Last week the Government announced plans to ban the use of retention payments in construction contracts, marking a major reform to longstanding industry practice and indicating the Government’s strong willingness to intervene directly in contractual arrangements.

Retentions of typically between 3-5% of the Contract Sum are withheld by employers and main contractors as security for completion of works and remediation of defects, with half of the retention released upon practical completion and the remainder following rectification of defects identified during the defects liability period. Yet in practice retentions often remain unpaid for years after PC, or are not repaid at all.

Use of retentions has long been criticised. Given their impact on cashflow and the financial risk for smaller contractors and sub-contractors, particularly when upstream contractors become insolvent or fail to release the necessary funds, there have been repeated attempts to reform retentions, as outlined in our previous blogs, The return of the debate on retentions (2021) and Contracts guidance marks step towards outlawing retentions (2022).

In its statement released on 24 March 2026, the Government set out its hope that the pending ban will achieve “fairer contract terms, more transparent practices and stronger, more collaborative relationships in the construction supply chain for the public and private sectors”.

While previously the Government consulted on alternative reforms, such as holding retention monies in third-party accounts or requiring guarantees, it appears now the Government’s intention is an outright ban of retentions.

The reception amongst industry bodies has been generally positive: the Construction Leadership Council (“CLC”) has campaigned for retention reforms since 2019 and welcomed the announcement, confirming it would work closely with the Government on implementation. The CLC cited late or non-payment of retentions as a key contributor to instability in the sector, criticising the existing system for restricting investment.

Larger contractors have been cautiously positive following the announcement, suggesting that the loss of retentions held may be broadly offset by the benefit of receiving payments more promptly from their employers. As a result, the overall cashflow impact may be neutral for some businesses.

However, the proposed ban may be less popular with employers and housebuilders at the top of the payment chain, who have traditionally relied on retentions as a form of security, including residential occupiers.

Amidst the intended reform it seems the Government has forgotten its own requirements in relation to the funding of building safety remediation. A full-scale move to ban retentions would place those obtaining funds from the Building Safety Fund (“BSF”) and Cladding Safety Scheme (“CSS”) in breach of their obligations since these schemes stipulate that a retention of at least 5% must be held until practical completion. Clearly the Government will need to outline how requirements under the BSF and CSS are to be aligned with the proposed retention ban.

Recognising the substantial operational change for the sector, the Government will be consulting on the details of implementation, with the scope, timing and transitional arrangements to be determined. It is envisaged that the ban will include a transitional period as employers and contractors will undoubtedly need time to adapt and develop alternative methods of ensuring quality and managing defects (respondents to the initial consultation mainly supported a 12 to 24-month transitional period). In the meantime, parties entering into construction contracts should be aware of changes to come and consider how to ensure fair allocation of risk, minimisation of defects and effective payment structures in future contracts.

While the motivation behind the Government’s reform – being the support of smaller businesses – is laudable, guidance on how to protect an employer’s valid interests in completion of the works and remediation of defects is eagerly awaited.

If you have questions about the announcement or require any assistance with your building contracts, please contact Zoë Deckker, Isabella Stewart or Brenna Baye or any other member of our Construction Team.

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