The announcement landed on 24 March 2026 with little fanfare for an industry that had been waiting for it since 2019. The Department for Business and Trade confirmed what specialist contractors, subcontractors and trade bodies had spent years campaigning for: retention payments in UK construction contracts are to be banned. For London's supply chain — where retentions on high-value projects can represent hundreds of thousands of pounds held for years — the implications are immediate, structural and not yet fully understood.
The reform sits inside the government's largest package of payment law changes in over 25 years, pairing the retention ban with a mandatory 60-day payment cap for large firms paying smaller suppliers, statutory interest set at 8% above the Bank of England base rate on all late payments, and sweeping new enforcement powers for the Small Business Commissioner. The combination represents a fundamental shift in how construction cashflow is governed — and it arrives at a moment when London's construction sector is already navigating cost pressure, insolvency risk and post-Grenfell compliance demands simultaneously.
While the Industry Celebrated, the Cashflow Complexity Remained
While the sector broadly welcomed the ban as long overdue, London Construction Magazine analysis shows that the removal of retentions without a fully established alternative security framework creates a transitional risk window that commercial teams and supply chain managers cannot afford to underestimate.
Retentions have never been a statutory requirement under UK construction law. They became embedded through contract practice — typically 3% to 5% of contract value withheld across interim payments, with half released on practical completion and the remainder held until the end of the defects rectification period. The commercial logic was straightforward: retentions incentivised contractors to return to site and remedy defects, and provided a readily accessible security buffer if they did not. For employers and main contractors, they also functioned as a form of cashflow leverage that the supply chain effectively subsidised.
The government's consultation, which ran from July to October 2025, explored two options: an outright ban or mandating third-party retention accounts. The more radical path was chosen. The DBT confirmed it would ban the withholding of retention payments under construction contracts and consult on implementation, citing the need to prevent small firms losing retained sums to upstream insolvency or deliberate non-payment. The Construction Leadership Council, which has campaigned on this issue since 2019, confirmed it would work closely with the department on timeline and process. Industry bodies including BESA, NFRC and the Finishes and Interiors Sector described the announcement as a landmark moment.
London Construction Magazine Insight — The Loophole Risk That Could Rewrite the Reform
Senior industry figures who welcomed the ban simultaneously warned that it may not deliver the protection it promises without rigorous anti-avoidance provisions. The concern is not theoretical. In New Mexico — the only jurisdiction globally to have implemented a complete retentions ban — main contractors and clients responded by undervaluing interim payments and loading payment obligations toward the end of the contract. The financial pressure on subcontractors did not disappear. It was restructured. UK construction law specialists have raised identical concerns, noting that employers and main contractors will seek alternative ways to protect themselves against defect risk, including payment schedule restructuring that recreates the economic effect of retention without technically breaching the legislation. Osborne Clarke has noted that any such restructuring attempts could fall within the scope of anti-avoidance measures introduced alongside the new legislation, but the boundaries of that scope remain to be tested. The consultation period will be critical.
Where the Delivery Pressure Appears for London Contractors
London Construction Magazine has observed that the transition period — estimated at 12 to 24 months for contractual adjustments, financial planning and development of alternative assurance mechanisms — will create an uneven playing field across the supply chain. Tier 1 contractors with established legal and commercial teams will adapt faster. Specialist contractors and SMEs, who stand to benefit most from the ban, may simultaneously face the most disruptive transitional period as alternative surety instruments become a condition of contracting where retentions previously served that function. This pressure compounds what London's construction market is already experiencing across margins and project conversion.
The surety market question is not marginal. The government's own analysis acknowledges that the ban will create a need for a larger and more sophisticated surety market to support the sector. Performance bonds, defect liability insurance and other instruments will need to scale to fill the security gap left by retentions. In London's high-value residential and commercial pipeline, where individual subcontract packages routinely run into the millions, the availability and cost of alternative security will directly affect bid pricing, contract terms and the commercial viability of specialist packages. Teams that begin modelling these implications now are better positioned than those waiting for legislation to finalise.
| By the Numbers — Construction Retentions Ban: The Reform at a Glance | |
| £11bn | Annual cost of late payment practices to the UK economy across all sectors, cited by DBT as the core justification for reform |
| 3–5% | Typical retention rate withheld under UK construction contracts — now set to be prohibited under the new legislation |
| 60 days | Maximum payment term for large firms paying smaller suppliers — mandatory cap introduced alongside the retention ban |
| 8% above base rate | Statutory interest now mandatory in all commercial contracts on late payments — no longer subject to opt-out clauses |
| 38 businesses | Close every single day in the UK due to late payment, equivalent to over 13,000 businesses annually |
| 12–24 months | Suggested transitional period for the industry to adjust contracts, develop alternative surety and embed new payment workflows |
| 25+ years | Since the last comparable reform of UK payment law — the Late Payment of Commercial Debts Act 1998 |
The Enforcement Shift That Changes Commercial Behaviour
Beyond the retention ban itself, the expanded role of the Small Business Commissioner represents a structural change in how payment disputes are resolved and how persistent late payers are held accountable. The SBC will gain powers to investigate payment practices proactively, adjudicate disputes outside of court, and issue fines of tens of millions of pounds against firms that persistently breach the new requirements. Boards and audit committees of large companies with poor payment performance will be legally required to publish explanations and corrective actions in annual reports — turning payment culture into a formal governance and ESG obligation.
For London's Tier 1 contractor community, this is not a minor procedural change. It introduces reputational and regulatory exposure at board level for payment practices that have historically been managed at commercial team level with limited external scrutiny. The combination of mandatory interest, a 60-day cap and active SBC enforcement removes the financial incentive that made strategic late payment a viable cashflow tool for large firms — a dynamic explored further in London's current construction market risk assessment. Whether the enforcement machinery is sufficiently resourced to match the ambition of the legislation remains an open question — but the direction of travel is unambiguous.
What Commercial Teams Should Be Reviewing Now
The ban is not yet in force. The government is consulting on implementation, and a transitional period is expected before the legislation takes effect. But the commercial implications begin before the law changes. Contracts currently being negotiated or tendered may span the transitional window. Standard form contracts — JCT, NEC and others — will require amendment to remove or replace retention clauses. Subcontract frameworks that have been structured around retention release milestones will need redesigning. Surety and bonding arrangements that were previously only required for larger packages may become standard across a wider range of specialist works.
The question of how defect risk is managed without retentions is also live on current projects, not just future ones. Employers who have relied on retention as a low-cost defect security mechanism will need to assess whether performance bonds, latent defect insurance or enhanced contract drafting can provide equivalent protection. Those who delay that assessment until legislation is finalised risk entering the new regime without the commercial and contractual infrastructure to manage it.
The full contractor cashflow implications, supply chain sequencing risks and recommended contract review steps are covered in the London Construction Magazine briefing on payment reform and construction procurement risk.
The retentions ban does not exist in isolation. It sits alongside a Building Safety Act compliance framework that has already increased the cost and complexity of delivery for higher-risk buildings, a cost environment shaped by materials volatility and geopolitical supply pressure, and an insolvency rate across the UK construction sector that remains disproportionately high relative to other industries. The reform addresses a genuine structural injustice in how cashflow has been distributed across the supply chain — but the transition period will test whether the alternative mechanisms can absorb the security function that retentions have historically performed. Regulators, developers, main contractors and specialist subcontractors are navigating those implications simultaneously, and the outcomes will depend as much on how contracts are rewritten in the next 18 months as on the final shape of the legislation itself.
| Expert Verification & Authorship: Mihai Chelmus Founder, London Construction Magazine | Construction Testing & Investigation Specialist |
