What the Commercial Payments Bill could mean for the construction industry

The Commercial Payments Bill was introduced in the House of Lords on 19 May 2026 and has recently passed Committee Stage. While amendments remain possible as it progresses through Parliament, the Bill proposes significant reforms aimed at tackling late payment and abolishing construction retentions. 

This article focuses on the proposed retention ban, payment term cap and mandatory interest regime, although the Bill introduces wider reforms affecting commercial contracts more generally. 

What does the Bill propose? 

The Bill proposes a complete ban on construction retentions. The Government has rejected alternatives, such as allowing retentions to continue where retained sums are held on trust. 

The proposal would insert new sections 113A-113E into the Housing Grants, Construction and Regeneration Act 1996 (HGCRA), prohibiting the deduction or withholding of retention payments under construction contracts. 

The drafting is deliberately broad. A retention is defined as: 

The definition is intended to capture deductions from interim payments, final payments and sums calculated by reference to the contract value, making it difficult to replicate traditional retention arrangements by other means. 

When will this come into force? 

The short answer is that no one knows yet. 

The Bill must still pass through the House of Commons and the retention provisions are notably absent from the sections scheduled to come into force immediately upon Royal Assent. This suggests recognition of the significant impact that abolishing retentions could have on an established industry practice. 

The legislation also contains lengthy transitional arrangements. Given the Parliamentary timetable and the proposed transition period, a retention ban may not take effect until around 2030 at the earliest. 

Nevertheless, businesses that currently rely on retentions would be well advised to begin considering alternative forms of security. 

What are the transition provisions? 

The Bill proposes a phased transition: 

• a 2-year transition period will commence when the new provisions come into force, during which retention clauses can continue to operate. Any new retention clauses entered into afterwards will be void;
• an additional 1-year period will then apply during which retention clauses entered into before the end of the 2-year transition period or existing retention clauses varied during the 2-year transition period may continue to operate with detailed provisions governing the release and repayment of retained monies at the end of the additional year (the “last retention day”); and
• retention clauses entered into before the transition period begins will generally remain effective unless varied during the 2-year transition period. 

Importantly, the statutory penalties for failing to pay a retention debt may still apply after the 2-year transition period, even where the underlying contract was entered into earlier. 

Consequences of failure to comply 

Proposed section 113E HGCRA introduces significant consequences for parties that wrongfully deduct or withhold retention payments after the 2-year transition period. 

The penalty would be the greater of: 

• £40; or 
• 50% of the retention debt withheld. 

This would be payable in addition to mandatory interest and any other statutory compensation arising from late payment. 

60-Day Payment Term Cap and Pay Less Notices 

The Bill would introduce a maximum payment term of: 

• 60 days from the due date for most construction contracts; and 
• 30 days where the purchaser is a public authority. 

Limited exceptions apply, including: 

• contracts between two large businesses; 
• situations where the purchaser is the smaller party; and 
• certain international trade arrangements. 

The objective is to prevent larger organisations imposing extended payment periods on smaller suppliers and subcontractors. 

The Bill would also prevent parties from agreeing a pay less notice period shorter than seven days before the final date for payment, which contrasts with the common current practice of agreeing shorter periods. 

Mandatory minimum interest rate 

The Bill would require commercial contracts to provide a statutory entitlement to interest on late payments at 8% above the Bank of England base rate. 

Parties would be unable to contract out of this right. Any contractual provision excluding or restricting entitlement to statutory interest would be void. 

Given the industry’s historic exposure to payment delays and lengthy supply chains, this reform could significantly increase the cost of late payment and encourage earlier resolution of payment disputes. 

How does the UK differ from other jurisdictions? 

The UK’s proposed approach is more restrictive than many comparable jurisdictions, which continue to permit retentions subject to additional safeguards. 

For example: 

• New Zealand allows retentions but requires them to be held on trust, protecting subcontractors if a contractor becomes insolvent;
• France permits retentions but requires retained funds to be held by an agreed third party; and
• the USA continues to permit retentions, although limits vary between states. 

Whether the UK’s approach affects investor behaviour remains uncertain. However, some developers and funders may regard a complete ban as reducing contractual flexibility and increasing project costs. 

What can the industry do? 

Construction clients should monitor the Bill closely and familiarise themselves with its key provisions. If enacted in its current form: 

• employers will need to consider alternative security mechanisms, including: 
  • performance bonds;
  • parent company guarantees;
  • insurance-backed products; and
  • escrow or project bank account arrangements.
• questions remain as to whether the bond market has sufficient capacity to replace retentions at scale. Increased bond usage may also raise project costs and create additional enforcement challenges; 
• standard form contracts will require review;
• quality assurance and defects management processes will need to be strengthened. Greater emphasis may be placed on inspections, testing and contractor reporting to prevent defects arising in the first place rather than relying on retention as leverage after completion; and
• organisations should review payment procedures to ensure compliance with the proposed 60-day cap and minimise exposure to penalties and interest. 

Although the Bill remains subject to change, it represents one of the most significant proposed reforms to construction payment practices for decades. Businesses that begin planning now are likely to be better positioned if the legislation is enacted in its current form. 

If you would like to discuss any of the issues raised in this article, please get in touch. 

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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