The End of Retentions: A New Era for Construction Cash Flow?

This forms part of a wider initiative to address late payments across the economy, an issue the Government estimates costs the UK over £11 billion each year and contributes to the closure of dozens of businesses every day.

The consultation focused on two options – a prohibition of retention clauses or the introduction of enhanced safeguards to improve current practices. Responses revealed overwhelming agreement that reform is necessary, particularly to curb the misuse of retentions.

According to the Government’s publication, 62% of respondents considered a complete ban effective in addressing the existing problems, while 65% supported strengthened protective measures.

A consistent theme across responses was the negative impact of withheld retention monies on the finances of supply chain businesses, especially SMEs. Many reported that retention funds are often withheld without justification, paid only partially, or not released at all. This has a direct impact on working capital and funds for investment – issues that the Government appears keen to address as part of its wider economic growth ambitions.

However, some industry stakeholders cautioned against removing retentions entirely. They argue that the current framework offers a cost‑effective mechanism to incentivise performance and ensure post‑completion defects are rectified.

Despite varying views, the Government’s response indicates a leaning towards Option A: the removal of retentions altogether. It described this approach as the “less complex legislative proposal of the 2 options, simpler for the industry to implement and easier to enforce under construction contracts”.

No timeline has yet been confirmed for implementing any changes. Respondents generally supported a transitional period of 12 to 24 months to allow the industry to adapt. The Government has confirmed that further consultation will take place before any final decision is made.

Our team will continue to monitor developments closely. We regularly advise on the drafting and negotiation of construction contracts, including retention provisions, payment terms, and associated risk. If you need support reviewing existing contracts or preparing for the proposed reforms, please contact a member of our Commercial team.