The government proposal to ban retention payments under construction contracts may prove tricky to implement. Benjamin Garvey and Adam Thompson explain.
In March 2026, the Department for Business & Trade published its response to last year’s Late Payment Consultation. One point which has grabbed the attention of the construction industry is the government’s proposal to ban retention payments under construction contracts.
The government’s preference is an outright ban on retention payments, in keeping with the principles of good payment practice set out in the Construction Playbook and the prompt payment obligations under the Procurement Act 2023.
However, many employers – typically main contractors – have long relied upon retentions, and that reliance has only grown as regulatory and quality standards become more stringent, with greater accountability for the safety and compliance of completed works through legislation such as the Building Safety Act 2022.
What does the consultation propose for retentions?
The consultation considered two measures which could be implemented to mitigate unfair practices concerning construction retentions:
- Option A (outright prohibition on retentions): making it unlawful for parties to deduct and withhold retention sums from payments properly due under construction contracts; or
- Option B (protecting retention sums): allowing retention sums in construction contracts, but legislating for mandatory protection measures, such as segregation of retentions through a distinct bank account, or through some form of surety or insurance-backed guarantee;
Each could be enacted via an amendment to the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act).
A significant majority of respondents to the consultation favoured reform, broadly agreeing that retentions had negative implications. The government intends to progress Option A. Analysis suggests this would be the lower-cost option, and respondents generally agreed it would need simpler legislation to implement.
The government acknowledges there are far-reaching implications to banning retentions and intends to carry out further consultations before any final decision is made, with a particular focus on addressing concerns over build quality. A transitional period of 12 to 24 months is favoured, to allow time for contractual adjustments, financial planning, and the development of alternative assurance mechanisms.
Alternatives to retentions?
In the event of a blanket ban, the employer may look for means to benefit from a retention in all but name.
Monthly deductions throughout the works might prove difficult if reforms go ahead, but they could engineer contract payment terms to ensure a significant sum is left for payment at the conclusion of the works.
Legislation permits payments on a milestone basis. Employers could, subject to careful drafting of Construction Act compliant payment terms, section works so that a final payment falls due at completion, just in time for a well-placed pay less notice.
This would mean that there is no strict retention, but there would be a large sum at the completion of the works owed to contractors in the supply chain.
Project bank accounts, or escrow accounts, are viable options that can provide effective protection of payment sums. However, the administrative burden and cost of such accounts may make them less practical for smaller-scale projects.
Under the Construction Act, an employer can only withhold retention sums after demonstrating grounds for doing so under the contract. The same would be true under a bond, project bank account or escrow account – monies will typically only be released with agreement of the parties or a legally binding decision.
Performance and retention bonds are difficult to secure for all but the largest employers and projects, increasingly expensive, and often considered commercially unsuitable for larger projects. Reform of the bond market might be necessary for them to become a truly viable alternative.
While employers can mitigate some risks through more frequent and intensive inspection regimes before practical completion, these would not eliminate the risk posed by latent defects discovered post-completion. In this respect, there are few genuine alternatives to retentions that prove as versatile.
Uncertain implications
The benefits of an absolute ban on retention sums are clear, but the practical implications are uncertain. The risks of such a robust policy change cut both ways.
Contractors in the supply chain that have pushed for a ban may find themselves vulnerable to equally onerous workarounds that employers adopt.
Employers, without a legislated alternative, may face increased costs or risk falling foul of statutory quality requirements.
The challenge for government is striking a balance between safeguarding parties from unfair retention practices and ensuring employers retain the contractual tools they need to deliver quality, safe and compliant buildings.
Benjamin Garvey is an associate and Adam Thompson a senior associate at Trowers & Hamlins.
