The Government has announced it is proposing to ban the practice of deducting and withholding retention payments under the terms of a construction contract. The Government made the announcement in the recently published outcome to the Late Payment Consultation that ran from 31 July 2025 to 23 October 2025 (Late payment consultation: time to pay up – government response). The ban on retentions is part of a number of measures announced as part of a wider package to tackle late payment, discussed further in Late payment: From voluntary codes to real consequences.
Published: 25 March 2026
Authors: Amber Wright
In the response, the Government said there was “broad agreement” on the issues caused by retentions with 87% of respondents in favour of retention reform. Problems identified by respondents included that “withheld money is often subject to unjustified late, partial, and non-payment” impacting cash flow for small and medium businesses in the construction industry.
However, the Government acknowledged that some respondents were concerned about any change to the current legislative framework. These respondents commented that retentions are “a cost-effective mechanism, which provides an incentive for firms to fulfil their contractual obligations and to rectify defects”.
A ban on retentions is likely to be met with a mixed reaction across the sector. The practice of withholding retentions is standard practice in the industry and an important tool for risk management in construction projects. It has many advantages, not least, that it is widely understood across the supply chain and is simple to administer.
The implementation of a ban on retentions represents a seismic shift in how the industry currently operates and, therefore, any ban would have to be carefully managed. The Government commented that respondents to the consultation were in support of a 12 to 24-month transition period. This would allow time for contracts to be adjusted, financial planning and, importantly, the development of “alternative assurance mechanisms”.
If the Government pushes ahead with a ban on retentions, those who procure construction services will require alternative options to be put in place to provide security against the risk of non or defective performance under construction contracts. Currently the availability of alternatives, such as performance bonds, is limited and, where these are available to contractors, they represent a costly option. Increasing the duration of performance bonds and/or agreeing these at a lower level might be one solution but not one that is hugely effective or attractive. Default retention bonds may also provide an alternative to retention on a usual on demand basis for a similar sum callable for failure to rectify. However, these will require negotiation between the parties and add additional costs to the project.
In the response, the Government recognised the “need to create a larger and more sophisticated surety market to support the construction sector and its clients if retentions are no longer a means of mitigating risk”. The Government also accepted this is likely to require “a range of solutions in order to meet the needs of both construction clients and the supply chain”. Implementation of the ban may, therefore, hinge on the appetite of the surety market to meet the demand for alternative ways to provide security.
The use of retentions is a divisive issue in the industry and there have been several attempts at reform in the form of a number of Private Members Bills that have failed to progress through Parliament. The government recognises that the proposed ban on retention is “ambitious”. Therefore, the government confirmed its intention to consult further on the impact of the proposal before taking a final decision on implementation. This will represent a crucial opportunity for interested parties to respond further and highlight to the government the potential impact an outright ban on retentions may have on the risk profile of projects.