At the start of this year, the Department of Business and Trade announced a proposed ban on retention payments to improve severe cash flow issues and protect small and medium-size enterprises from insolvency.
Following this announcement, many considered the pending changes for the construction sector (a more in-depth analysis can be found here), as well as the potential impact for the surety industry (a discussion on this can be found here).
On 20 May 2026, the Government introduced the Commercial Payments Bill to the House of Lords for its first reading. And, as many suggested, this takes the form of some significant amendments to the Housing Grants Construction and Regeneration Act 1996 (widely known as the “Construction Act”).
The construction industry will be following the Bill’s parliamentary journey and awaiting further updates as it progresses, while reviewing what has been announced to date.
Headlines from the Bill
An outlined transition period for the construction sector
There will be a transition period of two years from when the relevant sections of the Act come into force, and a period of three years to the “last retention day” at which point all existing retention must be paid back. However, from an initial reading, the interaction of these is not absolutely clear.
Capturing “retention”
“Retention” is widely defined to cover any payment, whether interim or final, under a construction contract (itself taking the existing wide definition of “construction operations”).
This includes not just the original stated contract sum, but any additional payments such as for variations, fluctuations and claims for additional money under the contract that a retention could be attached to.
“Retention clause” is also widely defined and would capture a clause not in writing – an oral agreement to apply retention – and also a retention clause in a separate agreement, such as a side letter.
Related agreements and bonds
“Related agreements” are widely defined as being an agreement relating to sums payable under the construction contract. However, the extent of this isn’t clear yet. The suggestion is that an agreement referring to or having a trigger linked to the construction contract would catch retention bonds. This may be absolutely intended but is not express.
Furthermore, this is the drafting approach taken by most construction performance bonds, which may be a concern as such bonds are concerned with wider performance of the construction contract and not purely retention. Clarity on this point would certainly be welcomed by the industry.
The retention payments in construction contracts ban
The new section 113C is the operative clause banning retention clauses after the end of the transition period and renders them void.
Section 113D goes further by attempting to close a possible loophole and banning an agreement to vary an existing retention clause – presumably with the intention of making it survive the ban. However, a variation that makes the clause more favourable to the payee is permitted. Logically, this permits variations to “fade out” the existing retention clause at the end of the transition period.
Remedies for non-release payments
At the “last retention day” the Bill provides for the repayment of retention, setting out statutory due dates and final dates for payments – which will be no more than 60 days after that.
Where there is a “retention debt” at the end of the two-year transition period, section 113E provides the remedy for the retention not being returned.
An interest remedy with teeth
In addition to the usual remedies for interest, there is an uplift “fixed sum” of the higher of £40 or 50% of the retention debt i.e. the defaulting employer would be required to pay 150% of the retention plus interest at up to 8% over base – a remedy with significant teeth.
Further anti-avoidance
The final section of the Bill relating to retention provides power to the Secretary of State to make further regulations to amend the new sections of the Construction Act. The intention behind this is to quickly close any further loopholes that may emerge without requiring any significant parliamentary time.
Conclusion
It’s evident that the Bill is a serious attempt to ban construction retention payments, with a particular focus on closing off potential loopholes. This is unsurprising to those familiar with the Construction Act, which was previously amended in 2011 to do just that.
The drafting is therefore complex and will require detailed analysis. It’s expected that it will come under scrutiny during its parliamentary journey which will, hopefully, provide further clarity in the few places where its effect is currently unclear.
In relation to the impact for sureties, the industry will be considering what security employers will want if the usual 5% retention is removed. During the defects liability period, the retention provides some assurance to the employer that the contractor has a financial incentive to return to remedy defects.
Historically, retention bonds have been issued to enable the employer to pay over the retention, with some recourse to a financial institution if the contractor fails to remedy defects resulting in costs for the employer. If retentions are outlawed, then retention bonds will also be illegal. So, it will be interesting to see if the changes will lead to sureties issuing a new product in relation to bonds and obligations to rectify defects during the defects liability period.