The UK construction industry has long faced financial pressure arising from complex supply chains, tight margins and persistent payment issues. 

Late payment and the withholding of retention monies remain two of the most significant challenges for contractors and specialist subcontractors.

The UK Government’s latest proposals on late payment reform, alongside its intention to ban retention payments in construction contracts, represent one of the most significant changes to construction payment practices in recent times. If implemented as proposed, these reforms could fundamentally reshape cashflow, risk allocation and commercial behaviour across the sector.

Tougher action on late payment

The proposed reforms form part of a wider Government initiative to tackle the poor payment culture across UK industry, with construction firmly in focus due to its reliance on cashflow throughout the supply chain. Late payment has been widely recognised as a major economic issue, with billions of pounds tied up in unpaid or delayed invoices each year, placing strain on small and medium‑sized businesses.

Recent Government announcements and legal commentary describe the proposals as the toughest crackdown on late payments in over 25 years.

Statutory cap on payment terms

One of the headline proposals is the introduction of a statutory cap on payment terms, which could be broadly as follows:

Large companies would be required to pay smaller suppliers within a maximum of 60 days. This would mark a significant shift from current construction practices, where payment terms of 90 days or more are not uncommon. All commercial contracts would also be required to include statutory interest on late payments, set at 8% above the Bank of England base rate.

The intention is to create a clear financial disincentive to late payment and encourage faster, more consistent payment practices across the industry.

Stronger enforcement and accountability

The Small Business Commissioner would have enhanced powers to investigate poor payment practices, adjudicate payment-related disputes and impose fines on businesses that persistently pay late.

In addition, large companies may be required to provide board‑level explanations for poor payment performance, introducing reputational as well as financial consequences. These measures are designed not only to change the law, but to drive a wider shift in payment culture and senior‑level accountability.

Proposed ban on retentions

Alongside late payment reform, the Government has announced plans to prohibit the use of retention payments in construction contracts.

Retentions have traditionally been used as security to ensure defects are remedied after completion, with a percentage of payments withheld until completion and the end of the defects liability period. However, the practice has come under sustained criticism for restricting cashflow and exposing subcontractors to the risk of insolvency, where retention monies can be lost entirely.

Following consultation, the Government has indicated that it is considering an outright ban on retentions, with further consultation expected on how this would be implemented. The decision to favour a ban, rather than alternatives such as ring‑fenced trust accounts, appears to be driven by ease of enforcement and a desire to remove the practice entirely.

Managing risk without retentions

The removal of retentions will inevitably require a change in how performance and quality risk is managed on construction projects.

Employers and main contractors may increasingly look to alternative forms of security, such as performance bonds, parent company guarantees and retention bonds.

​However, these mechanisms can increase project costs and may not be readily available to smaller contractors. As a result, contract structures, procurement strategies and pricing models may need to evolve to reflect a different balance of risk.

What this means for the industry

Late payment reforms and the proposed ban on retentions represent a significant shift in the legal and commercial landscape for UK construction.

Potential impacts include improved cashflow and financial resilience for subcontractors and specialist contractors, reduced payment-related disputes and improved supply-chain relationships, increased pressure on employers and main contractors to actively manage performance risk, and greater scrutiny of payment practices at board and senior management level.

If implemented, these changes could represent the most significant reform to construction payment practices since the introduction of statutory payment and adjudication regimes under the Housing Grants, Construction and Regeneration Act.

How we can help

We will continue to work with clients across the construction and property sector as the construction industry prepares for significant changes to payment practices. As early engagement and proactive planning is key, we can support companies when considering the following:

Contract and payment term reviews
Assessing existing and proposed contracts to identify exposure to extended payment terms, retentions and late payment risk, and advising on amendments aligned with the proposed reforms.

Strategic planning ahead of a retention ban
Supporting clients in reviewing risk allocation, pricing strategies and alternative security arrangements in anticipation of a prohibition on retentions.

Cashflow and commercial impact analysis
Helping businesses model the financial impact of faster payment terms and the removal of retentions at both project and portfolio level.

Dispute avoidance and risk management
Providing practical advice to reduce the likelihood of payment disputes and to respond effectively where issues arise.

We will continue to monitor the development of the legislation, and the consultation process as we await further detail.

If you would like to discuss how these proposed changes could affect your contracts, projects or wider business, please contact either Michael Murray or Glen Small.