Government proposes an end to retentions

Payment abuse and non-payment of contractors and subcontractors has been a long-running problem in the construction industry.

Historically, the use of retention has been conducted by the contractual deduction of an amount to provide protection for clients in the event that defects are not rectified by the contractor.

If for any reason the retention is not paid back as required, it inevitably causes distress to the contractor or subcontractor.

Mindful of this, in 2025 the UK government consulted on the matter and the possible solutions available to it, such as mandating the use of project bank accounts (PBAs) through legislation.

The government has decided that an outright ban on retention payments under the terms of a construction contract should be the way forward, together with other reforms relating to payment period abuse and statutory interest on late payments.

These recommendations have been published in the Late payment consultation: time to pay up – government response, with the government noting that they had received over 850 responses, including a submission from RICS.

In addition, the government intends to introduce a number of other measures, including greater powers to the small business commissioner, a 60-day maximum payment term, interest payable on all late payments, time limits for raising disputes on invoices and greater penalties on large companies that are persistent late payers.

As readers will be aware, and as the government notes in the response paper, a number of these subjects are already addressed in other legalisation relating to construction contracts such as the Housing Grants, Construction and Regeneration Act 1996 (HGCRA).

This includes a ban on retentions, as well as provisions on a 60-day payment period limit, and statutory – rather than contractual – interest on late payments at 8% over base rate.

The government has confirmed that it will work with the Construction Leadership Council (CLC) and construction clients to find solutions to minimise defects and it will also work with financial services to develop the surety market.

It is not expected that any new rules on a retention ban will be in place before 2027 at the earliest and there is likely to be a 12 to 24-month transition period.

Although late payment is a devolved matter, the government intends for these measures to apply across the UK. There is a stated intention in the consultation response to work with the devolved nations to ensure 'regulatory alignment'. 

The government has expressly stated that the new legislation will be drafted to counter 'back door' loopholes, in response to concerns that were raised as part of the consultation.

Clients have historically valued the inclusion of a retention fund that can finance defect rectifications in the case of contractor defaults, and there is understandably some resistance in the industry to remove this protection.

However, notwithstanding this feeling of security, it is common for the retention fund to be of insufficient value to cover the remedials. 

This can result in clients seeking additional protections and even increasing the typical 5% retained to a greater percentage which inevitably places additional stress on the contractor.

All parties will, of course, have the option to act in advance of the legislation and invoke a self-imposed ban on retentions, but clients will still need to be comfortable with the contract provisions in respect of the management and rectification of defects.

There are already a number of other remedies in place including PBAs and retention bonds.

While these options have been available for some time, there has not been good take-up, as in comparison to retentions they are more administratively painful and have a cost to the client.  

The government has noted that it will look at these measures as part of the drafting of the ban legislation, but it does not intend to mandate their use.

In addition, the most popular forms of contract will require updating once it is clear what changes the government intends to enact.

Currently under the JCT standard form of contract, the default provision is for a set percentage to apply – either 3% or 5% depending on the contract form used – and users have the option to insert nil or 0 if no retention is required.

It is therefore likely that an amendment will be needed to indicate that no such option will be available.

In the NEC suite, the withholding of retention is covered by an optional clause (X16) which will need to be withdrawn.

The organisation has supported the efforts of bodies such as JCT, NEC and CLC to identify alternatives and recommended the use of PBAs and other steps.

Therefore, RICS welcomes the government's response to the consultation and encourages RICS members and RICS-regulated firms to continue to contribute to future consultations on this topic.

For its part, RICS will engage with MPs during the drafting of legislation on behalf of its members and the industry in general.