Ban on construction retentions could have unintended consequences across the sector

On 24 March 2026, the Government announced plans to tackle late payment, including the abolition of retentions under construction contracts. These changes could have significant consequences (both good and bad) for the construction industry. Are you fully up to speed with these changes and what they could mean for you?

In this article, Abi Chorlton-Wilson and Ross Galbraith, both in our construction team, explain the upcoming changes set to impact the sector.

This most recent announcement is part of the “Time to Pay Up” reforms to tackle £11 billion in annual late payment costs. The proposed ban on retention in construction contracts is just one element of a broader reform package to protect SMEs. It sits alongside a 60-day payment cap and a compulsory interest rate of 8% above the Bank of England base rate on late payments. The Government believes these proposals will alleviate cashflow pressures, reduce insolvencies and promote fairer contractual arrangements.

What is retention?

Retention refers to a proportion of money (usually 3 or 5%) withheld from interim payments made by a client to a contractor under a construction contract. The main purpose of the retention is to provide security to the client in the event that the contractor does not complete the works or fails to remedy defects or other contractually non-compliant work. Typically, the first half of retention is released on practical completion of the works with the remaining half being released at the end of the rectification period (usually 12 months), once all the defects have been rectified. 

Why is it being banned?

Retentions have been widely criticised and can have significant adverse consequences for contractors. Sums are often withheld for years after completion, causing cash‑flow difficulties, an issue that affects businesses of all sizes but is widely regarded as having a disproportionate impact on small and medium-sized enterprises (SMEs). 

Where the party holding the retention becomes insolvent, the retained sums are frequently lost and never released. These problems are further exacerbated throughout the supply chain, as main contractors commonly replicate retention in sub‑contracts, effectively passing down the allocation of risk.

The Government has now decided to act on these issues and has explored two options:

1.      an outright ban

2.      allowing the use of retention clauses but requiring any sum deducted and withheld to be protected (by segregating the retained sums in a separate bank account or protecting the sums through an instrument of guarantee).

A significant majority of responses (87%) favoured reform, with 53% of respondents stating they could support either option. The Government has chosen option one and will ban the practice outright.

The decision will attract a mixed response. It is likely to be seen as a victory for contractors, who have previously spent a significant amount of time chasing for unpaid retention long after the rectification period has expired. However, clients are likely to be concerned as to how they can now convince contractors to return to projects to remedy any defects after practical completion, given they will no longer have any financial leverage. 

Varied consequences

The blanket ban on retentions will cause unexpected outcomes for the industry. Retention has traditionally acted as a safeguard against defective work and contractors failing to return to site. Without this mechanism, clients will need alternative methods to manage these risks. 

Chief Executive Melanie Leech of the British Property Federation describes the outright ban on retention as using “a sledgehammer to crack a nut” and that the ban “will undermine the ability of those funding new construction to ensure that buildings are defect-free”. 

Loopholes also remain a concern. Without knowing the scope and wording of the proposed ban, there is a risk that the ban could cause parties to withhold funds under different labels, instead of calling them “retention”. 

For example, stage payments, work packages or milestone payments could be used so that more of the contract price is paid at the end of the project. 

It is also unknown if the ban will extend to the use of project bank accounts to hold retention payments. This would help the risk of insolvency concerns while also ensuring that contractors return to remedy any defects. But this still does not solve the cash flow aspect that the Government wishes to address. As a result, they would likely also fall under the ban. 

There is the potential for an increase in construction disputes, something the Government has acknowledged. Many clients currently rely on the threat of withholding retention as leverage during the rectification period. However, in the absence of retention, they may need to escalate disagreements through formal and more costly processes, including adjudication, arbitration and legal proceedings.

Are any alternatives available?

If retentions are no longer an option, clients will need to consider alternative ways of guaranteeing the completion of relevant obligations under a construction contract. 

Clients could require contractors to place an amount equivalent to a retention into an escrow arrangement to be held until practical completion or the expiry of the defects rectification period. 

While retention bonds are available in the surety market as a substitute for cash retentions, there is significant doubt as to whether the market has sufficient capacity to support their widespread use across the construction industry. In addition, retention bonds would involve a higher cost, which would likely be passed on to contractors through increased project costs. 

Retention bonds can be an alternative, but they have clear downsides. They increase project costs and there are doubts about whether the surety market could cope if they were widely used. This can cancel out the cash flow benefits they are meant to provide.

The Government has stated that they will undertake further consultation with the interested parties before coming to a final decision. This will involve addressing concerns around build quality and surety alternatives. The Government is also committed to working with the Construction Leadership Council and other construction clients to develop practical solutions to minimising defects in projects, as well as working alongside financial sectors to expand the surety market. 

While banning retention in construction contracts could improve cash flow and financial fairness across the industry, it also brings risks around quality control and security for performance. The effectiveness of the ban will therefore depend on how well alternative protections are considered and adopted as the Government consults further. 

For any queries or legal advice on construction projects, please contact Ross Galbraith on 0191 211 7999 or [email protected].