As we've reported previously, research continues to show that poor payment practices are still the scourge of the construction sector.
On 30th July 2025, the Department for Business and Trade began a consultation process aimed at introducing UK-wide legislation directed towards tackling poor payment practices in the UK economy generally.
Specifically in relation to the Construction sector, however, the UK Government has indicated that it proposes to legislate in relation to retention monies.
The proposal is that the government will amend the Housing Grants, Construction and Regeneration Act 1996 (the 1996 Act) to either
(one) abolish retentions entirely
or
(two) allow retentions to be used in construction contracts but require any retention sums withheld to be protected.
Option one: ban of retentions
Under the first option the 1996 Act would be amended to make it unlawful for payers to deduct and withhold retention sums from payments to payees. Notwithstanding that ban on retention, payers could choose to seek alternative forms of insurance or surety in relation to performance 'but this would not be mandated'. The measure would be implemented for new construction contracts after a prescribed date, which will provide a transitional period for payers 'to adjust to new requirements including management of working capital'.
Option two: no ban of retentions but retentions to be protected
Under the second option, there would be no ban of retentions but in order 'to create the protection of retention sums for the benefit of the payee', payers would have the choice of either segregating the retained sums in a separate bank account or protecting the sums through an instrument of guarantee (insurance or surety bond). This measure would also be implemented for new construction contracts to allow a transitional period within which payers could prepare for and adjust their practices to meet the new requirements.
It is anticipated that option two is likely to include the following features:
- it would only apply to construction contracts as defined in the 1996 Act;
- where the construction contract makes no appropriate provision, the 1996 Act will imply relevant terms;
- retention will require to be released 'unless the required notice is made';
- interest on the retention is to be 'owned by the payee' and
- the payer will be required to report to the payee on any retention held.
Comment
The use of retentions in the construction sector continues to be a highly controversial subject. The consultation meets this controversy head-on by suggesting two options for reform. It will be very interesting to see which option is finally adopted after the consultation period comes to an end in October.
Whichever option is chosen, it should be good news for all those on the contractual chain in construction contracts who are anxious to make sure that the use of retention doesn't lead to unjustified delay in payment or, indeed, non-payment due to upstream insolvency and that retention monies retained aren't used for inappropriate purposes.
