Sarah Elliott
- Partner
- Construction
Retentions: going, going… gone?
In an announcement on 24 March 2026, Government confirmed its intention to legislate to ban the practice of deducting and withholding retention payments under the terms of a construction contract.
Government had initially consulted on 2 options in relation to retention reform as part of its wider aims to improve late payment practices generally. Option A – to prohibit retention clauses and Option B – to allow the continued use retentions but to require retention sums to be segregated and protected. There was a view that a ban would be simpler for the industry to understand and easier to enforce. Government will next consult with interested parties, such as construction clients, the Construction Leadership Council and the financial services sector on the impact of the proposed ban before a final decision is taken on implementation. There is recognition that if retentions are no longer to be used as a means of mitigating risk, alternative practical solutions to minimise defects will be needed, together with alternative security for employers. This would include the development of additional forms of surety. The proposed ban of retentions is also dependent on Parliamentary time and is likely to require amendment to the Construction Act. There will also be some form of transitional period to allow for contract adjustments and planning.
In addition, as part of the wider reforms to payment practices which are aimed at preventing unjustified late payment particularly to small and medium sized enterprises, the Government intends to make it a requirement that all commercial contracts contain a right to statutory interest at 8% above the Bank of England base rate, and to remove the ability of parties to agree an alternative remedy to the statutory interest.
Comment
The proposed abolition of retentions forms part of a series of measures said to be “the most ambitious legislation to tackle late payments in over 25 years” and follows many years of debate, consultation, and private member’s bills to modify the use of retentions.
Subject to further consultation and Parliamentary time, it now looks as if the practice of cash retentions will eventually come to an end at least for new construction contracts entered into after a prescribed period of time. The proposed ban of cash retentions will mark a significant change primarily in the way in which construction contracts operate, but its impact will be felt across the wider Real Estate industry. The change is likely to be welcomed by sub-contractors and the wider supply chain by removing the risk of loss of retention sums in cases of insolvency, and generally improving cash flow and working capital, but the challenge will be to ensure that there are workable alternatives for the management of defects and quality assurance for employers before implementation.
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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Rona Westgate
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