The Government's draft Commercial Payments Bill looks set to ban the use of retention mechanisms in construction contracts. What will this mean for the industry?
Retention clauses – whereby the employer deducts a percentage of sums due to a contractor, as a security against poor performance – are standard practice in English construction law. The current JCT Design & Build Contract, reissued in 2024, still contains a retention mechanism, allowing the client to hold 50% of the retention until practical completion of the works, with the remainder released at the end of the defects liability period.
Despite broad acceptance in the construction industry, successive governments have taken issue with retentions, citing the problems caused by reduced payments to contractors and the detrimental flow-on effect to supply chain payments. The introduction of legislation to strengthen late payment penalties and ensure prompt payment of suppliers, while well-intentioned, have been poorly policed and haven't resulted in improvements to payment processes.
In a volatile economy beset by contractor and supplier insolvency, late payment is once again a key policy issue. The draft Commercial Payments Bill, sponsored by the Department for Business and Trade, is the latest and boldest attempt to change industry practice, proposing an outright ban on retention mechanisms in construction contracts, alongside a series of other enforcement measures.
Unusually, the Bill was introduced in Parliament via the House of Lords, passing its second reading in June 2026 before being referred to the Lords' Committee stage. A third reading in the Lords is expected in the autumn, before the Bill passes to the House of Commons for final consideration.
As currently drafted, the Bill provides a two-year transition period from commencement of the law coming into force, during which retention clauses will remain lawful. Following the expiry of the transition period, no new retention clauses can be agreed and contracting parties will be unable to vary existing retention clauses. Three years after commencement, any retention clause in a construction contract will be void and any sums held as retention shall be repaid to the contractor within specified timescales. Any contract term that seeks to exclude or vary these rules will be void.
The Bill also introduces an implied term of a "retention debt", whereby any sums withheld from a payee in breach of the new rules will create a debt. Where retention is actively deducted after the expiry of the two-year transition period, a retention debt arises and the payee is entitled to recover a fixed sum in relation to the debt. Any contractual terms seeking to exclude or vary these implied terms will be void.
Unsurprisingly, the construction industry has been vocal in its criticism of the proposed ban. Some have argued that retentions are an essential mechanism to ensure contractor engagement in quality management and defects rectification, which are increasingly important in the light of the "competency" requirements imposed by the Building Safety Act. Withholding payment to a contractor will, arguably, keep them engaged with construction projects until the works are certified as compliant, especially Higher-Risk Building projects that are subject to the longer and more complex building control approval ("Gateways") regime.
Flipping the coin, the new BSA requirements create an equally compelling argument for clients not relying on retentions as a quality control measure. Reducing sums paid to contractors and slowing down payment of the supply chain may encourage contractors and suppliers to cut corners in an effort to save costs, prompting the "race to the bottom" behaviour complained of in Dame Judith Hackitt's Building a Safer Future report.
Others in the industry are concerned about the relative ineffectiveness of contractual alternatives to secure performance if retention mechanisms are banned. Parent company guarantees typically favour larger contractors but are less practical for smaller contractors and SMEs, who may not have the financial support of parent or associate companies. Performance bonds and retention bonds are also reliant on contractors having the covenant strength to secure a bond on commercially reasonable terms, which again may be more difficult for SMEs.
For better or for worse, the changes proposed by the Commercial Payments Bill are unlikely to be implemented quickly. The House of Lords has yet to release its report on the Bill following Committee stage, following which the Bill will return to the Lords for a third reading – at this stage, probably in late 2026 or 2027. It will then fall to the House of Commons to debate the Bill, where it's likely that lobbyists will put pressure on MPs to stick with industry practice and resist an outright ban on retentions.
If the Bill survives the scrutiny of both houses of Parliament and is passed into law in 2027 in its current form, the transitional periods will mean we don't see a ban on retentions fully in force until 2030 at the earliest.
We will provide further updates on the progress of the Bill in future editions of QHU.
