Construction contracts: Retentions under review

Retentions are a longstanding contractual practice within the construction sector, where the employer retains a percentage of the contract value as security against the cost of defects and/or against insolvency in the supply chain. The retentions are later released usually upon completion of the work and any balance once the defects liability period is over.

Change may be on the horizon. In July, the Government announced its Small Business Plan, which is a comprehensive package of legislative proposals to tackle late payment and ensure businesses are paid on time.

The Department for Business and Trade identified three key issues the measures aimed to address were:

• Late payments: where businesses fail to pay an invoice within agreed payment terms (30 days where no specific terms have been agreed).
• Long payment terms: where payment terms are agreed over extended periods, beyond 60 days.
• Disputed payments: where businesses disagree over the goods or services supplied and payment is delayed or reduced.

But specific to the construction sector, it was concerned that retained money could be lost through upstream insolvency or subject to late, partial, or non-payment.

The Government has undertaken consultation on proposals to deal with the issues identified above and the consultation document set out two proposals for retentions:

1. Prohibit the use of retentions; or
2. introduce requirements to protect retention funds.

The Government has indicated that an outright ban is its preferred option. This could be achieved by amending the Construction Act, which would be relatively straightforward. If this approach were adopted, the consultation document recognises that the party due to make a payment could still seek alternative forms of surety, such as performance bonds or insurance, but these would not be mandatory.

The change would apply only to construction contracts after a prescribed date, which would be subject to a transitional period for parties to adjust to the new requirements.

For completeness, the alternative proposal envisaged continuing to allow the use of retention clauses but protecting the retained sums in either a separate bank account and/or protecting the sums through an instrument of guarantee (insurance / surety bond).

Legal commentators have reported that the proposals have been broadly welcomed, particularly by contractors. However, there is an indication of resistance from developers who fear that their financial security is eroded together with losing leverage over a contractor to ensure defects are addressed.

Either approach would be a significant change in the sector.  The consultation closed on 23 October 2025, and a decision is expected in early 2026.