The government has announced a set of measures to tackle late payments, aimed at supporting small businesses. This includes banning the withholding of retention payments – laying the foundations for addressing widespread insolvencies throughout the construction industry. 

Contributors: Caroline Cowley and Deborah Ritchie

The practice of withholding retentions has been a fixture of construction contracting in England and Wales since the 1800s. The aim is to safeguard against contractors failing to complete works or rectify defects discovered during a ‘defects rectification period’ post-completion – with construction contracts typically allowing for three or five per cent retentions on average.

Despite their long-standing history, the use of retentions has been widely criticised – and their ramifications can be far-reaching. For example:

  • Retentions can be held for years after work is completed, disrupting cash flow. This affects all businesses, but is often perceived as disproportionately affecting smaller businesses. 
  • Insolvency of the parties holding retention sums often means retentions are never released.   
  • Issues in supply chains are compounded by retention issues, with main contractors using similar mechanisms in sub-contracts to share their allocation of risk.

According to recent figures published by The Insolvency Service, construction firms accounted for 17.1% of all insolvencies in England and Wales in January 2026. With the sector consistently accounting for more insolvencies than any other, the question of retention payments remains in the spotlight – and in 2025, proposals to address the issue were covered in the government’s late payments consultation.

The responses to the 2025 consultation were published on 24 March 2026, alongside an announcement of the government’s intention to move forward with a proposed ban on the practice of deducting and withholding retention payments under the terms of a construction contract. Alternatives such as utilising third-party bank accounts to safeguard monies in the event of insolvency were put forward, but the majority of respondents were in favour of a total ban. The intention of the proposed changes would be to prevent loss through insolvency, late payment, and non-payment. 

How could the changes impact your business?

Clearly. a change needs to be made – but whether an absolute ban is the best way to do so remains to be seen.

Until draft legislation is published, there is no clarity on timescales, the mechanism to remove retention payments beyond a suggested 12- to 14-month transitional period, or the development of alternative assurance mechanisms. Potential ramifications could include:

  • A fundamental rethink of standard contracting practices arising from any ban on retention payments in new construction contracts. 
  • Increasing contract prices to reflect risk allocation. 
  • Employers looking at alternative performance security, perhaps (if permitted) relying more heavily on performance bonds, retention bonds, guarantees and enhanced contractual defect liability provisions. 
  • The reduction of disputes related to delayed or withheld retention sums.  
  • A possible shift towards a zero-defect policy, which would allow for a more proactive approach to defect management and remove the need for retention payments altogether.

Those in the construction industry remain wary on both sides, with concerns as to whether the scope of legislation will be broad enough to prevent circumvention of the ban, and the cost and availability of any alternative forms of surety.

What steps should you take?

The government has stated that it will introduce new legislation ‘as soon as Parliamentary time allows’ – at which point, more information will be available on the items listed above, so it is important to keep a watchful eye on progress. Given the wide-reaching ramifications, you should review the proposed legislation once available and respond to any further consultations launched by the government on this matter.

One thing is clear: removing retention payments entirely will shift the balance of risk to developers who are already shouldering the burden of increasing regulations – increasing the risk of developers seeking alternative ways of passing the risk on.

Key takeaways

  • Rethink your standard contracting practices.

  • Prepare for the possibility that contract prices could increase to reflect risk allocation.

  • Consider alternative methods of ensuring performance security.