Retentions: The Government hasn’t “held back” on plans to ditch retention payments
What is happening?
The Government has announced plans to ban the use of retention payments in construction contracts. It has been dubbed as one of the most ambitious overhauls of payment practices in over 25 years. The proposal was unveiled by the Department for Business and Trade on 24 March, as part of a wider drive to tackle late payment practices that are said to cost the UK economy around £11 billion each year.
If implemented, the ban would prevent employers and main contractors from withholding a percentage of payments as “retention” to be released later, typically at the end of the defects period.
Why is it happening?
The primary driver behind the proposed ban is cashflow protection, particularly for SMEs and specialist sub-contractors. As retentions are often unsecured, they are frequently irrecoverable where an upstream contractor becomes insolvent, enters administration, or where an employer or main contractor simply fails to release funds.
By removing retentions altogether, the intention is to reduce insolvency risk in the supply chain, improve payment certainty, and protect smaller firms that are least able to absorb losses.
That said, the announcement raises as many questions as it answers – particularly around how employers will incentivise contractors to make good defects and how performance security will be managed without them.
What impact could this have?
The proposed ban could have wide‑ranging commercial and practical consequences across the industry, including:
- Greater defects and quality risk for clients Retentions are currently the simplest and lowest‑cost leverage available for employers to encourage contractors to return and remedy defects after practical completion. This has been accepted in the industry as crucial in securing contractor performance obligations. Industry bodies have warned that removing this incentive may weaken the drive for quality, make defects harder to resolve post‑completion, and leave clients – particularly smaller or one‑off developers – more exposed.
- More tension during projects Without a post‑completion financial “hold‑back”, and to offset the risks of there being issues with quality and defects, employers and project managers may challenge valuations of interim payments more vigorously, which seemingly may have the opposite intended effect of the proposed ban, and is likely to cause more tension during the carrying out of works. Employers and project managers may also look to tighten up certain requirements to achieve practical completion or, if it is known that there are concerns with quality, then ensure that quality issues are raised earlier and more robustly. All of which have the potential to lead to a less collaborative behaviours on projects and, in the short term, increase the risk of disputes.
- A shift towards alternative security arrangements By removing the ability to withhold funds, employers and funders will need to consider alternative means of securing contractor’s post-practical completion obligations. The surety market will need to respond to these demands. Alternatives such as retention bonds (already the most viable alternative to cash retentions), performance bonds and/or parent company guarantees may become more common, but these come at a cost and may not be accessible or affordable for all contractors.
- Changes to pricing and procurement and risk allocation Contractors may need to price differently to reflect increased risk and performance security costs, while funders and developers may take a more cautious approach to contractor selection.
- Attempts to work around the ban There is a recognised risk that parties may try to replicate the economic effect of retention through back‑loaded payment schedules, milestone payments or aggressive valuation practices. The Government has indicated that anti‑avoidance measures are likely, but how effective these will be remains to be seen.
- Updates to legal drafting The absence of retentions could also lead to tighter contract drafting, including, as mentioned above, more prescriptive practical completion requirements. Industry bodies may also need to consider changes to their standard forms.
Conclusion: a major shift, but market must adapt
The proposed ban marks a significant shift from a commercially market-accepted principle within construction contracts. Many in the industry will welcome the move as a long‑overdue step to protect cashflow and reduce insolvency risk across the supply chain, particularly for those best placed to suffer from the loss of retentions.
At the same time, retentions have long played a practical role in incentivising performance and safeguarding build quality. Removing them without ready-made alternatives risks creating further problems, including higher costs, increased disputes, and greater pressure on completion and certification processes.
Whether this reform proves to be a net benefit for the industry will depend largely on how the market adapts – including the availability of affordable alternative security, and how effectively anti‑avoidance measures are enforced.
For now, clients would be well advised to review their standard contracts and consider risk allocation and security strategies early, ahead of further consultation and implementation. The days of “holding back” may be numbered – but what becomes accepted in the market as a retention replacement, will be more important.
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