Could scrapping retentions finally fix long‑standing cashflow issues in construction – or does it simply shift risk elsewhere?

In July 2025, the UK Government launched a consultation aimed at tackling late payments, lengthy payment terms and unfair practices across the construction supply chain. One proposal in particular has attracted significant attention: the potential abolition of retention clauses in construction contracts.

How retentions work today

Under standard form construction contracts, a retention of typically 3–5% of the contract sum is withheld from interim payments. Usually:

• half is released at practical completion; and
• the balance is released at the end of the defects liability period (often 12–24 months later).

Retentions have traditionally operated as a form of leverage to ensure the timely rectification of defects. This function has taken on renewed importance for the housing sector in light of Awaab’s Law and the forthcoming Phase 2 measures, which propose to impose tighter obligations around hazards such as damp, mould and excessive heat.

Why the Government wants change

The Government’s consultation document highlights well‑documented issues with retention practices. These include late or non‑payment of retained sums, deductions without justification, and retention monies being lost entirely due to upstream insolvency. The impact falls disproportionately on SMEs, reducing working capital and limiting capacity for growth and investment.

To address this, the Government proposed amendments to Part 2 of the Housing Grants, Construction and Regeneration Act 1996, using a staged and transitional approach.

The two options consulted on

Option A – Total prohibition so that retention clauses would be unlawful and payers would no longer be entitled to deduct or withhold retention sums.

Option B – Tighter regulation of retentions, including:

• a single retention sum withheld only from the final payment;
• mandatory segregation of retention monies;
• automatic release unless notice is given; and
• payment of any accrued interest to the supplier.

Where the Government has landed (for now)

In its consultation response, the Government indicated a preference for Option A, citing lower cost for the industry and reduced complexity of implementation and enforcement. However, given the scale of reform, further engagement with industry stakeholders is planned before a final decision is taken. In particular, the Government has acknowledged the need to explore alternative ways to manage defects and to support the development of the surety market.

What this means in practice

If retentions are ultimately abolished, the construction industry will need to adapt quickly. Employers and funders would have to look more closely at alternative security mechanisms, such as bonds, parent company guarantees, project bank accounts or escrow arrangements. Standard form contracts will also need careful amendment, not only to remove retention provisions but also to revisit defect rectification provisions.

For further discussion on alternative security arrangements, please contact Priya Kale and Richard Brooks.