Construction retention payments to be banned and new mandatory payment provisions announced

On 24 March 2026 the UK Government issued a press release announcing the “toughest crackdown on late payments in over 25 years.” The announcement can be read here: Time to Pay Up: Government unveils toughest crackdown on late payments in over 25 years - GOV.UK.

Background 

The announcement follows a consultation last year which considered a variety of measures to reduce late and non-payments to small businesses. It is stated by the UK Government that the goal of the changes to payment terms are to protect Small and Medium sized Enterprises (SME). It is stated by the Government that the problem of late payments costs the UK economy £11 billion every year. 

The announcement

Retention

It has been announced that the withholding of retention payments is to be prohibited in construction contracts. This move follows the consultation for reform of retention payments where: 53% of respondents indicated that they could support either a ban on retention payments or protections to ringfence retention sums. While it was recognised at the consultation that there was an economic benefit to the payer in holding a retention sum, it was also reported by respondents that in the event of defects or insolvency of the payee, the retention sum was rarely, if ever, sufficient to cover the associated costs. 

There was slightly higher support in the consultation responses for protection measures for retention sums rather than an outright ban. Holding sums at arm’s length from the payer was seen as adequately protecting the interests of the payee while maintaining a mitigation of the risk of defects or insolvency of the contractor. A ban was chosen over these protections to preserve the ease of enforcement of the new measures. 

Respondents to the consultation highlighted that the removal of retention as an option for construction clients would necessitate alternative means of mitigating the risks of a construction contract, and it is on this basis that the UK government has proposed to consult further with interested parties in order to consider the implementation of the ban.

Payment Terms and Interest 

The UK Government has announced a 60-day cap on payment terms for all large firms when paying smaller firms. It is not yet clear what the statutory definitions will be of a “large firm” or “smaller firm”. It is expected that this will be clarified in due course. 

The Small Business Commissioner will also be given powers to investigate poor payment practices, adjudicate payment disputes and fine companies for breaches. Fines are said to be potentially worth tens of millions for firms that persistently pay late. Boards or audit committees of persistently late paying large firms will be required to publish explanations for late payments and actions taken to address this.

Also announced is a “new mandatory interest on late payments…all commercial contracts to include statutory interest set at 8% above the Bank of England base rate.” As the Late Payment of Commercial Debts (Interest) Act 1998 already allows for mandatory interest on ‘qualifying debts’ involving commercial contracts, but currently it does not apply where the contract already has a “substantial remedy” for late payment of debts. It reads as if the “substantial remedy” opt out will be removed from the legislation. 

The removal of retention as a form of protection against the failure to remediate defects will require developers and contractors to seek alternative means of mitigating risks. 

Extending timelines for payment between the Employer and the main contractor may be seen as an option by Employers, however this will likely be met with resistance from main contractors now faced with more limited timelines for payment of subcontractors that fall within the definition of “smaller firm”. 

Current means of mitigating the risk in construction projects include performance bonds and parent company guarantees, which are already promoted as alternatives to retention. However, bonds can be expensive and difficult to acquire for some companies, and not all companies will have a parent company with adequate financial covenant. 

It remains to be seen how the insurance market responds to these changes. The UK Government has committed to working with the financial services sector to identify ways of developing the surety market for the construction sector.

Further details on the new mandatory payment and interest terms announced are awaited. However, this is a clear warning from the Government that qualifying ‘large’ companies may face fines and adverse publicity if the payment cap (when implemented) is breached.

If you have any questions, please contact a member of our construction team or your usual Brodies contact.