The UK construction industry could soon see major changes in the way payments are handled. As part of its Small Business Plan, the government has launched a consultation called Backing your Business, aimed at reducing poor payment practices that hit smaller SMEs in particular. A key element of the discussion is the issue of late payments and, in particular, the use of retentions in construction contracts.
What’s happening?
The consultation, open until late October 2025, is seeking views from across the industry on potential new laws to make payment practices fairer. The government says late payments cost UK businesses up to £11 billion a year and in construction context, where cash flow is everything and supply chains complex, this impact is especially painful. While even small improvements could make a significant difference, there is concern that achieving this goal may have adverse implications for industry players.
What’s on the table?
The consultation highlights four main issues and some suggested approaches:
- Late payments – Tougher penalties are being considered, including a mandatory 8% interest charge on any payment made late.
- Overly long payment terms – Anything beyond 60 days could be banned, with 60 days set as the maximum limit by law.
- Disputed invoices – To stop disputes being used as a stalling tactic, invoices would need to be challenged within 30 days. After that, the full amount (plus interest) would become due.
- Cash retentions – The most controversial area. The government is looking at either banning retentions outright or requiring them to be safeguarded in separate accounts or via some other kind of third-party guarantee.
Retentions: the big talking point
Option 1 – Ban them: Retention clauses would disappear altogether. On the surface, that’s straightforward. However, this would need employers and contractors to rethink payment schedules, strengthen defect liability clauses, consider alternative forms of security and update termination or remedies provisions to make sure clients (and contractors) still have some protection if things go wrong.
Option 2 – Protect them: Retentions would stay, but only if ring-fenced or backed by a guarantee (to protect the contractor against client insolvency and provide greater certainty of repayment). Retained sums could also be able to accrue interest on trust for contractors, and thus there may be additional reporting obligations imposed on clients and developers. Clearly the downsides of this for a developer is more admin, more cost, and potentially tricky compliance issues where multiple projects are in play.
What this means for clients and developers
A developer’s priority will always be to make sure projects are delivered properly and defects are resolved. If retentions are banned, there will likely be a greater focus on other forms of protection, such as performance bonds, escrow arrangements or retention bonds. However, there are already pressures on obtaining these kinds of security.
For example, sureties can be reluctant to issue performance bonds on the developer’s terms, and a developer may, if retentions are banned, lose the option to uplift retention until satisfactory security is otherwise obtained. That could mean adjusting strategies including tighter contractor vetting, shorter defects liability periods, or milestone-based payments to help keep leverage in place.
Wider industry impact
The potential changes don’t stop at cash flow. Clear transition rules will be needed, particularly for projects already underway. Standard contracts like JCT 2024 would need re-drafting to reflect new payment and security rules if retentions disappear and the relevant payment legislation will need amending.
Interestingly, many industry bodies haven’t taken a clear position yet, perhaps because the proposals would cause such wide-ranging disruption. Some stakeholders are already floating middle-ground ideas, like caps or time limits on retentions, which could soften the impact.
Final thoughts
Whatever the outcome, the consultation is potentially a turning point in how payments are managed. The outcome could rebalance risk, reshape security provisions, and create more resilience in supply chains for SMEs. However, for clients and developers, the outcomes of the consultation could significantly affect your contracts and risk management strategies.
If you’d like to discuss how these proposals could affect you, and get advice on alternative security options, please get in touch with Alexandra Reid or Edward Lamport at Winckworth Sherwood.