For decades, retention clauses have been a fixture in UK construction contracts. Designed to safeguard against defective work and supply chain insolvency, they’ve also been a source of persistent financial strain—especially for contractors, subcontractors, and SMEs. With payments often delayed, partially withheld, or lost entirely due to upstream insolvency, the system has long been in need of reform.
The Problem with Retentions
Many building contracts and sub-contracts provide for an employer (under a main contract) or a contractor (under a sub-contract) to retain a percentage (typically 3-5%) of the value of the work carried out until practical completion with the remainder released when the rectification period or defects liability period has expired. While this offers some protection for clients, it can wreak havoc on the cash flow of those further down the supply chain. The collapse of Carillion in 2018 brought this issue into sharp focus, prompting several legislative attempts—most notably the Aldous Bill—to overhaul the system but unfortunately, it failed to pass through Parliament.
A Bold New Direction
Now, the UK Government is taking a decisive step forward. In July 2025, the Department for Trade and Business launched a consultation on late-payment reforms. As part of its measures to reduce late payments and unfair practice around retention payments, it is seeking views on a package of legislative measures to ensure fair and timely payments, including proposals on the use of retention clauses in construction contracts.
Legislative Shake-Up Ahead
The Government’s plan includes sweeping changes to the Housing Grants, Construction and Regeneration Act – commonly known as the Construction Act. Two major options are on the table:
1. Outright Ban on Retentions
This would be the cleanest and most straightforward solution. By amending the Construction Act, it would become unlawful for payers to deduct and withhold retention sums. The change would apply to new contracts signed after a specified date, with a transitional period to help firms adjust their working capital strategies.
2. Protection of Retention Funds
A less drastic alternative would allow retention clauses to remain—but with safeguards. Retained sums would need to be either:
- Held in a separate bank account, or
- Secured via an instrument of guarantee, such as insurance or a surety bond.
This approach would also require amendments to the Construction Act and the Scheme for Construction Contracts, ensuring that implied terms are in place when parties fail to include proper provisions. This change would be implemented for new construction contracts after a prescribed date and there would also be a transitional period.
What’s Next?
While the outright ban offers simplicity, the protection model provides flexibility. Either way, the proposed reforms mark a significant shift in how the UK construction industry handles payments—and could finally bring relief to the SMEs that form its backbone.
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