The UK construction sector may be on the brink of one of its most significant contractual reforms in decades. Following a detailed consultation on retention payments under Part 2 of the Housing Grants, Construction and Regeneration Act 1996, the government has signalled its intention to move toward prohibiting the practice of withholding retentions altogether.
This proposal reflects long-standing concerns across the industry about fairness, cash flow, and the effectiveness of retentions as a risk management tool.
What are retention payments and why are they controversial?
Retention payments are sums withheld by clients or upstream contractors typically 35% of the contract value until completion and rectification periods have passed. They are intended to:
However, critics argue that retentions frequently function as an informal financing mechanism for payers, rather than a genuine quality assurance tool. In practice, they are often released late or not at all creating persistent cash-flow pressures for smaller firms.
The consultation confirmed that many respondents believe retention practices can lead to:
Two Reform Options Considered
Option A: Prohibition of Retentions
Under this approach, retention clauses would be banned outright. Payers would no longer be allowed to deduct or hold back sums from payments.
Instead, they could rely on alternative mechanisms such as:
This option was widely viewed as simpler, more transparent, and easier to enforce.
Option B: Protection of Retentions
The alternative approach would allow retentions to continue but require them to be safeguarded for the benefit of contractors.
Protection mechanisms could include:
Supporters argued this would balance the need for quality assurance with improved financial security for contractors.
What the Industry Said
The consultation revealed strong consensus on the need for change:
There was also broad agreement that:
At the same time, some stakeholders defended retentions as a cost-effective incentive for performance, warning that alternatives could increase costs or complexity.
Why the Government Is Leaning Toward a Ban
Despite mixed views on the best approach, the government has proposed moving forward with Option A: a full prohibition on retentions.
Several factors underpin this direction:
However, concerns remain about:
Wider Industry Context
The debate over retentions is closely tied to broader reforms in construction quality and safety, particularly under the Building Safety Act 2022.
Many respondents emphasised that:
This suggests retention reform is just one part of a wider shift toward higher standards and stronger accountability.
What Happens Next?
The government has not yet made a final decision but has outlined its next steps:
A 12-24 month transition period is likely, giving businesses time to:
Conclusion
The proposed ban on retention payments marks a potential structural shift in construction contracting. While it promises to improve cash flow and fairness particularly for SMEs it also raises important questions about how the industry will manage risk and ensure quality without a long-standing financial safeguard.
Ultimately, the success of this reform will depend not just on legislation, but on the industry's ability to adapt, innovate, and raise standards across the board.
