- with readers working within the Property, Law Firm and Construction & Engineering industries
It's well recognised that poor payment practices present a challenge to both the construction industry and the wider UK economy. It's estimated, by the Department for Business and Trade, that late payments cost the UK economy around £11 billion each year and are particularly problematic for the construction industry, where margins are often tight and problems with cashflow can cause serious stress to businesses.
In response to this, the UK government has proposed new legislation, which is set to be the most significant reform to payment protections in the industry in over 25 years. The eight proposed measures aim to stop late payments and improve payment behaviour between businesses.
The key areas of reform target:
- late payments
- long payment terms
- resolution of disputed payments
- unfair practice around retention payments
This article looks at the eight proposed measures and provides some commentary around what those might look like for the construction industry.
The proposals
1. Audit committees and board-level scrutiny of large company payment practices
The first proposal is that company boards or audit committees would be required to make recommendations, and provide analysis, on payment performance of the company, to the company directors.
This information would have to be included in the directors' report and published through the company's accounts. Compliance with this would be ensured by allowing the Small Business Commissioner (the "Commissioner") to audit companies in relation to the payment performance reporting obligations.
The government has not committed to implement this proposal, but there is a focus on increasing transparency and accountability regarding payment reporting. Having this measure would ensure that directors are at least considering payment terms and practices on a regular basis, and if improvements can be made.
2. Maximum payment terms
This proposal, and the next two, involve potentially amending The Late Payment of Commercial Debts (Interest) Act 1998 (the "Act"). The Act governs the rate of interest that accrues on 'qualifying debts' arising under commercial contracts.
The Act permits payment terms longer than 60 days to be agreed between businesses if they are not 'grossly unfair'. The proposal is that the maximum permitted payment term between businesses is to be capped at 60 days, with the 'grossly unfair' exception removed. The government has indicated, further to another consultation, the limit may be reduced further to 45 days.
The aim of this proposal is to address the negotiation imbalance impacting small businesses. In the construction industry, small construction companies (often sub-contractors, or sub-sub-contractors) may feel compelled to accept lengthy payment terms, to the detriment of their cashflow, to not lose a potential contract. Having a firm cap in place for payment terms would protect smaller businesses and, in turn, protect the wider supply chain.
3. A deadline for disputing invoices
A key proposed change to the Act is to only allow invoices to be disputed within the first 30 days following receipt, otherwise, the invoice may not be disputed and must be paid.
The intention is to provide greater financial certainty for businesses. The proposals acknowledge that companies sometimes dispute invoices close to the payment deadline with the intention to delay payment. This is to the benefit of their own cash flow cycle but at the expense of their, often smaller, contractors and suppliers. Having a fixed period for payments to be disputed would potentially reduce this practice, although it would not prevent parties disputing the invoice before the 30 days.
However, while the change would arguably give parties further certainty around cashflow and the project value, it could also result in parties issuing invoices for knowingly disputed sums, hoping that they go unnoticed by others in the supply chain. This could result in a similar situation to the current 'smash and grab' type adjudications we see in the construction industry. It is also unclear how these measures would sit alongside clear contractual terms that allow disputes to be determined within different timescales, and whether these terms would be incompatible with the new legislation.
4. Mandatory statutory interest
The application of the interest rate provisions in the Act can currently be disapplied by the contracting parties. The government intends to remove this exemption, making the application of the statutory interest rate mandatory to all qualifying agreements. The rationale for this change is that it will prevent smaller businesses from being pressured to accept lower interest rates, to protect relationships with larger actors in the market.
The mandatory nature of this reform is hoped to level the payment playing field in the construction industry. This would be a significant change and would potentially involve a re-write of the default payment clauses in many of the standard form contracts (which generally adopt interest rates lower than the Act), as well as bespoke contracts and/or amendments to the standard forms.
5. Additional reporting on statutory interest
The Reporting on Payment Practices and Performance Regulations 2017 (the "Regulations") require qualifying companies to disclose their payment practices and policies.
The scope of the Regulations is set to be expanded during these reforms. The current proposal would require companies to publish their statutory interest liability, in another attempt to increase the transparency of payment practices.
6. Financial penalties for persistent late payers
The Commissioner, under the new proposed legislation, would be able to impose penalties on businesses that frequently fail to pay timeously. The current proposals would allow the Commissioner to investigate, and issue a penalty, if certain thresholds are met. These thresholds relate to unpaid statutory interest liability and the frequency of late payment.
The majority of the proposals considered above seek to incentivise compliance. However, this proposal arguably goes further and demonstrates a commitment to penalising those that do not comply. Further details around how this would be enforced and implemented in practice are still to be provided.
7. Additional powers for the Small Business Commissioner
It is also proposed that the Commissioner will gain new powers through the expansion of The Enterprise Act 2016.
The expansion will allow for the Commissioner to conduct investigations into 'subpar' payment practices and support small businesses facing payment disputes. The Commissioner will continue to be able to arbitrate in payment disputes where a small business contracts with a larger one, with the expanded powers also granting them a broader power to investigate unfair payment practices by larger companies.
As above, further details around how these powers would operate and be implemented in practice are still to be provided.
8. Use of retention clauses in construction contracts
Retention clauses permit the withholding of a portion of the contract sum until certain conditions are met. In construction, this is usually completion and/or the expiry of the relevant defects periods. The use of retention clauses in construction contracts is common. It operates as a mechanism to provide security in respect of incomplete works and defects.
The proposal recognises that the practice of withholding retention places a financial burden on those further down the contractual chain. The government intends to either prohibit retentions through these reforms, or to introduce stringent requirements in relation to their operation.
At present, each option is "considered viable". This would have a particular impact on the construction industry, where parties may have to turn to alternative methods, namely bonds or guarantees, to provide security. This alternative may not be commercially viable for smaller businesses (or may not be available at all), which could cause issues balancing the commercial security of the project and ensuring smaller firms remain involved in such projects.
The practice of withholding retentions has been controversial in recent years but is still common practice in the construction industry. If these were to be removed altogether, or heavily regulated, this would be a major change for those operating with the industry in the UK, and alternatives to ensure security of the project will need to be considered carefully.
Next steps
The consultation ended on 23 October 2025, and the government expects to publish the outcome in mid-January, 12 weeks after the close of the consultation. The findings of the consultation will provide a better understanding of the likelihood of the various proposals being enacted and the timeframe for implementation.
Regardless, 2026 looks to be an interesting time for payment in the construction industry, and those involved should keep an eye on the progress of these reforms.
This article was co-authored by Ruaridh Brown.
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.
