Earlier in 2026, we reported on the UK Government's announcement that it proposes to ban retention payments in construction contracts – a move that, if implemented, will put an end to years of debate and fundamentally affect the way risk and performance are managed in the industry.

We now have more detail on how the ban is expected to take effect, in the form of the Commercial Payments Bill (the Bill). The Bill was introduced into the House of Lords on 19 May 2026, and is due to have its third reading on 20 October 2026. The ban sits within a broader package of reforms to UK payment law designed to address payment practices, strengthen protections for suppliers and introduce new enforcement measures.

Whilst there is still much scope for amendment as the Bill continues its progression through Parliament – with the retention provisions now in clearer focus, this article explains how the proposed ban would work, when the changes could take effect, and outlines four practical considerations for construction businesses.

Recap on retentions in construction contracts

Retentions (where the paying party withholds a percentage of the value of work carried out (usually 3-5%) from payments as security to ensure the contractor rectifies any defects, complies with its contractual obligations and as protection against insolvency) have historically been common practice in construction contracts. The retention sum is then released, often in two stages, once a release condition is met – typically the achievement of practical completion / the issue of the notice of completion of making good of defects. Retentions are governed by the terms of the applicable contract, with standard form construction contracts such as JCT and NEC including specific provisions to deal with them.

Why are retentions in the spotlight now?

The lack of governance around their deduction and release means that retentions often give rise to disputes. The recent debate at Report Stage of the Bill in the House of Lords highlighted that around 65% of retention payments are paid late and almost 25% are never paid back at all, e.g. in cases of upstream insolvency. Their disproportionate impact on small and medium-sized enterprises (SMEs) and subcontractors lower down the supply chain is often cited as a factor in favour of their abolition.

Following decades of debate and several efforts at reform, in 2025 the Government published its Late Payment Consultation. This proposed either an outright ban on retention clauses, or to permit retentions but require retained sums to be protected either in a segregated bank account or through a guarantee such as insurance or a surety bond. Of the respondents, 87% favoured some form of reform.

The Government opted for a ban: one of the most significant developments in this area (and indeed construction law and practice) in over 25 years.

How does the Commercial Payments Bill propose to implement the ban?

Scope

The Bill proposes to implement the ban on retentions through amendments to the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act). The Bill would insert new sections 113A to 113F into Part 2 of the Construction Act. The ban would apply to "construction contracts" as defined in the Construction Act. It would catch a retention clause whether it appears in the construction contract itself or in "an agreement relating to sums payable under that contract". It would also apply even where the retention clause is not in writing.

A two-year transition period

The ban would not take effect immediately. When the relevant provisions come into force, a two year transition period would begin. During that period, the expectation is that retention clauses could still be agreed and would remain lawful. This includes clauses agreed under contracts entered into before the period began, and pre-existing clauses varied during it.

The outright ban

From the end of the two year transition period, and start of year three, it is expected that the outright ban would come into effect automatically. Any new retention clauses agreed after that date would be void. A variation to an existing retention clause or a "related term" would also be void – except for a variation that makes the clause more favourable to the payee.

A longstop for the return of retained sums

The Bill sets a "last retention day" three years after the provisions come into force. Any "transitional retained sums", meaning sums deducted or retained in the three years ending on that day under provisions agreed or varied during the transition period and not yet repaid, would have to be returned to the payee. The existing payment notice and pay less notice machinery in the Construction Act would apply to that return. 

Consequences of failing to repay retentions

If, after the transition period, a payer fails to pay the notified sum when due, and the sum is a retention that has fallen due for repayment, the payee would be entitled to recover the withheld sum as a "retention debt". In addition to the withheld sum, it would be entitled to the higher of £40 or 50% of the "retention debt", together with late payment compensation and statutory interest. This is a significant financial deterrent against late repayment of retentions.

Substance over form: what the ban will and won't catch

Recent debates at Report stage in the House of Lords have helped clarify several practical questions:

Staged and interim payments: an amendment at Report stage asked whether parties would be precluded from staging payments, e.g. to defer some payments until after practical completion. Lord Leong, for the Department for Business and Trade, confirmed that "genuine staged and interim payment arrangements will ….remain entirely permissible". However, describing a withholding of money for completed work as a staged payment would not take it outside the ban "if, in substance, the money was being retained as security for the performance of contractual obligations". 

Escrow: Escrow and bank-facilitated payment arrangements remain permitted. Lord Leong drew a distinction between "a third party facilitating payment of money that is due and a third party holding back that money as security for the supplier's performance", which could amount to a retention. 

No exemption for resident-led companies: Lord Leong resisted an amendment which would exempt contracts entered into by resident-owned or resident-led properties. He acknowledged the intention behind the proposal, i.e. that such companies should have assurance that work is completed properly and that defects are remedied without additional cost to leaseholders. However, it rejected the notion that retentions would be effective to ensure this and noted the potential uncertainty within mixed ownership structures. He also pointed to the gateway regime under the Building Safety Act 2022 as providing greater quality assurance for higher-risk buildings. 

 

Other changes to payment provisions

The Bill also proposes to tighten the Construction Act payment regime in several other ways:

  • the extension of the final date for payment where a payee serves a default payment notice would be capped, so that it cannot go beyond the permitted 30- or 60-day period.
  • pay less notices would have to be issued no later than seven days before the final date for payment.
  • bank holidays would no longer extend payment periods.

What does this mean for construction businesses?

As noted above, the Bill is due to have its third reading in the House of Lords on 20 October 2026, and it will then move to House of Commons for further debate. There is still potential for further amendment. 

However, if it does receive Royal Assent in its current form – which would likely be in 2027 – the timeline outlined above, including the two year transition period and three year longstop date, means that the outright ban would not come into force until 2030 at the earliest. There have been indications from Government that the retentions provisions may come into force at a later date, which would push out this date even further.

This gives parties a window to prepare rather than react. We recommend that clients:

  • Start considering alternative forms of security. While the market for surety bonds remains under pressure with many providers tightening conditions or withdrawing from the market altogether, the Government has said it will work with surety providers to ensure that a range of products is available when the ban comes into force. It remains to be seen how this will work in practice.
  • Avoid disguised retentions. Payment structures will be judged on their substance. Restructuring a retention as a deferred or staged payment may not be a viable workaround. 
  • Revisit payment procedures. The changes to default payment notices, pay less notices and bank holidays will require updates to payment processes and template documents. 
     

We will continue to monitor the Bill's progress through Parliament and will provide further updates as it develops.

If you would like to discuss how the proposed ban may affect your projects or contracts, please get in touch with Philip Baker or Emma Knight.