Commercial Payments Bill enters Parliament: What does it mean for construction?

What are the key implications of the bill for the construction industry?

The Small Business Protections Bill, formally known as the Commercial Payments Bill (the Bill), introduces a suite of reforms, including a 60-day maximum payment period for large businesses dealing with Small and Medium Enterprises (SMEs) and the mandatory statutory interest on late payments.

Most significantly for the construction industry, it proposes an outright ban on retention clauses in all construction contracts.

Retention is a long-established contractual practice across the construction industry, typically involving the withholding of up to 5% of a contract’s value. Retention is typically used to protect employers by incentivising performance and covering defects. However, UK government’s Late Payment Consultation (the Consultation) highlighted that the negative impact on suppliers is frequently disproportionate to any benefit obtained by the employer.

In particular, the following key issues were identified:

• retention payments are frequently withheld long beyond the defects liability period
• retention sums are rarely sufficient to cover the costs of defects/insolvency, undermining the rationale behind them, and
• delayed release or non-payment of retention sums has a tangible impact on SME solvency

Although reform of the approach to retention was considered, the government consider a ban to be the more straightforward legislative proposal, to be simpler for the industry to implement and ultimately be easier to enforce.

How exactly does the Bill propose to abolish construction retentions, and what will parties need to do during the transition period?

The Bill proposes to implement the abolition of construction retentions by amending Part II of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996), inserting new provisions (sections 113A-113F) to prohibit their use.

Its drafting is intentionally broad, defining a ‘retention’ as ‘the practice by which one party (‘A’) to a construction contract deducts or retains sums of money equating to a percentage of either a) the amount payable to another party (‘B’) for any goods, services or works supplied… b) an interim payment payable to B….or c) the contract total of the construction contract until any condition for release…is met’.

In recognition of the construction industry’s widespread adoption of and reliance on retention clauses, the Bill contemplates a two-year transition period, during which contracts containing retention clauses may continue. However, after the end of the transition period, retention clauses will be void regardless of whether the contract containing the clause was entered into before, during or after the transition period.

Additionally, after the end of the transition period, the Bill also prohibits the variation of retention clauses, unless the variation has the effect of making the retention clause or related term more favourable to the payee.

To the extent the Bill is passed, parties would be well advised to take full advantage of the transition period. Businesses operating in the construction industry should update their template contracts, reviewing their pricing models to reflect the removal of retained sums and, where necessary, transitioning to alternative security structures.

How effectively would current provisions prevent retention-like arrangements? Are there any uncertainties in the provisions, or ways that parties might try to recreate the same commercial effect through other mechanisms?

The drafting of the Bill is intentionally broad. While this has clearly been adopted to prevent circumvention, its effectiveness is not guaranteed.

For one, there’s a risk that sums other than retention sums may be captured by the Bill’s definition. It’s common practice for monies ‘equating to a percentage’ of a sum due to be conditional on the performance of a variety of obligations. Monies are often withheld until documents such as collateral warranties or security documents (like parent company guarantees) are provided.

Most crucially, the Bill doesn’t seem to account for the risk of parties introducing retention-like arrangements and circumventing the ban altogether.

There’s nothing to expressly prohibit parties from engaging in conduct that allows them to replicate the economic effect of retention. For example, parties reluctant to give up retention could back-load payment schedules or require sums to be paid upon the achievement of certain milestones. Both approaches have the effect of delaying when sums are due, impacting the cash-flow of the supply chain in the same way as retention.

How will the Bill interact with the existing payment regime under the Housing Grants, Construction and Regeneration Act 1996?

In addition to banning retention clauses, the Bill supplements various provisions of the payment regime under the HGCRA.

Reflecting the government’s intention to protect cash-flows and reduce the prevalence of insolvency, the Bill purports to reduce the freedom of parties to structure payment arrangements as they see fit.

Large businesses contracting with SMEs will no longer simply have to ensure payment mechanisms are adequate to determine how much is payable and by when. They’ll have to make payment within the period of 60 days, beginning with the day after the payment due date.

Additionally, the Bill introduces a mandatory statutory interest for late payments at 8% above the Bank of England base rate, removing the ability of parties to contract out of or dilute this interest rate.

The financial consequence of non-compliance with payment obligations is therefore increased beyond the current regime of HGCRA 1996.

Does the new Small Business Commissioner adjudication scheme add anything for construction payment disputes?

The Bill affords the Small Business Commissioner (the SBC) quasi-judicial powers, including the ability to: (a) adjudicate payment disputes, (b) investigate systemic late payment practices, and (c) impose financial penalties on repeat offenders.

Generally, the SBC’s adjudication function is unlikely to displace the existing adjudication mechanism for dealing with construction payment disputes. First, the Bill provides that certain disputes are excluded from the SBC adjudication scheme, including those in respect of which the SME who would otherwise be entitled to refer the dispute under the scheme ‘has a statutory right to refer to another person for adjudication or arbitration’. On the basis that parties to construction contracts have a statutory right to adjudicate under HGCRA 1996, it appears that payment disputes under construction contracts will fall outside the scope of the SBC adjudication scheme. This arrangement avoids the uncertainty that might arise from jurisdictional overlap (i.e. from the existence of two routes to adjudication).

More widely, it’s worth noting that the Bill doesn’t confirm the process the SBC will follow when determining a payment dispute (and the extent to which this will follow/depart from existing procedures). Equally, it’s unclear whether SBC determinations will match the speed and enforceability of construction adjudications.

Conclusion

The Bill marks a decisive shift towards enforcing prompt payment and protecting cash-flow in construction. However, its success will depend on whether industry participants adapt in substance rather than form, and whether courts effectively prevent retention‑like workarounds emerging in practice.