Government changes in late payment and how it effects construction
Government initiative to remove retention payments
The UK Government is proposing one of the most significant structural reforms to construction payment practices in decades: the potential ban (or major overhaul) of retention payments.
What the government is proposing
At the centre of the reform is a plan to make it unlawful to withhold retention payments in construction contracts.
This sits within a broader late payment crackdown and includes:
- A full ban on retention clauses (preferred option)
- Alternatively, mandatory protection of retention funds (e.g. ring-fenced accounts or performance bonds)
- Integration into wider reforms such as 60-day payment caps and mandatory interest on late payments
Recent 2026 announcements indicate the government is actively moving toward a full ban, with a 12–24 month transition period for industry adjustment.
Why retentions are being targeted
Retention payments (typically 2–5% of contract value) have long been used as a performance guarantee, but they create major credit risk issues:
- Delayed or non-payment of earned cash
- Loss of funds due to upstream insolvency
- Use of retention as free working capital by larger firms
The government has explicitly recognised that retentions:
- distort cashflow across supply chains
- disproportionately impact SMEs and subcontractors
- contribute to business failures and financial stress
What replaces retentions?
If a ban is implemented, firms will need alternative security mechanisms, such as:
- performance bonds or insurance
- escrow / trust accounts
- project bank accounts (ring-fenced payment structures)
These approaches aim to protect performance risk without withholding cash.
Strategic implications for credit management
For credit teams, this reform is a major shift:
1. Improved cashflow predictability
Removal of retentions reduces long-tail receivables and improves working capital visibility.
2. Reduced bad debt exposure
Subcontractors are less exposed to losing retention balances if a contractor becomes insolvent.
3. Shift from cash withholding to risk underwriting
Risk mitigation will move toward:
- financial due diligence
- contractual protections
- insurance-backed security
4. Contract negotiation becomes more critical
Credit and commercial teams will need to agree:
- alternative security mechanisms
- clearer payment triggers
- tighter dispute timelines
Bottom line
The move to eliminate retentions is a structural reset of construction credit risk.
If implemented fully, it will:
- remove one of the biggest sources of hidden working capital strain
- rebalance power in favour of subcontractors
- force the industry toward more transparent, finance-driven risk management models
