UK Government Proposals to Abolish Construction Retention
By Luke Devine, Solicitor, Caldwell Ritchie Berry
The UK Government has announced a significant review of late payment practices with a particular focus on the construction sector. The proposals will obviously be of interest to Irish contractors and suppliers doing work or supplying construction products in the UK. The announced plans represent one of the most robust attempts in recent years to tackle long-standing issues surrounding delayed payments and cash flow within supply chains. While the proposed investigation applies broadly to all commercial contracts, it places notable emphasis on construction payment practices.
Proposed Ban on Construction Retention Payments
Of particular interest to the construction industry is the Government’s proposal to examine the abolition of retention payments. An alternative option that is being considered is to offer special protections for retention sums. Retention has long been a staple feature of construction contracts. Currently, the position regarding retention monies varies only slightly across the standard forms and is broadly similar insofar as it is typically expressed as percentage of the contract price. It is usually partially released at practical completion and then fully released after the defects liability / rectification period expires.
In a press release from the Department for Business and Trade dated 24 March 2026, the Government has indicated that the purpose of this review is to:
“prevent small firms losing retentions to insolvency or non-payment.”
Industry bodies have repeatedly highlighted that retention monies are frequently withheld for extended periods or lost entirely where upstream parties become insolvent. Estimates would suggest that billions of pounds are tied up in retention across the sector at any given time.
Advocates of reform to the legal framework argue that abolishing retention would improve liquidity for subcontractors and reduce financial vulnerability within the supply chain. However, critics caution that retention serves as an essential risk management tool for employers and main contractors, and its removal may necessitate alternative security mechanisms such as bonds or other insurance-backed solutions.
Business Secretary Peter Kyle stated that:
“Far too many businesses are forced to shut down because they have not been paid – that is simply unacceptable. We are unveiling the strongest, most robust changes to payment laws in over a generation – laws that will transform the fortunes of small businesses for years to come and make their day to day lives much easier.”
Interest on Late Payments and 60-day Payment Cap
The suggested changes include a new 60-day cap on payment terms. New mandatory interest for late payments is also being considered, with a requirement for all commercial contracts to include statutory interest set at 8% above the Bank of England base rate.
Our View
These proposals represent a potentially significant recalibration of payment practices in the UK construction industry. For subcontractors and SMEs, the plans are likely to be welcomed as a long-overdue intervention. Conversely, upstream parties who rely on retention to ensure successful project delivery or operate with extended payment cycles are likely to view the proposals with caution. Stakeholders and practitioners across the construction sector will be watching closely and time will tell what shape these proposals take in future.
Should you require any advice on retention related disputes, please do not hesitate to get in contact with one of our Team.