Retentions won’t be retained: UK Government plans to ban cash retentions

The Department for Business and Trade has announced a suite of measures intended to tackle late payments and what it describes as "poor" payment practices across the UK economy. The most significant proposal, from a construction perspective, is a complete ban on the use of cash retentions in construction contracts.

The measures form part of a broader legislative agenda and, as set out below, any change is unlikely to be sudden.

What changes are proposed?

The Government's announcement covers two broad areas: an extension of the powers of the Small Business Commissioner (SBC) and a series of wider late payment reforms including:

• Persistently late-paying large companies to publish commentary on why payment performance is poor and what actions they are taking to fix this.
• Maximum payment terms of 60 days, with strictly limited exemptions.
• All commercial contracts to contain a right to statutory interest at 8% above the Bank of England base rate.

Alongside these, it intends to legislate a complete ban on cash retentions in construction contracts.

Rationale of the proposed retention ban

The Government's announcement follows its most recent consultation which ran last year on the use of retentions in the construction industry. This consultation followed a long history of reviews, consultations, reports and private members bill dating back as early as the 1960s.

In this latest consultation, 85% of responses favoured some form of reform of the retentions regime; either further regulation or a complete ban, with no significant preference between banning versus further regulation. 

The Government’s rationale for its decision is that a complete ban is the least complex legislative proposal, simpler to implement and easier to enforce. This contrasts with a previous consultation response from 2017, where the Government went as far as describing the principle of cash retentions as "sound", characterising retentions as a "safety net" to "encourage contractors to return to site to remedy defects.

During that consultation, the Government also considered alternatives such as retention bonds, parent company guarantees, performance bonds and escrow or third-party accounts. For every alternative, it identified potential downsides and noted that transitioning away from cash retentions could be costly and could create security concerns for project funders. The current announcement does not appear to address how these practical difficulties will be overcome and the detail of any proposed alternative mechanism remains unclear.

In other comparable jurisdictions such as Australia and New Zealand, governments have taken a range of approaches to the question of retentions and an outright ban is by no means the international standard. Therefore, the UK Government's proposal represents a relatively bold policy position.

How and When Will This Start to Affect Businesses?

Further Consultation

In short, any change remains some way off. The Government will consult further before taking a final decision on implementation, acknowledging the "ambition of the policy". Industry participants and other interested parties can therefore expect further opportunities to engage with and influence the shape of the final proposals.

One focus area may be how retentions are defined in the legislation. For example, broad drafting may have unintended consequences. Could it ban the practice of withholding monies until a performance bond, parent company guarantee or key collateral warranties are delivered? If so, how will these risks be addressed?

Steps to Implement

Following consultation, any final decision would then need to make its way through Parliament. Given the breadth and complexity of the measures proposed, this is likely to involve detailed scrutiny at committee stage and may attract significant debate. It is reasonable to expect that the full legislative process could take a considerable period.

Transition Period

Even once legislation is enacted, there is likely to be a 12-24 month ^[1] transition period to allow businesses time to adapt their contractual arrangements, procurement processes, and supply chain relationships. Publishers of standard form contracts, such as the JCT and NEC will also need time to publish any necessary amendments to their contracts. For example, some JCT contracts specify an interest rate of 5% above the Bank of England’s official rate and apply a default 3% retention rate unless a value is specified in the contract particulars. The length of any transition period has not yet been confirmed, but given the scale of the changes proposed, a meaningful lead-in time would be expected.

Practical Steps and Recommendations

Although the timeline for implementation remains uncertain, businesses operating in the construction sector and wider supply chains would be well advised to begin preparing now. In particular, it may be sensible to review current contractual arrangements to understand the extent of reliance on cash retentions and to identify clauses in templates that may need to be amended in due course. Engaging with supply chain partners on alternative security arrangements such as retention bonds, extending performance bonds which may otherwise expire at practical completion, parent company guarantees and other measures will also help to ensure a smoother transition when the time comes.

It is equally important to consider the impact of the wider payment reforms on procurement strategies and tender documentation. The introduction of maximum payment terms, mandatory interest on late payments, and statutory deadlines for disputing invoices will all require adjustments to standard commercial processes.

^[1]  We note that this estimated period is based on the majority of the responses to the consultation which supported a 12–24-month transition period. However, the Government has not indicated this would be accepted nor is it bound to provide this transition period.