The House of Lords Library has noted that late payment is estimated to cost the UK economy approximately £11 billion each year, with around 44% of small and medium-sized enterprises (“SMEs”) invoices reportedly paid late. The construction sector has been identified as a particular area of concern, including in relation to retention arrangements and other practices that can place financial pressure on smaller businesses.

The UK Government’s (the “Government”) proposed reform of construction retentions has progressed beyond consultation and is now contained in the Commercial Payments Bill (HL) 2026 (the “Bill”). Introduced in the House of Lords on 19 May 2026, the Bill received an unopposed Second Reading on 9 June 2026 and completed Committee Stage on 21 July 2026. Report Stage concluded on 15 September 2026 with the Bill’s third reading in the Lords scheduled for 20 October 2026.

The Bill forms part of a wider package of measures intended to improve payment practices, including restrictions on payment periods, enhanced statutory rights and greater powers for the Small Business Commissioner. For the construction industry, however, its most significant proposal is the abolition of contractual retention mechanisms.

As currently drafted, new retention clauses would become ineffective following a two-year transition period. The Bill also contains transitional provisions for existing retention arrangements and introduces a statutory payment and compensation regime where retentions are unlawfully withheld. The policy objective is to improve cash flow and reduce insolvency risk within construction supply chains.

The proposed retention reforms should be viewed in the context of the Government’s wider programme of late-payment reform. The Government has described the Bill as a significant package of measures designed to improve payment practices and the flow of cash through supply chains, with the construction retention provisions forming part of a broader attempt to address delayed and disputed payments affecting SMEs.

Although the Bill has not yet received Royal Assent and remains capable of amendment, its progress provides a sufficiently clear indication of policy direction that construction industry participants should begin considering its implications now.

Background: why are retentions being targeted?

Construction retentions are a long-established means of providing security against defective or incomplete work. Typically, a percentage of amounts otherwise payable under a construction contract is withheld and released in stages, with part becoming payable at practical completion and the balance following the defects liability period.

The Government’s concern is that retained sums can create cash-flow pressures and become exposed to insolvency risk within the supply chain. Following consultation, the Government elected to pursue an outright prohibition on retentions rather than a model under which retained monies would be protected in a separate account or similar arrangement.

The proposed ban

The Bill would introduce a statutory regime under which specified retention practices in construction contracts are ultimately prohibited. The provisions are framed by reference to the substance of the arrangement rather than the terminology used by the parties, meaning that simply removing the word “retention” from a contract is unlikely to avoid the legislation.

The Bill also contains regulation-making powers concerning retention practices, enabling the Government to address arrangements that seek to reproduce the economic effect of a retention through alternative contractual structures. The intention is therefore not only to prohibit conventional retention clauses, but also to prevent parties from restructuring payment mechanisms to achieve substantially the same outcome.

The proposed regime goes beyond rendering retention clauses ineffective. It also provides for statutory financial consequences where retention monies are withheld unlawfully, potentially exposing a payer to liability beyond the amount originally retained. The precise operation of these provisions will depend upon the legislation as enacted and any supporting regulations.

Transitional arrangements

The proposed prohibition will not take effect immediately. The Bill provides for a two-year transition period during which existing and newly agreed retention arrangements will remain subject to transitional provisions. This is particularly important for long-term construction projects and framework arrangements, which may span both the commencement of the new regime and the eventual prohibition.

Likely contractual and practical consequences

The removal of retentions is likely to change the way construction projects are administered. Greater emphasis may be placed on identifying and resolving defects before practical completion is certified, with employers potentially adopting more detailed inspection and snagging procedures. In the absence of post-completion retentions, employers may also focus more closely on interim valuations, payment notices and pay less notices, resulting in disputes shifting away from retention sums and towards what is properly due under the contract.

The Government has recognised that the transition may lead to an increase in disputes and adjudications, with parties relying more heavily on performance security, warranties, indemnities and other contractual remedies to manage quality and performance risks. Alternative forms of security may include performance bonds, parent company guarantees, escrow arrangements, project bank accounts and insurance-backed solutions. However, these mechanisms are unlikely to be cost-neutral and may increase procurement and administration costs. The Government’s decision to pursue an outright prohibition, rather than a retention-protection model, means that the availability and effectiveness of alternative forms of security are likely to play an important role in determining the long-term success of the reforms.

A further challenge will be preventing parties from recreating the commercial effect of a retention through alternative payment structures. For example, parties may seek to defer larger proportions of the contract price until completion or another later milestone. Whether such arrangements amount to an unlawful retention will depend on the final statutory wording and any regulations made under the Bill. Employers and developers will therefore need to distinguish carefully between legitimate milestone payments and arrangements whose primary purpose is to defer payment in a manner analogous to a retention.

The counterargument: quality and security

A commonly raised concern is that retentions provide a simple incentive for contractors to return and remedy defects. Their removal may increase reliance on bonds, guarantees and formal dispute resolution. Questions also remain as to whether the surety market can provide alternative protection on a cost-effective basis at the scale required.

The Government has recognised this issue and has indicated that it intends to work with the Construction Leadership Council and the financial services sector to develop the market for alternative forms of security. It remains to be seen what this engagement will produce that is not already available to the construction sector.

Standard form contracts

The proposed reform is likely to require corresponding changes to the principal standard form construction contracts.

Retention provisions are embedded within the commercial architecture of widely used forms, including JCT and NEC contracts. The precise amendments will depend upon the final legislation and the approach taken by the relevant publishers, but standard forms will inevitably need to reflect the new statutory position where the ban applies.

This is particularly relevant for clients using standardised procurement documentation across multiple projects. A single contractual precedent may no longer be suitable for every UK jurisdiction.

The position should also be distinguished between new projects and existing projects. The fact that a standard form is subsequently amended does not necessarily mean that an existing contract is automatically brought within the new regime. The statutory transitional provisions and the contractual terms governing the relevant project will need to be considered separately.

The Northern Ireland position

For Northern Ireland clients, the territorial scope of the Bill is one of the most important aspects of the current proposals. Although the Bill forms part of a wider programme of UK payment reform, the proposed construction retention ban does not currently extend to Northern Ireland. Sections 11 to 16, which contain the proposed retention regime, apply to the Great Britain jurisdictions, whereas separate provisions amend the Construction Contracts (Northern Ireland) Order 1997 in relation to payment terms and associated statutory rights.

This distinction reflects the fact that construction payment legislation is a transferred matter in Northern Ireland. While the UK Government has indicated that it intends to work with the devolved administrations to achieve regulatory alignment, alignment does not mean that the substantive provisions of the Bill automatically apply in each jurisdiction.

Accordingly, an NI employer or contractor should not presently proceed on the basis that the Commercial Payments Bill will itself make an existing retention clause unlawful in Northern Ireland. Rather, Northern Ireland is included within the wider programme of payment reform through amendments to the Construction Contracts (Northern Ireland) Order 1997, which governs matters such as payment dates, payment notices, pay less notices and adjudication.

The Bill therefore creates an important distinction. Northern Ireland is brought within the wider payment reform agenda, but the specific prohibition on construction retentions remains outside the NI regime under the current drafting. For NI clients, the immediate focus should therefore be on reviewing payment provisions, valuation procedures and statutory payment mechanisms rather than removing retention clauses.

The distinction is particularly important for organisations operating across multiple UK jurisdictions. Contract precedents and procurement processes developed for projects in Great Britain following implementation of the retention ban may not be suitable for projects in Northern Ireland and vice versa. Businesses should therefore undertake a jurisdiction-specific review of their contract suites, identify projects likely to remain live during the transition period and consider whether alternative forms of performance security will be required. The position should also be kept under review, particularly given the Government’s objective of regulatory alignment and the Northern Ireland Executive’s ability to legislate in this area.

Practical steps

Although the Bill remains subject to further parliamentary scrutiny, organisations with long-term projects, framework arrangements or standard form contract suites may wish to begin reviewing their existing payment and security arrangements now. Particular consideration should be given to the continued use of retention provisions on GB projects, the availability of alternative forms of performance security and the operation of payment mechanisms during the proposed transition period. Clients operating across multiple UK jurisdictions should also consider whether separate contract precedents will be required to reflect the differing position in Northern Ireland.

Summary

The Commercial Payments Bill represents a significant proposed reform of construction payment practice. The Government has moved from consultation towards legislation which would, if enacted in its current form, prohibit construction retentions in Great Britain following a transitional period.

The Bill is not yet law and remains subject to further parliamentary scrutiny. Nevertheless, its progress means that employers, developers, contractors and subcontractors with GB projects should now be considering the consequences for procurement, contract drafting, payment administration and performance security.

For Northern Ireland, the position is importantly different.

The Commercial Payments Bill does not currently abolish construction retentions in Northern Ireland. Instead, it proposes to extend wider payment reforms to Northern Ireland through amendments to the Construction Contracts (Northern Ireland) Order 1997.

The appropriate message for an NI client is therefore not that “retentions are being abolished across the UK”. The more accurate position is that the Government is legislating to abolish construction retentions in Great Britain while separately extending wider commercial payment reforms to Northern Ireland.

For clients operating across jurisdictions, this distinction will need to be reflected in contract precedents, procurement strategy and project-specific advice.

The position should be kept under review as the Bill progresses through Report Stage and the House of Commons and, separately, as the Northern Ireland Executive considers the implications of the wider UK payment reform programme.

For further information, please contact a member of our NI Construction and Engineering Group.