In October 2025 we reported on the government’s late payments consultation, aimed at tackling poor payments practices.
The results of the consultation were received in March 2026, and now, on 19 May 2026, the long-awaited Commercial Payments Bill has been introduced to the House of Lords.
One of the key talking points of the consultation that we highlighted in our article was retention and whether this should (i) be banned entirely or (ii) not be banned, but be ring-fenced, in order to minimise the possible supply chain effects that can be caused.
The Bill now confirms the governments preferred option is (i). This means that, after the relevant date as explained below, including a retention clause in a construction contract will be unlawful.
What does the bill propose?
The bill proposes that new Sections 113A to 113F are inserted in Part 2 of the Housing Grants, Construction and Regeneration Act 1996.
Under Section 113A, retention is defined as circumstances where one party deducts or retains a percentage of the amount owed to another party, whether this is calculated against interim payments or the total contract value, until a condition for release is met, for example expiry of making good defects or another specified condition under the contract.
Under Section 113B a “related agreement” (as well as the primary construction contract) would also be captured by the Bill (extending the prohibition on retention to any other side arrangement made between the parties who may be looking to circumvent the proposed legislation).
When would the ban kick in?
The ban would not, however, be immediate. Rather, similar to the Building Safety Act, the Bill allows for a “transition period” of 2 years from the date that the Bill becomes law in order for the industry to get up to speed with the changes. It is only following that 2-year period that retention clauses will be prohibited and any retention clauses that are still in place following that 2-year period will become “ineffective” (Section 113B).
Any “transitional retained sum” that is withheld (i.e. any sums that are permitted to be withheld by reason of falling under the transition arrangements) will be subject to payment no later than 30 days after the payment due (for public authority payers) and 60 days (for private sectors payers). The payment due date is 30 days after the end of the transition period.
Following the end of the 2-year transition period, the outright prohibition ban on retention will be effective (Section 113C).
Further protections
Under Sections 113D any attempt to agree a variation to an existing retention clause after the end of the transition period will also be void. This will not however apply if the variation makes the retention clause more favourable to the payee. It is not entirely clear however how a more favourable retention clause will be lawful if it pertains to retention in some form.
Finally, under Section 113E, if retention is held back after the end of the transition period, a “retention debt” arises. In these circumstances, the offending party will be penalised whereby the payee is entitled to recover a fixed sum in the amount of the higher of £40 or 50% of the retention. This entitlement to a fixed sum is in addition to any entitlement to be paid (i) statutory interest under the Commercial Payments and Interest on Late Payment Act 1998 (being 8% above the Bank of England base rate) and any sum payable under section 5A of that Act (a fixed compensation sum and reasonable debt recovery costs for any late payment).
Clearly the potential consequences of breaching Section 113E would be severe.
What does this mean for clients and developers?
In our previous article we commented on the importance of balancing supply chain pressures with the importance of ensuring projects are delivered properly and defects are resolved without delay. The implication being that 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. All of these come at a cost (often borne by both clients and contractors), whether this be through premiums payable or administration fees. Furthermore, the cost of these alternative options is potentially higher than the cost of holding back retention.
In terms of supply chain sensitivities, the Bill will apply to main contractors too, who will equally be unable to withhold retention from their sub-contractors, and this may further impact upon their insolvency risk.
Final thought
Clearly, the implications of the Bill, should it become law, will be felt at all levels of the supply chain.
The industry has until that time and after that 2 years of transitional arrangements in order to consider how best to ensure that the different stakeholders’ interests are protected effectively, and most importantly, projects are completed, on time and minimising financial supply chain impacts.
JCT, NEC and other standard forms of contract will need to be updated in due course to reflect the legislation that is enacted. However, in the short to medium term, the different parties will need to be sensitive to the impact of the Bill and how this may affect contractual negotiations. Contractors, for example, may use the Bill to seek to avoid agreeing to retentions or otherwise to lower retention amounts. Conversely, clients will likely start placing greater emphasis on tighter contractor vetting and consideration of other forms of security, particularly those with lower levels of premium costs or administrative fees.
Ultimately the most successful projects will likely reflect a balance of protecting project completion whilst ensuring supply chain pressures are manageable.
If you’d like to discuss any queries relating to the Commercial Payments Bill and alternative security options, please get in touch with Alexandra Reid.