Construction retentions ban: what it means for contractors

The Commercial Payments Bill would make retention clauses in construction contracts void after a two-year transition period. Retentions already held would have to be repaid by a “last retention day” three years after the rules start. The bill has finished its House of Lords stages but is not law yet, so nothing changes for contractors today.

What is a retention?

A retention is part of a payment that a client or main contractor holds back as security against defects or non-completion. It is typically released in stages, at practical completion and at the end of the defects period.

The government’s Time to pay up response says respondents found retained money is often subject to “unjustified late, partial, and non-payment”. That squeezes cash flow for small and medium contractors, and the money can be lost if the payer becomes insolvent.

What does the bill do?

The bill amends Part II of the Housing Grants, Construction and Regeneration Act 1996, the Construction Act. According to Gowling WLG’s analysis, it inserts new sections 113A to 113F.

The ban covers “construction contracts” as defined in section 104 of the Act. It catches retention clauses:

• in the contract itself
• in a separate agreement about sums payable under it, such as a side letter
• that are agreed orally rather than in writing

How will the ban be phased in?

The ban arrives in three steps, counted from the date the provisions come into force. That date will be set by regulations and has not been announced.

During the transition, any change to an existing retention clause is void unless it makes the clause more favourable to the payee. After the last retention day, existing retention clauses and their release conditions stop having effect.

Repayment uses the normal payment notice and pay less notice machinery. Brodies’ June 2026 analysis says the sums fall due 30 days after the last retention day, with a final date for payment 60 days after that, or 30 days for public authorities.

What happens if a payer does not repay?

An unpaid retention becomes a “retention debt”. The payee can recover the debt plus a fixed sum of the higher of £40 or 50% of the debt.

Late payment compensation and statutory interest at 8% above the Bank of England base rate apply on top, and cannot be contracted out of. In practice a payer that holds on to a £10,000 retention could owe £15,000 plus compensation and interest.

What stays allowed?

Not every staged payment is a retention. Gowling WLG’s reading of the bill, as amended at Lords report stage on 15 September 2026, is:

• Staged and interim payments are fine. Withholding money for work already done, as security, is caught whatever it is called.
• Escrow and bank-facilitated payments are allowed where they help pay money that is due, rather than hold it back.
• Resident-led companies get no exemption.

The government chose an outright ban (Option A) over requiring retentions to be protected in a segregated account or by a surety bond (Option B). It says it will work with the financial services sector to develop a larger surety market, which payers may turn to instead.

Where does the ban apply?

The retention provisions apply in England, Wales and Scotland. Law firm Arthur Cox notes that Northern Ireland is covered by separate amendments to the Construction Contracts (Northern Ireland) Order 1997, which do not make existing retention clauses unlawful there.

Where is the bill now?

The bill was introduced in the House of Lords on 19 May 2026, according to the government’s press release. Report stage was on 15 September 2026, and third reading was listed for 20 October 2026 with no amendments tabled.

It now moves to the House of Commons, where it can still be amended. Our post on the Commercial Payments Bill tracks each stage and the wider late payment measures, including the 60-day cap on payment terms.

Which applies to you?

• If you are a subcontractor owed retentions, keep chasing them under your current contract. Nothing is released early.
• If you are a main contractor, you will hold retentions from your supply chain and have them held by clients, so plan for both sides ending.
• If you are a client or developer, look at retention bonds or other security before the transition ends.
• If you work in Northern Ireland, do not assume the ban applies to you.

What accountants should do now

1. List retentions receivable and payable for construction clients, with expected release dates.
2. Check the VAT treatment. HMRC’s manual VATTOS9120 explains the tax point rules for retention payments, which differ by contract type.
3. Model the cash flow change. Ending retentions improves cash for subcontractors but may raise bonding costs for main contractors. Our guide to cash flow forecasting can help.
4. Use today’s routes for late retentions. Construction Act disputes go to adjudication, not the Small Business Commissioner, whose remit excludes them. Invoice finance can bridge the gap meanwhile.

Frequently asked questions

Are construction retentions banned now?

No. The Commercial Payments Bill is still going through Parliament, and the ban only starts after a two-year transition from a date set by regulations.

When will the retentions ban take effect?

No date is set. Gowling WLG expects Royal Assent in 2027, so the outright ban would not apply until 2030 at the earliest.

What happens to retentions I already hold?

They must be repaid by the last retention day, three years after the provisions come into force. Late repayment triggers a fixed sum of the higher of £40 or 50% of the debt.

Does the ban apply in Scotland and Northern Ireland?

The retention provisions apply in Great Britain, which includes Scotland. Northern Ireland has separate amendments that do not ban retentions.

Will staged payments still be allowed?

Yes. Genuine staged and interim payments remain lawful. Holding back money for completed work as security is what the ban targets.