Rethinking Retentions: From Consultation To Crackdown, How Payment Reform Is Reshaping Construction Contracts

Retention payments, where a percentage of the contract sum is withheld until completion and rectification of defects, have long been a source of cashflow pressure and, ultimately disputes across the construction supply chain.

Long-running policy discussions as to whether retentions should be reformed or abolished, have now moved firmly into the realm of implementation. Following the Government’s March 2026 announcement of a wide-ranging late payment crackdown, the direction of travel is clear: the use of retentions in their current form is under serious threat.

Here is what that means in practice.

Concerns with the current system

The mechanics of retention are well established:

• Typically, 3–5% of the contract sum is withheld
• Half released at practical completion, with the balance following expiry of the defects period
• Contrary to e.g. JCT standard drafting, retention funds are rarely ring fenced or accrue interest for the benefit of the payee

While intended to ensure the proper completion of works, the reality is more complex. Contractors “earn” the money by carrying out the works but often have no control over the retentions deducted from payments. In many cases it is absorbed into the payer’s general cashflow, creating both legal ambiguity and financial exposure.

That exposure has been repeatedly demonstrated. The collapse of Carillion in 2018 left significant retention sums unrecovered across the supply chain. More recent contractor failures have reinforced the same point: if retention funds are not protected they can disappear entirely and are not released to the payee. Payees often have to fight for the release of retention monies even where they have fully complied with their obligations under the contract. There are examples of payers refusing to issue a Notice of Completion of Making Good or deducting the “cost” of alleged defects in an attempt to avoid releasing retention monies.

The result is a system that, in practice, often operates less as a safeguard and more as unsecured credit provided by those lower down the supply chain.

From policy question to policy direction

Earlier consultations considered whether retentions should be retained, reformed or abolished. The latest Government announcement goes further.

As part of a broader package aimed at tackling late and deferred payments, the Government has indicated its intention to remove the practice of withholding retention altogether, with consultation now focused on how that change should be implemented.

This sits alongside wider reforms, including:

• a proposed cap on payment periods for large businesses dealing with SMEs;
• mandatory application of statutory interest on late payments; and
• enhanced enforcement powers to address poor payment practices.

Taken together, these measures reflect a shift away from reliance on contractual discipline alone, towards a more interventionist approach to payment practices.

The direction is clear: improving cashflow and reducing systemic risk within supply chains has become a legislative priority.

Implementation and timing

The Government has now made clear that the days of retention, in its current form, are numbered. The question is not “if” but “when” and “how”.

The position is not yet underpinned by legislation, and no formal prohibition is currently in force. Detail is still emerging around timing, transitional arrangements and how existing contracts will be treated, particularly given how deeply embedded retention is across the industry.

In the meantime, the industry should proceed on the basis that withholding retention will no longer be a viable mechanism going forward.

Legal and practical implications

Retention reform does not sit in isolation. It forms part of a broader evolution in construction law towards transparency, enforceability and supply chain fairness.

If retention is removed or fundamentally restructured, the impact will be felt across standard forms:

• JCT contracts, which assume staged retention (albeit held on a fiduciary basis), would require significant revision
• NEC’s more flexible approach may adapt more easily but would still require rebalancing
• FIDIC-based arrangements will need UK-specific adjustment where retention is embedded

For employers and main contractors, the practical response is likely to include:

• increased dependence on performance security (bonds, guarantees or insurance);
• enhanced scrutiny at practical completion;
• tighter quality control processes; and
• stronger project monitoring during delivery rather than reliance on post-completion leverage.

For subcontractors and suppliers, the removal of retention would improve liquidity and reduce exposure to upstream insolvency, though it may be accompanied by tighter contractual obligations and performance oversight.

Consultants and contract administrators will also see a shift in emphasis. Where retention has historically operated as a financial backstop, greater focus will fall on certification, inspection and defect management throughout the life of the project.

A step towards a different payment culture

The significance of these reforms lies not only in the potential removal of retention, but in the broader change in approach they represent.

Payment practices in construction are moving away from discretionary or trust-based arrangements towards enforceable, transparent and regulated systems. Retention, long embedded in industry practice, is now being reassessed in that context.

Those operating in the construction sector should begin reviewing their approach now in relation to:

• how payment structures are drafted;
• what mechanisms are used to manage performance risk; and
• whether alternative security arrangements are already in place or need to be developed.

Consideration should also be given to how existing contracts will operate during any transition period, as legacy arrangements may continue alongside new requirements.

Conclusion

The Government’s latest reforms mark a turning point in the debate around retention. What was once a question of reform has become a question of timing and implementation.

Whether through abolition or restructuring, the current system is unlikely to remain unchanged. The challenge for the industry is not simply to amend standard terms, but to rethink how risk, performance and payment interact across the supply chain.

Those who adapt early will be better placed to manage that transition: protecting cashflow, reducing disputes and aligning with a more structured and transparent payment environment. If you would like to discuss how these proposals could impact your business, please get in touch.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.