On 24 March 2026, the Government issued a press release on late payments snappily entitled “Time to Pay Up: Government unveils toughest crackdown on late payments in over 25 years”. Within that press release it was announced that they would be a “banning of retention payments under the terms of construction contracts”. The reasoning was to “prevent small firms losing retentions to insolvency or non-payment”.
The announcement follows yet another consultation on retentions last year which proposed two options (previously covered in my blog, “Retentions: Carry on consulting? [1]”). Those were broadly an outright ban or statutory intervention to provide some form of protection for retention funds such as paying them into a separate bank account where they are held on trust.
The results of the 2025 consultation showed that a significant majority (87% of responses) favoured reform and, of those, 53% of respondents indicated they could support either option. However, the view was also expressed that an outright ban might present the least complicated option. A transitional period of 12 to 24 months was also thought sensible for “contractual adjustments, financial planning, stakeholder engagement, and the development of alternative assurance mechanisms”.
The Government’s decision to opt for an outright ban will be seen as a victory for subcontractors in particular who can spend months or years chasing their retentions long after the defects liability period has come to an end. Indeed, I recently chased an unpaid retention due back over 5 years ago where the excuses provided for non-payment were forced at best. The interest due alone was significant and in the interim the subcontractor in question had been unable to invest that money in its business elsewhere. Insolvencies up the contractual chain have also historically and more recently led to significant amounts of retention being lost. This puts great strain on the supply chain as a whole and creates the risk of a domino effect. Anything that minimises that risk is of course a good thing, particularly in the current economic climate.
In contrast, employers and developers may now be concerned as to how they can compel contractors (and in turn subcontractors) to return and fix defects during the defects liability period following practical completion. Quality control, and the huge cost of rectifying defects years down the line, is a hot topic at the moment.
So where does the outright ban on retentions leave us? Well, first of all, standard forms will need to be amended to account for this ban. The JCT provisions linking retention to the defects liability period and how payments are made post-practical completion will all need to be reviewed. There may also be some debate about what constitutes a retention and what does not if the ban is not carefully worded. For example, if monies are held back in a pay less notice to cover defects before practical completion, would that fall within the proposed definition? These issues will require careful thought to try and minimise any disputes. The transition provisions will also need to be carefully thought through so they don’t impact the risk balance already agreed by parties in longer-term and/or higher-value contracts.
Finally, employers and developers will also want to have some means to motivate a quality build, as indeed will main contractors. Post-Grenfell, the historic lack of quality control within the industry has been starkly highlighted. Whether the means of ensuring quality is additional security that is released at the end of the defects liability period or perhaps the employer investing in an old-fashioned clerk of works during the build itself, or paying for more frequent or better inspections during the works themselves, remains to be seen. Given the costs of performance securities or insurance, cost will, as ever, be a key consideration. Demanding a performance security is fine but ultimately the cost will be added to the contract price.
The good news is that we finally have a decision on how to deal with retentions – namely they will be banned. It remains to be seen what emerges in their place and how that affects the industry.