On the 24th of March, the Government announced upcoming changes to late payment legislation: Time to Pay Up: Government unveils toughest crackdown on late payments in over 25 years - GOV.UK.

Retentions

The main headline coming out of these legislative proposals was the ban on retentions in construction contracts. On 19 May, The Commercial Payments Bill had its first reading in Parliament, revealing more about the detail of how the new rules will be implemented in practice. In this article we will summarise the new rules that we might expect to see affecting construction contracts in the future.

Regarding the retention ban, Chapter 2 of the new bill has set out a clear timetable that will start running as soon as the bill comes into effect, enabling construction firms to know what to expect:

  • The bill proposes to amend the Housing Grants, Construction and Regeneration Act 1996 to introduce a two-year transition period to phase-out retentions.
  • Any retentions collected or held during this period are called “transitional retained sums”. This includes retentions held as part of contracts that were agreed before the transition period begins and that are agreed during that period.
  • Any contracts entered into after the end of this two-year transition period may not contain retention clauses. Any such clauses agreed to after this point will be void. Any variations made to retention clauses after this point will also be void.
  • After the end of the transition period, there will be a one-year gap until the “last retention day”.
  • Retention clauses written into contracts before the end of the transition period will become ineffective the day after the last retention day, as do any clauses providing conditions for the release of any retained sums.
  • The due date for payment of payment of any sums still held as transitional retained sums is 30 days after the last retention day (or earlier, if agreed by the parties). For public authorities holding any retentions, this will also be the final date for payment.
  • For parties that are not a public authority, the final date for payment will be 60 days after the payment due date for transitional retained sums (or earlier, if agreed by the parties)

The proposed rules in the bill leave no doubt that retentions are on the way out. It also heavily incentivises parties that hold retentions to end the practice in line with the timetable:

  • After the end of the transition period, any retention debts that remain unpaid after their final date for payment, or that arise after the end of the transition period in breach of the new rules, will be repayable along with a fixed sum of either £40 or 50% of the retention debt (whichever is higher) due to the payee. This will apply on top of new statutory compensation for late payment and new statutory interest applied to the same. Contracting out of this term will not be permitted.

This could therefore become quite complicated. We think it could look something like this - let’s assume the bill comes into force at the end of this year:

  • 31 December 2026

    Bill comes into force

    Transition period begins

  • 01 January 2028

    Construction contract entered into

    Retentions are included

  • 31 December 2028

    Transition period ends

    After this point, no new construction contracts may contain retention clauses. Previously agreed clauses continue to operate.

  • 31 August 2029

    Contract completion date

  • 31 December 2029

    Last retention day

    From this day onward, all retention clauses in construction contracts become void. All contracts clauses that describe mechanisms for the release of retentions, or conditions to be met for release of retentions, are now also void.

  • 30 January 2030

    Payment due date for all retained sums

  • 01 March 2030

    Final date for payment

    All retentions owed by Public Authorities

  • 31 March 2030

    Final date for payment

    All remaining retention

  • 31 August 2030

    Defects liability period ends

For contracts entered into after the transition period it remains to be seen what alternatives employers and contractors will look for. For some an extended duration of performance bond (perhaps stepped down during the defects liability period) may be an option or a retention bond. Some commentary from governmental sources when the initial changes to legislation were published indicated that bonds were the answer. However, anyone who has tried to procure a bond knows that it is not that straightforward. The bond market has been difficult for a while and unless that changes whilst there may be alternatives for large contractors with comfortable bank balances there will not be bonds available for many SMEs.

Contractors will also have to be careful in relation to contracts entered into before the transitional period ends which can include retentions if they are entering into sub-contracts post the end of the transitional period as any retention clauses included within those would be void.

It is also worth noting that as a retention is described as a sum of money “equating to a percentage” of an amount payable being deducted until any condition for release is met it may also catch other provisions - such as retention of 10% of sums until a performance bond is delivered.

Payment terms

While all contracts are soon going to be subject to a 60-day cap on payment terms, construction contracts have been given special attention on this subject. There already exist payment requirements in terms of sections 110 to 114 of the Housing Grants, Construction and Regeneration Act 1996. However, whilst these require contracts to include an “adequate payment mechanism” including due dates and final dates parties are free to set their own payment schedules, deciding how long the period between the due date for payment and the final date for payment should be.

Chapter 1 Section 2 of the new bill requires that that the final date for payment must fall within 60 days of the due date for payment, Where the payer is a public authority, the final date for payment must fall within 30 days of the due date. Any terms in construction contracts that allow the final date for payment to fall outside these limits will be void. In these instances, the scheme is implied, setting the final date for payment 30 days after the payment due date.

Since 2015 Public Authorities have been subject to the Government’s Prompt Payment Policy, which requires all Government buyers to insert 30-day payment terms into their contracts – this bill codifies that rule into law.

For private sector contracts, most payment terms presently allow around 30 days anyway. While it remains possible to delay the final date for payment up to 60 days after the due date, doing so would increase pressure on contractors and their supply chain.

One scenario that is prevented by the new payment terms is the continuation of retentions by clever manipulation of payment terms - a contract containing payment terms that require the final 2 stage payments to have a final date for payment 360 days after the due date, for example. This would effectively enable the contractor to smuggle in retention-like payments under cover of payment terms. By enforcing a cap on payment terms that most contractors will find adequate, this item in the new bill will probably have very little impact on business as usual for most contractors while preventing pseudo-retentions from being allowed.

Pay less notices

Schedule 2 Part 1 of the new bill also includes amendments to the Housing Grants, Construction and Regeneration Act 1996. If the bill passes, pay less notices will have to be issued at least 7 days before the final date for payment (currently, the act reads “not later than the prescribed period before the final date for payment”). Any notices issued after this date will be invalid. It is not uncommon to see periods of 1-3 days before the final date for payment as the deadline for pay less notices therefore this will require changes to current practices.

Statutory interest

On top of these construction industry specific changes to payments, new rules on statutory interest on late payments will also have to be incorporated into all new contracts, including construction contracts. The bill also seeks to introduce mandatory interest rates for late payments, and in construction contracts this interest starts accruing the day after the final date for payment. These interest payments will not be able to be contracted out of, and will be set at 8% above the Bank of England standard base rate.

Standard forms such as JCT/SBCC and NEC are examples of contracts which currently include interest rate clauses for late payment at lower interest rates and which will either need to be amended or deleted.

Final thoughts

If this bill becomes law, construction firms will need to revise their contracts and standard forms will likely be amended to comply with the new rules and adapt to further changes on retentions. The legislation shows the government’s clear intent to tackle late payment, and even if the bill is amended, it seems likely that it will be passed in some form. Although the timing remains uncertain, the changes could significantly affect contract terms and administration, so anticipating these changes now will help firms stay ahead.

Contributors

Kirsteen Milne

Partner

Robert Brown - Trainee Solicitor
Robert Brown

Trainee Solicitor