The government has provided further detail on its proposed ban on retentions through the publication of the Commercial Contracts Bill.

Published: 22 May 2026
Author: Amber Wright

In a press release, it says the Bill, described as the Small Business Protections Bill, will deliver “the toughest crackdown on late payments in a generation”. Significantly for the construction industry, the Bill prohibits the largely routine practice in construction contracts of deducting or withholding retention payments. We first discussed this proposal in our earlier update,  Government proposes a ban on retentions. The Bill has now had its first reading in the House of Lords, bringing the proposed ban a step closer. It also includes wider measures to tackle poor payment practices in contracts, with potentially significant implications across the supply chain.

When will the ban apply?

The ban will require amendments to the Housing Grants, Construction and Regeneration Act 1996 (HGCR Act 1996) by inserting new sections 113A-F. Section 113A(1) of the Bill contains a broad definition of retention practices, intended to capture and prohibit the common use of retentions in construction contracts. The ban will apply where one party to a construction contract deducts or retains sums of money until certain conditions are satisfied. The ban applies to sums deducted or retained equating to a percentage of the amounts payable in accordance with the terms of a construction contract for the supply of any goods, services or works, an interim payment or the contract total of the construction contract. The contract total is the amount payable for any goods, services or works supplied and any additional sums in accordance with the terms of the contract.

Section 113A(2) gives a non-exhaustive list of conditions of release including that the party has met all its obligations or specified conditions under the construction contract or that a period set aside for making good any defects has expired. The ban also extends to related agreements, which is presumably aimed at prohibiting parties seeking to avoid the ban by making side agreements.

Transitional provisions

A ban on retentions will be a major shift and will require the industry to adapt and to potentially ensure that alternative forms of security are in place to manage project risk. In recognition of this, the Bill contains transitional provisions and an outright ban on retention may still be some way off. The timeframe for implementation of the ban is not clear with the government saying it will consult further on the timing.

Following the provisions coming into force, retention clauses will remain effective for two years. Any retention clause agreed during the two-year transitional period or where a retention clause was agreed before the provisions came into force but was varied during the two-year period that followed, will continue to be effective for three years following the provisions coming into force. Following the end of the three-year period, those clauses will be ineffective and any sums that remain deducted or retained will have to be reimbursed within the timeframes set out in the Bill. Any retention clause agreed or varied after the two years period following the provisions coming into force will be void. The provisions will not impact pre-existing retention clauses provided they are not subsequently varied after the provisions come into force.

Penalties for unauthorised retentions

Parties who deduct retention in breach of the ban are set to face tough penalties. The Bill provides that where sums are deducted or retained in contravention of the retention ban, it will be an implied term in a construction contract that the party due the retention is entitled to recover a fixed sum penalty of the higher of £40 or 50% of the retention debt. This is in addition to any other entitlement including statutory interest on the amount withheld or deducted of 8% above the Bank of England base rate.

Availability of alternatives

The ban on retentions will likely see a significant increase in demand for alternative forms of security to mitigate project risk. Alternatives may include bonds (or bonds of longer duration), parent company guarantees, escrow agreements, project back account and insurance backed defect warranties.Something akin to a retention bond may also be a possibility providing security against a contractor failing to complete outstanding works and remedy defects. The viability of these will depend on whether these alternative products are widely available and not prohibitively expensive. They will undoubtedly lead to increase project costs and will take time to negotiate. The timing of the implementation of the ban may, therefore, be influenced by the appetite of the surety market to work quickly to meet the demand for alternative ways to provide security.

In any event, a ban would also increase the focus in projects on the importance of ensuring thorough inspection and accurate valuation of work. Certification of practical completion with substantial snagging will be risky without the security of retentions or a viable alternative. The ban may result in practical completion becoming an increasingly higher bar, taking longer to achieve with contractors at greater exposure to the risk of damages for delay. The ban will likely result in an increase in disputes, at least, initially where the boundaries of alternative options to mitigate risks and the scope of the ban itself are tested.

Other provisions

The Bill contains other measures impacting construction contracts. These include restricting the timescale for serving a payless notice under s.111(5)(a) of the HGCR Act 1996 to 7 days before the final date for payment. Typically, employers and main contractors include payment terms enabling maximum flexibility to serve the payless notice up to one day before the final date for payment.  Other measures include:

• capping acceptance or verification procedures to 30 days unless the term is a ‘fair and reasonable one’
• imposing maximum payment terms of 60 days, with strictly limited exemptions
• mandating interest on late payments at 8% above the Bank of England base rate
• giving suppliers the right to a fixed sum where a purchaser raises a dispute late or without sufficient information

Impact on development

Commenting on the proposed retention ban in March 2026, the British Property Federation said “a complete ban on their use is a sledgehammer to crack a nut and will undermine the ability of those funding new construction to ensure that buildings are defect-free”. Regulation and additional costs have beset the industry over the last few years against a challenging and unpredictable economic backdrop. External factors such as Brexit, Covid, the War in Ukraine and conflict in the Middle East has impacted the confidence of investors. It will be interesting to see whether this ban on retentions which the government describes as “ambitious” together with other measures still to come, including the implementation of an additional tax on housebuilding in the form of the building safety levy, will impact overall investment and growth – including the government’s own housebuilding targets.