Insolvency and pressures on cash flow in the supply chain are a perennial problem in the UK construction industry – as brought into particularly sharp focus by the recent collapse of ISG. They also sit behind the continued debate about the practice of cash retentions and its impact on the wider supply chain and the resilience of the UK construction market as a whole.

Retention payments remain a very common practice in construction contracts – with most building contracts entitling the employer to withhold a percentage of the value of the work performed, usually between 2-5%, until completion or rectification of defects. However, parts of the industry including Build UK and the Construction Leadership Council (CLC) continue to push for measures to remove retentions from the supply chain by the end of 2025.

In a recent development, in October 2024 the Secretary of State for Business and Trade announced new secondary legislation to amend the Reporting on Payment Practices and Performance Regulations 2017. The Reporting on Payment Practices and Performance (Amendment) (No. 2) Regulations 2024 (the Regulations) have been laid in draft form, and will come into force on 1 March 2025.

These come within the wider context of a suite of measures which are intended to improve the UK's business payment culture and tackle late payments and long payment terms.

We take a closer look below at what the new Regulations achieve, the further proposals, and where this all sits in the ongoing debate surrounding retentions in the construction market.

What do the new Regulations require?

The new Regulations introduce the definition of a "construction contract" and a "qualifying construction contract" into the Reporting on Payment Practices and Performance Regulations 2017 (the 2017 Regulations). A "construction contract" is defined by reference to the broad definition of such contracts in the Housing Grants, Construction and Regeneration Act 1996.

The Regulations create new requirements for a "qualifying company" or a "qualifying Limited Liability Partnership" to publish certain information about their payment practices and policies in relation to any construction contracts they have with their suppliers, notably whether these include or do not include the use of retention clauses. Where the report confirms that retention clauses are included, further details will be required including:

  • whether these are always included, are included in the company's standard terms, or are only included in certain specific circumstances
  • whether there is a standard percentage rate applied to retentions
  • whether there is a practice of ensuring that a retention clause in a qualifying construction contract between the qualifying company and its supplier is no more onerous than any retention clause in a qualifying construction contract between the qualifying company and its client in that supply chain
  • a description of the mechanism or process for the release of monies deducted or retained by the qualifying company and
  • statements, expressed in accordance with a formula set out in the Regulations, of the difference between amounts deducted or retained pursuant to retention clauses in contracts with suppliers, and clients.

What does this mean for you?

Some in the industry may question whether the Regulations go far enough.

Unlike procurement law which mandates prompt payment in public contracts (in Regulation 113 of the Public Contracts Regulations 2015 and also, from 24 February 2025, in sections 68, 73 and 88 of the Procurement Act 2023), the original 2017 Regulations do not go as far as actually requiring large companies to pay valid and undisputed supplier invoices within 30 days, but merely to report on their payment practices and policies (including, from 1 March 2025, retention practices).

In private-to-private contracting, therefore, there remains nothing mandating shorter payment terms nor implying terms to that effect into contracts – the Regulations merely require large companies to report payment performance. At most, they may presumably shine a light on slow payers and those who use onerous retention practices, thereby motivating them to employ less onerous payment terms.

In respect of retentions in particular, this is a long way off the long-term aim of the CLC who, in collaboration with NEC in its joint guidance to industry on the use of retention clauses published in November 2022, supported eliminating retentions altogether. This followed an earlier Private Members' Bill - the Construction (Retentions Abolition) Bill – which had its first reading in the House of Lords in November 2021 but we understand will make no further progress.

More recently, the call to abolish retentions has been reiterated by Build UK in its March 2024 update to its Roadmap to Zero Retentions, originally published in 2021.

We continue as always to wait and see if anything will move on this legislatively, particularly following the Secretary of State's announcement on 7 October 2024 which emphasised the Government's "determination to tackle the scourge of late payments, meeting the commitments laid out in our manifesto and plan for small business."

For the time being, and unless further regulation is introduced, it appears that any crackdown on retentions will continue to be market driven. For those employers who do choose to drop retentions – which may have the wider commercial benefit of the works being provided at a lower cost - they may look to more prescriptive drafting of the requirements for achieving completion and ensuring effective quality management, or the provision of further security in the form of performance bonds or parent company guarantees.

If you would like to discuss any of the issues raised in this article, please get in touch with Ruth Griffin, Gemma Whittaker, Emma Knight or Christopher Brennan.