The UK Government has introduced legislation proposing significant reforms to payment practices in the construction sector, including a prohibition on retention clauses. The reforms are intended to address longstanding concerns about fairness, cash flow and payment security across the construction supply chain.
Ending the Practice of Retentions
At the heart of the reforms is a proposal to prohibit the deduction and withholding of retention payments under construction contracts. To implement this, the Government intends to amend the Housing Grants, Construction and Regeneration Act 1996, as amended (commonly known as the Construction Act).
Retention provisions allow the paying party under a construction contract (typically the employer or main contractor) to withhold a percentage of the overall contract sum (usually around 3% to 5%) from payments made to contractors and sub-contractors. Half the retention sum is typically released at practical completion, with the final half released once the certificate of making good defects has been issued. In practice, however, the release of retention payments may be delayed, disputed or, in some cases, not made at all.
Consultation Findings and Preferred Approach
The consultation sought views on two potential reform options:
- A complete prohibition of retentions, or
- The protection of retained sums, either by holding them in a segregated bank account or securing them with a guarantee.
Consultation responses demonstrated strong support for reform, although views were divided between an outright prohibition and measures requiring retained sums to be protected. The Government ultimately decided to pursue a prohibition, considering this approach less complex legislatively, simpler for the industry to implement and easier to enforce.
Many respondents argued that retention payments are frequently subject to late, reduced, or non-payment, often without justification. There was also a widespread perception that the primary driver behind retentions is the financial advantage they offer to the paying party.
Industry Concerns and Counterarguments
Despite broad support for reform, some stakeholders expressed concern about removing retentions entirely. They argued that retentions serve as a cost-effective mechanism to incentivise contractors to complete work to the required standard and to rectify defects promptly.
The Government has acknowledged these concerns, particularly in relation to maintaining build quality and the availability and cost of effective alternative forms of security.
Transition and Next Steps
The Government has introduced The Commercial Payments Bill [HL] (“the Bill”), which would amend the Construction Act to prohibit the deduction and withholding of retention payments under construction contracts.
If enacted, the prohibition would not take effect immediately. The Bill includes transitional arrangements intended to phase out retention clauses over time. However, the precise timetable and treatment of existing contracts will depend on the Bill’s final wording, its commencement provisions and any associated regulations.
A Shift Towards Fairer Payment Practices
If enacted, the proposed prohibition would represent a significant change to construction payment practices. It is intended to improve cash flow, reduce the risk of retained sums being lost through upstream insolvency and address late or non-payment. However, retentions currently provide employers and main contractors with a straightforward form of security and an incentive for contractors to rectify defects. The industry will therefore need to consider appropriate alternative mechanisms for managing defects, quality and performance risk. Until the Bill receives Royal Assent and the relevant provisions come into force, retention clauses remain permissible, subject to the existing contractual and statutory payment regime.