possible alternatives such as escrow arrangements.

Why this matters now

At a strategic level, employers may want to consider now, in broad terms, what replacement protections are realistic for their projects. Without a retention to fall back on, employers will need to think carefully about whether their practical completion inspection and sign‑off processes are robust enough to address defects that may surface in the six months thereafter. They may also need to bear in mind, when negotiating longer-term contracts, that new retentions are unlikely to be permitted after the two-year transition period and may need to be released after the “last retention day” three years after enactment. Engaging with the consultation should be a priority for stakeholders across the industry.

Other major reforms: payment timing and notices

If passed, the Bill would also impose new outer limits on payment timing in construction, requiring the final date for payment to fall within 30 days of the payment due date for public authority purchasers and 60 days for others. Failing that, non-compliant terms would be void and instead implied terms of the “Scheme” would apply (the Scheme for Construction Contracts (England and Wales) Regulations supports the Construction Act by providing default payment and adjudication rules whenever a construction contract lacks the required provision).

There are proposed exemptions (specific to the payment date reforms), which broadly include cases where the purchaser is smaller than the supplier, and where both parties are large undertakings, although the precise test will depend on the statutory size categories and any regulations made under the Bill.

During the Lords debate, peers questioned whether the 60-day period should be shortened to 30 or 45 days, or at least made subject to a formal review mechanism, so this may remain an area for further scrutiny. Shortening payment periods could tighten payment administration considerably, especially because the Bill also introduces a requirement for pay less notices to be served at least seven days before the final date for payment.  That would increase the risk of procedural disputes and force employers to be more proactive in issuing their own notices.

Mandatory statutory interest

The Bill, if passed, would also prevent parties from contracting out of statutory interest for late payment, currently 8% above the Bank of England base rate. Interest would run from the day after the final date for payment in construction cases. Employers will not welcome this restriction on their freedom to contract. The valuation of construction works can be a complex and technical process, and this mandatory interest could be seen as onerous where the reason for the late payment is a genuine dispute over entitlement

Expanded powers for the Small Business Commissioner

Finally, the Bill would expand the Small Business Commissioner’s role, including a new adjudication route for some payment disputes outside the usual Construction Act adjudication regime and stronger powers to investigate poor payment practices, direct remedial action, require publication of certain late payment information and impose penalties on larger businesses.

Looking ahead

Although the Bill is still at an early stage, it represents a potential reset of risk allocation, contract administration and supply chain strategy in construction.

Burges Salmon will continue to monitor developments closely and can support clients in understanding the implications for their projects, procurement models and contractual frameworks, including by helping to shape responses to the forthcoming consultation. Please do get in touch if you have any questions about this or any other topics.