The UK government has unveiled a far-reaching reform package aimed at tackling late payments and reshaping financial practices across the construction sector, centred on a proposed construction retentions ban and stricter payment rules. Announced on 24 March following the 2025 Late Payment Consultation, the measures introduce a mandatory 60-day payment cap for large firms paying smaller suppliers and enforce statutory interest of 8% above the Bank of England base rate on overdue payments. The reforms are positioned as the most ambitious intervention in over 25 years to address late payment practices, which the government estimates cost the UK economy £11 billion annually.
Key policy measures and legislative direction
At the core of the reforms is the decision to prohibit the withholding of retention payments in construction contracts, marking a significant shift from long-standing contractual practices. The government has opted for a full ban rather than requiring retentions to be held in protected accounts, following consultation between July and October 2025. The consultation revealed that 87% of respondents supported reform, with 53% open to either prohibition or regulated retention mechanisms.
Alongside the construction retentions ban, large companies will be required to comply with a maximum 60-day payment term when paying smaller suppliers—shortening timelines that have historically extended to 90 days or more. All commercial contracts must also include statutory interest at 8% above the base rate for late payments, reinforcing provisions already set out in the Late Payment of Commercial Debts (Interest) Act 1998 but often excluded in practice.
The Small Business Commissioner will receive expanded powers to investigate poor payment practices, adjudicate disputes, and impose fines on persistent offenders. Additional measures include potential board-level accountability for payment performance, increasing both financial and reputational pressure on large firms.
Operational and financial implications for construction
The proposed ban fundamentally alters how performance risk and quality assurance are managed in construction projects. Retentions have traditionally served as a low-cost mechanism to ensure contractors return to rectify defects and to provide protection against contractor insolvency. Their removal is expected to require widespread contractual and financial restructuring.
As highlighted by World Construction Today, the elimination of retention mechanisms is likely to prompt a transition towards alternative security instruments such as performance bonds, parent company guarantees, and retention bonds. However, these alternatives introduce additional costs and may not be equally accessible across the supply chain, particularly for smaller contractors.
The government has acknowledged that a more sophisticated surety market may be required to support this transition. Industry responses have also raised concerns about whether the surety sector can scale effectively to meet increased demand.
Risk allocation, disputes, and compliance challenges
The reforms introduce new complexities around risk allocation and enforcement. Without retentions, employers and contractors may seek to restructure payment schedules deferring a larger portion of contract value to later project stages to replicate the economic effect of retained funds. The government has identified this as a “material” risk and is expected to introduce anti-avoidance measures as part of the legislation.
There is also an expectation of a short-term increase in disputes as the industry adjusts. Previously, withheld retentions often acted as informal leverage during the defects liability period. Their removal may push disagreements into formal adjudication processes, potentially increasing costs and administrative burden.
Industry stakeholders have raised concerns regarding quality assurance and investment risk. The British Property Federation warned that removing retentions could undermine quality incentives and reduce investor confidence, particularly affecting smaller or less experienced clients.
Strategic and market impact
The combined effect of the payment cap, statutory interest enforcement, and the construction retentions ban signals a structural shift in the commercial framework of UK construction. The reforms aim to improve cash flow, strengthen financial resilience across supply chains, and address longstanding imbalances affecting subcontractors and specialist firms.
World Construction Today observes that the reforms go beyond legislative adjustment, reflecting a broader attempt to reshape payment culture within the industry. If implemented as proposed, the measures could represent one of the most significant changes to construction payment practices since the Housing Grants, Construction and Regeneration Act 1996.
While further consultation is expected on implementation timelines and legislative mechanisms, construction businesses are being advised to review contract structures, risk allocation strategies, and security arrangements in preparation for the changes.
