A Review of Payment Practices in the Construction Sector: Will Retentions Be Retained or Regulated?
Cash retentions are a near-universal tool in the construction toolkit to ensure that a contractor or sub-contractor returns to site to remedy defects or attends to incomplete works. The origin of retentions has been dated back to 1840, during the establishment of railways in the Victorian era. However, despite their wide use and long history, the application of retentions is controversial. The UK Government is currently reviewing the application of retentions (again) as part of a wider scheme to consider payment practices within the construction sector. The proposed regulatory options include implementing regulatory measures or abolishing retentions altogether. However, as in previous consultations on the subject, the Government may also choose to maintain the status quo.
At the highest level, retention monies are formed by holding back a percentage, usually 3-5%, of the payment otherwise due and owing to the contractor for works completed. If there is no lawful reason for the Employer to make a reduction, i.e. to remedy a contractor’s defect, then retentions should be returned to the contractor in full at the end of the defect’s liability period, although the JCT contract typically sees a first instalment being returned at Practical Completion and the balance at the end of the defects liability period. It is a system that is designed to cause minimal hardship to a contractor, the 3-5% percentage is not designed to break the bank per pay cycle, but the percentage calculated against the overall project offers enough of an incentive to ensure the contractor will return to site if necessary.
What are the potential issues with retentions
If properly used, retentions can provide a proportionate level of security to the employer/client and project funders, balancing the interests of the parties. The financial security allows projects to get off the ground with little to no cost up front in providing bonds or other alternative methods.
However, the main concerns around retention practices include:
- If the employer/client goes insolvent. the contractor joins the other unsecured creditors in an attempt to recover the retention monies.[i]As an unsecured creditor they are less likely to get full (or, indeed, any) recovery of monies owed to them.
- Delays in paying retention sums to the contractor. This could affect cashflow, the ability to meet the business’s costs and perhaps even the need to borrow (e.g. through overdraft) to cover cashflow gaps.
Since the starting point is that, subject to any lawful deductions being made, the contractor or subcontractor is entitled to receive the retentions in full, the injustice of the above can be keenly felt.
Furthermore, issues with retentions can impact the entire supply chain as contractors generally hold back retentions down the chain, both as back-to-back protection against defects but also to mitigate the effect of the reduced cashflow.
Previous proposals for regulating retentions
Since the Banwell Report in 1964[ii] and the Latham Report three decades later in 1994[iii], the impact of retentions in the construction industry has been under review by the UK Government.
In more recent years:
2011
The Housing Grants, Construction and Regeneration Act 1996 always contained a prohibition against ‘pay when paid’ clauses, i.e. a clause that makes payment conditional upon a third party paying, such as a clause stating that the main contractor will pay the subcontractor or release retentions to the subcontractor when the main contractor is paid or gets retentions released to it by the employer/client (subject only to an upstream insolvency carve out[iv]). In 2011, this was taken further, prohibiting “pay when certified” provisions, which means that payment cannot be conditional on the performance of obligations under another contract.
However, as of 2017, despite statutory regulation, some contractors were reportedly still encountering conditional payment.[v]
2017
Parliament conducted a consultation on retentions (amongst other poor payment practices) supported by a research paper prepared by Pye Tait (“2017 Research Paper”). The Consultation Response Paper considered that the principle of cash retention is “sound”, describing retentions as a “safety net” to “encourage contractors to return to site to remedy defects.”[vi] However, they also considered the alternatives such as retention bonds, parent company guarantees, performance bonds, escrow/third party accounts. For every alternative, they found potential downsides and noted that it could be costly and would create security unease for project funders to transition to an alternative. A complete ban on retentions was not consulted on but many respondents nonetheless proposed such a ban.
2017
The Construction Industry (Protection of Cash Retentions) Bill, a private members’ bill which sought to ring fence retentions into a Government-approved third party trust scheme, did not get past its first reading in Parliament.
2018
Following the collapse of Carillion plc, a large construction company, resulting in mass loss of retentions (approximately £800m), the Construction (Retention Deposit Scheme) Bill, another private members’ bill, was introduced. The purpose of this Bill was to mandate that retention monies would be put into a deposit scheme. However, this Bill also failed to progress through Parliament.
2021
A third private members’ bill, the Construction (Retentions Abolition) Bill, was introduced. This envisioned the complete removal of retentions. This too did not make any progress.
2025
Under the Reporting on Payment Practices and Performance (Amendment) Regulations 2025, UK’s larger companies and limited liability partnerships (LLPs) must report twice in a financial year on their payment practices, these Regulations introduced additional requirements on a qualifying company or LLP to publish certain information about their payment practices and policies with respect to retention clauses in any construction contract they have with their suppliers, including statements about the company’s/LLP’s standard practices for applying retentions and whether a standard percentage rate is applied, duly disclosing that percentage.
Of interest, without delving into the position of the Scottish Government in any detail, the Scottish Government has by way of a Policy Note clarified that its long-term aspiration is to reduce or remove the need for retentions.[vii]
Approach taken in the NEC and JCT contracts
The NEC form of contract contains retentions only as an optional clause and if opted into there are protective clauses that kick in. The JCT forms of contract contain guidance on other alternative methods and the alternative of a retention bond in place of monetary retentions.
What is the purpose of the current consultation?
The Department for Business and Trade (formerly the Department for Business, Energy & Industrial Strategy) has opened a consultation titled: ‘Late payments consultation: tackling poor payment practices’ in the UK across all industries. The consultation relates to several poor payment practices including maximum payment terms and interest rates and notably considers retention practices within the construction industry.
This builds upon the changes brought in on 1 March 2025 under the Reporting on Payment Practices and Performance (Amendment) Regulations 2025, set out above.
What proposals does the consultation seek input on relating to retention clauses?
The consultation seeks comment on whether retention clauses should either be prohibited altogether or whether additional requirements will be added to protect retention funds deducted and withheld from insolvency and late or non-payment.
Protective measures
The suggested protective measures include:
- Retention monies to be segregated into a separate bank account and protected through an instrument of guarantee.
- A single bank account and separate ledger for each payee and each contract.
- Any interest is owned by the payee.
- Payer is required to keep accounting and records and make these available to the payee within a reasonable period and without charge.
- Payer is required to report on the sums held and mechanism of protection.
- Retentions will be automatically released on expiry of period of rectification of defects unless otherwise notified.
- Any disputes about amount and timing of release will be dealt with by existing dispute resolution processes.
How have other countries approached retention?
As a lawyer who originally started practising in New Zealand, the contrast in regulation is fascinating. There, the retention regime has been subject to clear focus and designated a primary concern to the industry. The New Zealand Government responded quickly to several large-scale insolvencies with retention issues at the centre. With a comparatively smaller construction sector, the impacts were perhaps more keenly felt and therefore more swiftly dealt with.
The current regulations in New Zealand, by way of the Construction Contracts (Retention Money) Amendment Act 2023 focused on adding additional security, are as follows:
- Retention funds are automatically deemed to be held on trust
- Money must be held in a separate bank account – this bank account must be used solely for the purpose of holding retention money
- Records must be made available on a quarterly basis
- The bank must be advised that bank account is used for retentions
- Minimum of 10 days’ notice of intention to use to remedy defects
- There are penalties for companies and company directors who do not comply.
The above regulations apply to all commercial construction contracts. There is a placeholder in the Construction Contracts Act which allows for a de minimis threshold to be set by regulation, although none has been set.
There appears to be no reports yet of the amendments being tested or discussed in the New Zealand Courts. Admittedly these amendments only came into force on 5 October 2023 and only apply to commercial construction contracts entered or renewed after that date, so that is to be expected.
The 2017 Research Paper also considered that several steps had already being taken in other countries to regulate the way retentions are held, citing (as the regimes stood in 2017) that in New South Wales, Australia, retention money held on projects worth over $20m must be held in a trust account with an authorised deposit-taking institution. The 2017 Research Paper cited 1997 legislation from British Columbia, Canada that stated that retention money (otherwise called “holdback” money) must be held in a separate account. The Paper further cited that there was evidence that alternative approaches, such as retention bonds, were being predominantly used in the USA. We anticipate that the abovementioned regimes have continued to evolve since the 2017 Research Paper, and therefore the body of regulatory examples for the UK to draw on would be broader today than it than was in 2017.
Despite steps being taken in other jurisdictions to regulate this area, as can be seen above, the UK Government has not made any significant changes to the retention scheme in recent years (in fact, even since Banwell Report in the 1960’s called for entire elimination in favour of selective tendering, and the Latham Report in 1994 said that Retentions were not operating in practice as they should). The 2017 Consultation and supporting 2017 Research Paper did not result in any further regulations. The 2017 Consultation cited that it would be costly to abolish retentions and set up an alternative as well as creating security unease for project funders. Regulations would result in a large shift from the current practices. For example, as set out above, one of the proposed regulations is for retention money to be segregated in a separate bank account (an option that is already anticipated in standard contracts). This is not a new idea. However, the 2017 Research Paper found that less than 5% of client respondents held retentions in a separate, ring-fenced account purely for the purpose of retentions.[viii] Of the contractor respondents, none held money in trust.
The 2017 Research Paper also cited evidence that amongst those with experience of holding retentions in the last three years, there was limited evidence of widespread use of alternative mechanisms to retentions in the construction sector in England. There was more evidence of their use in addition to, rather than as a genuine alternative to, retentions. Although this research is now eight years old, we can imagine the numbers remain relatively similar.
Against that background, it is clear that, historically, there has been hesitation by the UK Government to comment on the level of change required (if any) and then make changes accordingly. It is unclear whether this consultation would provide the level of assurance the Government would need in order to start making any changes to the regime. Either way, we will monitor the outcome of the consultation and provide updates as they are become available.
Have your say
The consultation is open until 23 October 2025 and can be found, here.
[i] The recent case of Grove Construction (London) Limited v Bagshot Manor Limit [2025] EWHC 591 (TCC) highlights further issues in that it found that retentions could not be recovered from the assignee, as per our article located, here.
[ii] Sir Harold Banwell (1964), Placing and management of contracts for building and civil engineering work. Sir Harold Banwell opined that if selective tendering is used, the use of retention money could be entirely eliminated [Page 30].
[iii] Sir Michael Latham, (1994), Constructing the Team: Joint Review of Procurement and Contractual Arrangements in the United Kingdom Construction Industry. Sir Michael Latham recommends mandatory trust funds for payments, including retention monies if the retention money system is to continue [Page 97]. Sir Michael Latham indicates that the idea of retentions “is a sound one, though in practice the system no longer operates in that manner.” He instead advocated for retention bonds. [Page 99]
[iv] For example, if the Employer/third-party making payment up the chain is insolvent.
[v] Pye Tait Consulting prepared for the Department for Business, Energy & Industrial Strategy , BEIS Research Paper 17, October 2017 at page 20-21 (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/654399/Retention_Payments_Pye_Tait_report.pdf) (“2017 Research Paper”)
[vi] Department for Business, Energy & Industrial Strategy, February 2020, Retention payments in the construction industry: A Consultation on the practise of cash retention under construction contracts (“Consultation Response Paper”).
[vii] https://www.gov.scot/publications/construction-policy-note-cpn-1-2024/
