The Commercial Payments Bill: What Could It Mean For The Construction Industry?

What is the Commercial Payments Bill?

Considered to be the most significant legislation to tackle late payments in over 25 years and introduced to Parliament in May 2026, the Bill aims to reform various aspects of payment practices in commercial transactions. It makes proposals in respect of interest on late payment of commercial debts, banning retention clauses in the construction sector and introducing a maximum payment term.

The Bill has been put forward in the hope of tackling late payments to small and medium-sized businesses. Late payments are said to costs the UK economy £11 billion per year and see 38 UK businesses close every day.

This article focusses on the Bill’s proposals that will have the biggest impact on the construction industry.

Proposed changes to payment terms

The Bill would introduce a maximum payment term for the final date for payment in a construction contract of:

• 30 days beginning with the day after the payment due date where the purchaser is a public authority; and
• 60 days beginning with the day after the payment due date where the purchaser is not a public authority.

There are a limited number of exceptions which would apply, and these include where the contract is between two large businesses and in contracts where the purchaser is the smaller party.

Proposed changes to pay less notices

The Bill would prevent contracting parties from agreeing a period shorter than 7 days before the final date for payment to serve a pay less notice.

Proposed changes to interest charges

The Bill will mandate interest on late commercial payments at a rate of 8% above the Bank of England base rate.

Proposed changes to retentions

The Bill proposes a complete ban on retention clauses in construction contracts by inserting new clauses 113A to 113F into the Construction Act. These proposed new clauses are drafted broadly so as to capture deductions from interim payments, final payments and sums calculated by reference to the contract value. As a result, parties to a construction contract will be unable to seek to replicate traditional retention arrangements by other means.

The financial consequences for breaching this ban would be significant. As drafted, the proposed new section 113E of the Construction Act provides that if, after the transition period, a party deducts or retains a sum considered to be a retention (as defined in the proposed new section 113A of the Construction Act) then the penalty would be the greater of:

• £40; or
• 50% of the retention debt withheld,

and this penalty would be payable in addition to mandatory interest and any other statutory compensation arising from late payment.

Transition period

As at the date of this article, the Bill is still with the House of Lords and is undergoing its third reading. When it will come into force is anyone’s guess. However, the Government has confirmed that there will be a transitional period and the measures introduced by the Bill will not be applied retrospectively. Instead, payments, contracts and disputes will be judged according to the rules in place at the relevant time.

At present, the proposed new section 113B of the Construction Act is drafted such that the transition period in respect of retentions is two years beginning with the day on which section 113B comes into force.

The future of retentions

Retentions serve to provide a level of protection to an Employer, acting as a financial safeguard to ensure that a project is completed in accordance with the contractual specifications and that any defects are addressed. Equally, retentions serve as an incentive for a Contractor to address any defective and incomplete works.

In their proposal to prohibit the deduction and withholding of retention payments, the Government stated as follows:

“To address concerns about build quality and surety alternatives, we will work with the Construction Leadership Council and construction clients to develop practical approaches to minimising defects, as well as working with the financial services sector to identify ways of developing the surety market for the construction sector.”

Just what the Government will introduce in the place of retentions is not known. Whilst the content of the Bill is still subject to change and has a fair way to go before it receives Royal Assent, businesses that currently rely on retentions may wish to begin considering alternative forms of security.