On 24 March 2026, the UK Government published its response to the Late Payment Consultation (the Consultation), proposing the most significant reforms to construction payment practices in 25 years.

If you operate in the construction sector, particularly as a Small and Medium Enterprise (SME), these proposals are likely to affect you. The Government is seeking to tackle the impact of late payments and, most notably, is proposing to ban retention clauses in construction contracts altogether[1].

While the Government accepts that retention can, in some cases, offer a cost‑effective form of security, the response recognises widespread concern that current retention practices place unnecessary pressure on cash flow across the supply chain. The clear direction of travel is toward reform, and you should be considering now how these changes could affect your contracts, payment arrangements and risk management.

The current state of play on retention

Retention is a long-established contractual practice in the construction sector, where typically, up to 5% of a contract’s value is withheld as a “carrot” to secure performance and/or cover defects. Whilst retentions offer employers protection and serves to support their cash flow, the negative impact on suppliers is often disproportionate to the benefit obtained.

With this in mind, the Consultation highlighted the following issues for both employers and contractors[2]:

• Retention payments are frequently withheld for long periods – often well beyond the defects liability period,
• Retention sums are rarely sufficient to cover the full cost of defects or insolvency anyway, undermining the rationale behind them,
• Delayed release or non-payment of retention has tangible impact on SME solvency, and
• Alternative contractual mechanisms exist that can secure performance without the associated drawbacks.

Considering these issues, the Consultation proposed several options for reform and has settled on an outright ban on the practice of deducting and withholding of retention payments under construction contract.

What does this mean for contractual security?

While the Government intends to consult further on implementation before effecting its reforms, the Consultation’s findings reflected a settled view that whatever the approach taken, given the significance of these changes: a transitional period would be necessary to allow for contractual adjustments, financial planning, and the development of alternative assurance mechanisms.

Additionally, the Consultation acknowledges that the construction sector will require new methods of mitigating risk and quality control in the absence of retention. With an impending gap, the expectation (and hope) is that the bond market will step into cover meaning that any change will also require a larger and more sophisticated bond market to step up to support the construction sector.

Our view is that a transitional arrangement and increased involvement of bond surety would be paramount and the proposals are sensible and well considered in this regard.

How we can help you

Change, albeit a welcome one for many in the sector, brings uncertainty. While the Government will consult further on how it approaches these reforms, it would be prudent for you to prepare now. Many employers are already getting ahead of the changes, reviewing their approach and implementing new retention or bonding practices to prepare their businesses.

Our team of experts can support you in understanding the impact of the Government’s proposals, preparing your contracts ahead of the changes, and advising on suitable alternative security options.

If you have any questions, or need support, please contact Alex Jones or Isabella Troy-Williamson.

[1] https://www.gov.uk/government/consultations/late-payments-tackling-poor-payment-practices/late-payments-consultation-tackling-poor-payment-practices

[2] https://www.gov.uk/government/consultations/late-payments-tackling-poor-payment-practices/outcome/late-payment-consultation-time-to-pay-up-government-response-web-version#detailed-response