Cash retention has been part of UK construction contracting for decades. Employers and main contractors have used it as security against defective work, incomplete works and the cost of putting problems right. Contractors and subcontractors, meanwhile, have often treated it as money they may eventually receive, but cannot use while the project is running.
That arrangement is now facing its most significant challenge yet.
The Commercial Payments Bill, introduced in the House of Lords on 19 May 2026, proposes to prohibit contractual provisions allowing retention sums to be deducted and withheld under construction contracts. The Bill completed Committee stage on 21 July, with Report stage due to begin when Parliament returns on Tuesday 1 September. Royal Assent is currently targeted during 2027, although the Bill may still be amended.
This is not an immediate overnight ban. There is intended to be a two-year transition period from commencement, followed by a run-off period for existing arrangements. But contractors, developers and subcontractors in Essex, Kent and London should start preparing now because the change will affect cash flow, contract security, tender pricing and the surety market.
Why the retention ban matters
The Bill is designed to address the wider problem of late commercial payments. Government figures indicate that late payments:
- Cost the UK economy approximately ÂŁ11 billion each year
- Contribute to the closure of 38 UK businesses every day
- Lead to around 14,000 business closures each year
- Affect approximately 44% of SME invoices
- Require businesses to spend an average of 86 hours each year chasing payment
Construction has long experienced particular pressure because the supply chain can involve several layers of contractors, delayed valuations, disputed applications and retentions that remain unpaid until months after practical completion.
For a smaller subcontractor, the retained amount may represent wages, supplier payments or working capital. For a developer or main contractor, it provides a familiar form of protection if defects emerge. Removing it improves cash flow for the supply chain, but it also removes a security mechanism that employers have relied on for a long time.
The industry therefore needs to replace the function of cash retention, not simply remove the deduction.
What the proposed timetable means
The Bill proposes a phased approach.
During the first two years after commencement, existing retention clauses would remain lawful. This is the main transition period and should give businesses time to revise standard forms, tender assumptions and security arrangements.
From the start of year three, parties would not be able to agree or vary new retention clauses. Existing transitional clauses may continue to operate only for the permitted run-off period. At the end of year three, referred to as the last retention day, all retention clauses would become void, together with terms dealing with the treatment of retained sums.
Any transitional retained sum would then have to be paid within 30 days of the last retention day. The final date for payment would be a further 30 days for public-sector payers and 60 days for private-sector payers.
The Bill also proposes a penalty where a payer unlawfully deducts or retains money. The payee would be entitled to the retention debt itself, statutory interest and a fixed sum equal to the higher of ÂŁ40 or 50% of the retention debt. Contracting out of that protection would be void.
The exact operation will depend on the final legislation and commencement regulations. The important point is that existing contracts cannot simply be ignored. Their retention provisions need to be mapped against the transition and run-off periods.
The wider payment changes
The retention ban is part of a broader set of payment reforms.
For relevant private-sector business-to-business contracts, the Bill proposes a statutory maximum payment term of 60 days. Public contracts would generally remain subject to 30-day payment requirements. There are limited exemptions, including some contracts between two large undertakings and certain arrangements where the purchaser is the smaller party.
Statutory interest would also be entrenched at 8% above the Bank of England base rate. Contract terms could no longer avoid that right by providing a different “substantial remedy”.
The Bill would also require invoice disputes to be raised within eight days before the payment due date, or by the due date where payment is due within 14 days of performance. A payer that raises a late dispute could face compensation of the higher of ÂŁ40 or 1% of the contract price, or 1% of the disputed contract price.
Construction contracts would have additional requirements, including earlier pay less notices, limits on extensions to final payment dates and the removal of bank holidays as a reason for extending payment periods.
These measures may improve payment discipline, but they are also likely to create more arguments about valuation, notices, milestones, defects and entitlement. We should expect an increase in payment disputes and adjudications while the industry adjusts.
The Bill also proposes stronger powers for the Small Business Commissioner, including investigations into larger businesses, binding interim decisions in certain disputes, enforcement and publication directions, and fines of up to 1% of annual UK turnover.
What replaces cash retention?
Several alternatives are being discussed, but none is a perfect replacement.
Retention bonds
A retention bond can provide security to an employer without withholding cash from the contractor. The surety agrees to pay within the terms of the bond if the contractor defaults on specified obligations.
The difficulty is cost and availability. Retention bonds may be expensive for smaller contractors and subcontractors, and a surety may not offer them where the applicant’s financial strength is weak. Employers may also request an on-demand bond, while the UK market generally provides bonds on a default basis.
That distinction matters. A default bond normally requires the beneficiary to establish that the contractor has defaulted and that the relevant conditions of the bond have been met. It is not the same as being able to demand payment simply because a defect or disagreement has arisen.
Performance bonds
Performance bonds are already familiar, but they have generally been used alongside cash retentions rather than instead of them. Demand is likely to increase as employers seek wider protection against non-performance and insolvency.
Contractors should understand:
- Whether the bond is conditional or on-demand
- The percentage of the contract value required
- The events that allow a claim
- The expiry and maintenance provisions
- Whether the bond mirrors the underlying contract
- What indemnities the surety requires
This is particularly important given the tightening surety market discussed in our recent article, Ardmore Could Cost the Bond Market ÂŁ100m: What the Surety Squeeze Means for Contractors in Essex and London.
If demand for bonds rises while sureties are reassessing exposure after major construction failures, contractors should not assume a facility will be available at short notice.
Project bank accounts and trust accounts
Project bank accounts can help improve payment through the supply chain by separating project money and reducing dependence on one party’s general cash flow. They may be particularly useful where the objective is to protect subcontractors.
Trust accounts could also be considered, although they are less common and their treatment under the final legislation will need careful review. Neither option necessarily gives an employer the same performance protection that cash retention provided.
Parent company guarantees
A parent company guarantee may provide additional support where a contractor or subcontractor is part of a financially stronger group. However, its value depends on the parent’s actual financial position, the wording of the guarantee and whether the parent remains within the relevant corporate structure when the claim arises.
Milestone payments
Milestone payments may become more common, with part of the contract sum becoming due when clearly defined stages are completed.
But drafting needs care. The Bill’s definition of retention is potentially wide and could capture an arrangement where a percentage of money is held back until a condition is met. A genuine payment milestone should be linked to a defined stage of performance, not operate as a disguised percentage deduction.
The same issue may arise where payment is withheld until a contractor provides collateral warranties, parent company guarantees or bonds. These provisions could arguably fall within the prohibition if they operate by withholding money that is otherwise due. The courts may ultimately need to decide where the line is drawn.
The impact on construction insurance
The retention ban will not turn a liability policy into a bond, and a bond does not replace insurance.
A Construction Contractor Insurance programme should be reviewed alongside the new security arrangements. Depending on the contractor’s role, this may include public liability, employers’ liability, contract works, professional indemnity, products liability, plant and business interruption cover.
For contractors, key questions include:
- Does the policy reflect the contracts being accepted?
- Are design, specification or coordination responsibilities covered?
- Are contractual liabilities wider than the insured negligence standard?
- Does the policy respond to disputes arising from defective or incomplete work?
- Are subcontractors and consultants properly insured?
- Are bond costs and collateral requirements included in tender pricing?
- Is trade credit insurance needed for major customer exposures?
General Contractor Liability Insurance should also be reviewed carefully. Public liability may respond to injury or third-party property damage, but it will not normally pay an employer’s bond claim, fund a retention debt or cover a pure cash-flow shortfall.
For subcontractors, trade credit insurance may become more important if payment disputes and customer failures increase. Check the credit limits applying to key developers and main contractors, along with notification requirements for overdue invoices and disputed debts.
Our earlier article, Your Subcontractor Just Went Bust: How Supply Chain Insolvency Is Rewriting Construction Contractor Insurance in 2026, explains why customer concentration and unpaid applications deserve close attention. Developers and main contractors should also consider the lessons in Your Main Contractor Just Went Bust: The ÂŁ5m Ardmore Lesson Every Subcontractor in Essex and London Needs to Learn.
Keep better progress records
Without the cash-flow incentive created by retention, employers may scrutinise valuations and progress more closely. Liquidated damages may also be deducted more readily before practical completion if an employer no longer expects to rely on retention at final account stage.
That makes contemporaneous records essential.
The decision in Mace Construct Ltd v Baltic Investment Holdings Ltd [2026] EWHC 976 (TCC) is a useful reminder. The court considered how an adjudicator could review an extension of time and emphasised the importance of the information available when the decision was made, rather than relying only on hindsight.
Contractors should keep:
- Updated programmes and progress reports
- Site photographs and inspection records
- Payment applications and notices
- Signed instructions and variation records
- Defect notifications and responses
- Meeting minutes and correspondence
- Evidence of completed milestones
- Records showing when information was provided or delayed
When retained cash is no longer available as a buffer, clear evidence may become one of the contractor’s most important protections.
A practical checklist for Essex, Kent and London contractors
Before the Bill becomes law, contractors and subcontractors should:
- Review current contracts for retention clauses, release dates and transitional exposure.
- Model cash flow using 30-day and 60-day payment scenarios rather than relying on historic payment behaviour.
- Price alternative security into tenders, including bond premiums, legal costs and collateral requirements.
- Start surety discussions early, particularly if an employer may require an on-demand bond.
- Review group structures and the availability of parent company support.
- Check milestone drafting so payment stages do not unintentionally become disguised retentions.
- Improve progress records and maintain a reliable notice process.
- Review credit limits on key customers and consider trade credit insurance where appropriate.
- Check Construction Contractor Insurance and General Contractor Liability Insurance against current contractual obligations.
- Obtain legal and insurance advice before replacing a retention clause with a new security mechanism.
Our earlier guide, Why the 2026 Commercial Payments Bill Will Change the Way You Buy Business Insurance in Essex, covers the wider implications for commercial policyholders.
Conclusion
The proposed retention ban should improve cash flow for many contractors and subcontractors, but it will not remove the underlying risks of defective work, incomplete projects or contractor insolvency. It will shift those risks into contracts, bonds, guarantees, escrow arrangements and more rigorous payment administration.
The timing is important. Demand for retention bonds and performance security may rise while the surety market remains cautious. Smaller contractors could face higher costs or difficulty obtaining the form of security demanded by an employer.
Businesses looking for Business Insurance Essex or Business Insurance London should therefore review their insurance and contract arrangements together. Plan bond costs into bids, assess customer credit exposure and check that liability, professional indemnity and trade credit policies reflect the work and obligations being accepted.
The strongest response is early preparation. Contractors that understand their retention exposure, maintain good records and approach the surety market before a tender deadline will be in a much better position when cash retention finally disappears.
This article provides general information only and is not legal, financial or insurance advice. The Commercial Payments Bill may be amended before Royal Assent, and the effect of any retention clause, bond, guarantee or insurance policy depends on its wording and the circumstances. Obtain specialist professional advice before relying on a particular arrangement.
Frequently asked questions
Is cash retention already banned in UK construction contracts?
No. The Commercial Payments Bill is still progressing through Parliament. It proposes a two-year transition period from commencement, followed by a run-off period for existing arrangements. The final legislation and implementation dates may still change.
What will replace cash retention?
Potential alternatives include retention bonds, performance bonds, project bank accounts, trust accounts, parent company guarantees and carefully drafted milestone payments. Each option provides a different type and level of protection, so the most suitable approach will depend on the project and the parties involved.
Will retention bonds be available to small contractors?
Not necessarily. Retention bonds may be expensive for smaller contractors, and sureties may decline to offer them where the contractor’s financial strength or covenant is insufficient. Early discussions with a specialist broker and surety provider are recommended.
What penalty is proposed for unlawful retention?
The Bill proposes that a payee could recover the retention debt, statutory interest and a fixed sum equal to the higher of ÂŁ40 or 50% of the retention debt where money is unlawfully retained. The final legal position will depend on the enacted legislation.
Does Construction Contractor Insurance cover a bond claim?
Not automatically. A bond is a separate security instrument, while Construction Contractor Insurance responds according to its own policy wording. Liability, contract works, professional indemnity and trade credit policies may address different parts of the risk.
Should subcontractors consider trade credit insurance?
It may be appropriate where a subcontractor has significant unpaid exposure to one or more developers or main contractors. The policy will usually include debtor-level limits, notification requirements, waiting periods and conditions relating to disputed or overdue invoices.
Why are progress records more important after the retention ban?
Employers may scrutinise valuations, milestones and delay more closely when they can no longer rely on retention as a final-account safeguard. Accurate programmes, notices, photographs, payment applications and defect records can be important evidence in payment and extension-of-time disputes.