Blog Author: Chiara Pieri – Senior Associate, CMS Cameron McKenna Nabarro Olswang LLP
“There must be a ‘cash flow’ in the building trade. It is the very lifeblood of the enterprise.” So observed Lord Denning MR over fifty years ago in Dawnays Ltd v F.G. Minter Ltd [1971] 1 WLR 1205 – words as pertinent today as then. It is precisely the issue of cash flow and its systematic disruption by late payment practices that the Government’s reforms now seek to address.
In March 2026, the Government published its response to the 2025 late payment consultation under the title Time to Pay Up, confirming what it describes as the most significant late payment legislation in over 25 years, addressing the pervasive problem of late payments. For the construction industry, which contributed 238 of the 867 consultation responses received, the headline is unmistakable: the Government promises to fix the problem of late payment, which includes the proposal to ban retention payments. As they say: “It’s time to pay up”. That proposal, together with the broader reform package, has the potential to reshape how the sector manages cash flow, risk, and contractual relationships but as this article explores, the gap between stated ambition and legislative reality may yet prove considerable. This article examines the key outcomes of the consultation, the history of the retention debate, and what the proposed reforms would mean in practice for the construction industry.
Retention payments: a long-running debate
Before turning to the consultation itself, it is worth recalling that retention reform is far from a new concept. Retentions originated in the UK during the construction of the railway system in the 1840s, when railway companies withheld a minimum of 20% of contractors’ payments as security against completion costs. The practice evolved to become standard across the sector, providing assurance of project completion and protection against defects. Calls for reform have followed at regular intervals, including:
- The Banwell Report (1964) first recommended the abolition of retentions, concluding they were outdated and economically damaging. Despite this, retentions remained common.
- Sir Michael Latham’s 1994 report, Constructing the Team, recommended replacing retentions with retention bonds or, alternatively, holding cash retentions in a secure trust fund.
- The Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”) introduced payment and adjudication protections but stopped short of abolishing retentions.
- The 2017 BEIS-commissioned Pye Tait report confirmed that retentions were frequently subject to unjustified late, partial, or non-payment, disproportionately burdening SMEs and those lower in the supply chain. A need for further investigation was identified.
- The 2011 amendments to the Construction Act provided that construction contracts could no longer link the release of retention to events under another contract, known as conditional payments.
- The subsequent Construction (Retention Deposit Schemes) Bill 2017-19 (the “Aldous Bill”) sought to introduce compulsory retention deposit schemes but was never enacted.
In short, successive Governments over the last three decades have recognised the problem but, to date, there appears not to have been sufficient political will to act.
The consultation and the key reforms
The 2025 Time to Pay Up public consultation ran from 31 July to 23 October 2025, attracting over 850 responses. Its centrepiece is a hard cap of 60 days’ maximum payment terms between UK businesses, with limited exemptions. Implementation is expected by 2027. Two-thirds of respondents supported this measure, though some raised concerns that 60 days might become the default rather than the ceiling.
Beyond this, the key proposals and reforms include:
- Mandatory statutory interest: 8% above the Bank of England base rate on all late payments, with no ability to contract out. This would extend the current Late Payment of Commercial Debts (Interest) Act 1998 regime which provides for interest at this level but as a default in the absence of a “substantial contractual remedy for late payment of the debt”. Currently standard form construction contracts have rates of 3 – 5% over base;
- Deadline for disputing invoices: a statutory time limit to curtail tactical disputes, with separate measures proposed to align with the provisions for construction contracts under the 1996 Act;
- Board-level scrutiny and reporting: requirements to report on interest payments as one mechanism to identify poor payment practices with audit committees of persistently late-paying companies being required to publish explanatory commentary and fines linked to the scale of unpaid interest;
- Expanded Small Business Commissioner powers: investigation, adjudication, and financial penalties.
The proposed retention ban
The Government consulted on two options, which would involve amending Part 2 of the 1996 Act:
- Prohibit use of retention clauses entirely, making it unlawful for payers to deduct/withhold retention sums; and
- A protection mechanism requiring segregation or guarantee of retained sums.
Of those who responded on retention reform, 87% favoured change, and 62% agreed that an outright ban would be effective.
The Government has confirmed it will work with the Construction Leadership Council and financial services sector to develop practical approaches to minimising defects and expanding the surety market – sensible commitments that underscore how much ground remains to be covered before legislative change to give effect to any retention ban takes effect.
Will this reform deliver meaningful change?
Those who have been around for long enough in the construction sector may be forgiven a degree of scepticism about whether meaningful change will materialise and if so, when. Three points merit particular attention.
First, the Government’s consultation response contains an important caveat: “However, given the ambition of the policy, we will consult further with interested parties on the impact of this measure before taking a final decision on implementation.” In practice, this means a further consultation, followed by primary legislation through Parliament. No imminent change should be anticipated; the industry should continue to operate on the basis that retention clauses remain lawful for the time being.
Second, the further consultation is likely to prove contentious. The 2017 Pye Tait report found that tier 1 contractors use retention monies as working capital in 37% of cases. Those are significant cashflow dependencies and the political will to override any resistance as a result will be tested.
Third, the quality assurance question is genuine and unresolved. Retentions act as a multi-purpose insurance policy and removing the mechanism without a credible alternative risks undermining client confidence. The UK surety and bond market is not currently scaled to absorb the demand that a ban would create, and performance bond costs may prove prohibitive for smaller suppliers – the very firms the reform is designed to protect. However, where there is a demand created, the market is likely to respond and this may be an area where solutions could be forthcoming.
Conclusion
The Time to Pay Up consultation response represents the most significant statement of intent on payment practices in a generation. Yet intent and implementation are very different things. The further consultation process, alternative surety mechanisms to replace retention and passage of primary legislation all lie ahead, each presenting opportunities for dilution or delay.
Construction practitioners should be preparing now – mapping retention exposure, reviewing required standard form amendments and advising clients on transitional planning but should do so with a clear-eyed recognition that this reform, like those before it, will be tested by the commercial realities of an industry in which cashflow remains the bottom line.
Originally published in Construction Law, 1st May 2026
