In 2025, I wrote about retention in the construction industry and asked whether the sector was truly moving away from the practice, or simply finding new ways to hold on to it.
That question now has fresh weight.
The UK Government’s response to its Late Payment Consultation: Time to Pay Up, published on 24 March 2026, points to a major shift in how payment risk may be dealt with across supply chains. The government has described the package as the most ambitious legislation to tackle late payments in over 25 years. For construction businesses, the message is clear. Change is coming.
So, what does that mean for those in the construction sector?
Retention in construction contracts
One of the most significant proposals is the government’s stated intention to ban the withholding of retention payments in construction contracts, subject to further consultation on how that would work in practice. Retention has long been used as a form of protection against defective work and failures to return to site. If that protection is removed, developers and contractors will need other ways to manage that risk.
Those alternatives already exist. The most common are performance bonds and parent company guarantees. But neither is a perfect substitute. Bonds can be costly and difficult to obtain, particularly for smaller firms. Parent company guarantees are only useful where there is a parent company with sufficient financial strength behind it.
That means the real impact of any retention ban will depend on two things. First, whether these alternatives are widely available. Second, whether they are affordable. In practice, that is where risk is likely to be redistributed across the construction supply chain.
The proposed 60-day payment term cap
The government has also confirmed plans for a hard cap of 60 days on payment terms where large firms pay smaller suppliers, with a later reduction to 45 days after five years, subject to further consultation.
At present, longer payment terms can still be agreed if they are not considered grossly unfair. The proposal would remove that flexibility. If legislation is introduced in the form proposed, payment terms above the statutory cap would no longer be allowed, subject to whatever exemptions Parliament decides to include.
There is still uncertainty around the statutory meaning of large firm and smaller supplier. That detail will matter. In construction, main contractors often sit between employer payment terms above and subcontract payment obligations below. If a contractor faces a mandatory 60-day cap when paying parts of its supply chain, but remains tied to longer payment cycles upstream, that mismatch could create obvious pressure on cash flow and contract strategy.
Mandatory interest on late payment
Another important proposal is the removal of the current substantial remedy opt-out under the Late Payment of Commercial Debts (Interest) Act 1998.
At the moment, statutory interest does not apply if the contract already includes a substantial remedy for late payment. The government has said it intends to remove that opt-out, so statutory interest would apply regardless of alternative contract wording, at 8% above the Bank of England base rate.
That would be a meaningful shift in bargaining power. Late payment would no longer be just a commercial frustration. It would carry a clearer and more automatic financial cost.
Alongside this, the government also plans stronger board and audit committee accountability, with additional reporting obligations for large businesses on payment practices and performance. That moves the issue further into the compliance space, rather than leaving it as a matter of private contract negotiation.
Enforcement and the Small Business Commissioner
Enforcement is also expected to become stronger. The government plans to expand the powers of the Small Business Commissioner, including powers to investigate poor payment practices, impose financial penalties for persistent late payment, and adjudicate disputes. The proposed penalties would be linked to the business’s unpaid statutory interest liability.
That matters because it moves enforcement away from reputational pressure alone and towards real financial consequence. Exactly how those powers will be used in practice, and where the enforcement threshold will sit, will be watched closely by large and small businesses alike.
What this means for the construction sector
The direction of travel has been visible for some time. The Reporting on Payment Practices and Performance (Amendment) Regulations 2025 came into force on 1 March 2025, adding further transparency around payment and retention reporting.
The latest reforms go further. For the construction sector, they are likely to drive changes not only to commercial behaviour, but also to the Construction Act framework and the standard form contracts used day to day. That is a forward-looking legal view based on the government’s announced policy direction. I cannot verify the final form of any legislation until it is introduced and passed.
The practical message is more immediate. Project stakeholders should now be reviewing:
- payment terms across the contract chain
- security arrangements where retention has traditionally been used
- where risk will sit if retention is removed and alternative protections are limited or costly
The government has said it will work with the financial services sector to support the surety market for construction, but it remains to be seen how quickly that market responds, or whether pricing becomes workable for all parts of the industry. With legislation expected when Parliamentary time allows, the coming months should bring more clarity on scope, timing and implementation. In the meantime, developers, contractors and subcontractors would be wise to review upcoming projects now, rather than wait for the detail to land.
With late payment reform in construction contracts moving up the agenda, now is the time to review your payment terms, retention arrangements and wider risk position across live and upcoming projects. If you would like to understand how these changes could affect your contracts or supply chain, get in touch.
