In late 2022 I had the pleasure of working with both the CLC and the NEC to produce the NEC and CLC Guidance Note for dealing with retentions in NEC3 and NEC4 construction contracts. As many will know, the NEC (unlike other forms) has an “opt in” provision for retentions (i.e. you have to actively select retentions applying) aligning with its overall ethos of mutual trust and cooperation and collaboration throughout the contractual chain generally. The Guidance Note itself aimed to highlight alternatives to retentions, as retentions are known to cause widespread cash flow difficulties in the industry especially when large contractors become insolvent. Its drafting followed years of reports on retentions and their alternatives by numerous government departments.

So what has happened since then? Well, the answer is very little indeed. However, on 30 July 2025 the current Government (the relevant department now being called the Department for Business and Trade) launched yet another consultation called “Late payments consultation: tackling poor payment practices”.  As part of that consultation, the thorny topic of retentions is dealt with yet again.

The consultation notes the impacts of “poor retention payments practices, and the risk of non-payment due to insolvency, include higher business overheads, weakened relationship through the construction supply chain, and increased costs of construction projects. As firms price in the risk of losing retentions, all of which constrain business growth”. Two (alternative) measures are proposed in the consultation. These are:

1. Prohibiting the use of retention clauses in construction clauses from a certain date with a transitional period to allow adjustments to be made in relation to working capital; OR
2. Introducing requirements to protect retention sums deducted and withheld under retention clauses in construction contracts.

Both measures would be carried out by amending the Housing Grants, Regeneration and Construction Act 1996 (the “Act”).

The second measure proposed in the consultation is plainly the more complex in terms of how it can be achieved. However, it would provide more protection for employers (or main contractors) during the applicable rectification period in the context of an industry where “Building Safety” and extent of defects is firmly in the spotlight.

The suggestions put forward to protect retention funds are that payers would have a choice of either: (1) segregating the retained sums in a separate bank account; or (2) protecting the sums in question through “an instrument of guarantee (insurance of surety bond)”. The consultation notes that the proposals will only apply to those contracts falling into “construction contracts” under the Act and that where construction contracts don’t comply with the new provisions, an amended form of the Scheme for Construction Contracts would step in. The proposals are therefore more specific than previous attempts at dealing with the issue.

The consultation’s second measure envisages that a single retention amount would only be allowed until the end of the rectification period and that the monies would be automatically segregated asserting that “the market will deliver provision of any bank account or instrument of guarantee”. In a reversal of the current position, retentions will be automatically released once the period for rectification of defects expires (unless notice is given to the contrary) with interest payable. This is an improvement on the current position where the reality is very much “release on chasing” if you’re lucky. If you’re not so lucky, extensive correspondence and even an adjudication may be required to secure payment. As such it is to be welcomed. The normal dispute mechanisms will apply (i.e. adjudication).

The aim of the consultation is to establish the preferred mechanism for protection of retentions, the length of any transitional period and get an estimate of the costs involved in setting up the different proposals made by the consultation for protecting retention funds.

Those who have followed the long history of consultations on retentions and their alternatives will be aware that the costs of guarantees and insurance products covering such payments (or replacing them) can be considerable particularly in times of economic uncertainty. As such, to this author having a separate bank account mechanism holding the funds (presumably on trust) seems the better option if they can be set up quickly and easily. Examples of the rules governing such bank accounts, or standard terms, would be a useful starting point so that parties have a ready-made option available to them rather than having to negotiate terms specifically.

For those who want to give their views, the consultation closes on 23 October 2025 and it is to be hoped that action is taken promptly following that date. It’s certainly been a while coming….

The consultation can be found at: Late payments consultation: tackling poor payment practices - GOV.UK