Stopping late payments and banning retentions? Government plans to fix construction cashflow

The construction industry has long been plagued by late payments and poor cash flow, issues that stifle growth and threaten the survival of businesses across the sector.

Now, the government has launched a consultation containing proposals aimed at tackling poor payment practices, which may mark the turning point that many have hoped for.

More about the consultation

The Late payments consultation: tackling poor payment practices points out that late payment "costs the UK economy almost £11 billion per year and closes down 38 UK businesses every day … the proposals aim to improve cash flow through supply chains and support small businesses with payment disputes".

While the consultation is about "business to business" payments more generally, it singles out retention clauses in construction contracts, and the wider changes it proposes will also significantly impact the sector.

The consultation runs until late October 2025.

Why the government is focussing on late payment and retentions

The government believes cashflow is critical for business survival and growth – to buy products, pay staff, invest in training and development. Late payment hampers this by disrupting cash flow and causing insolvency.

It spells out four ways late payment manifests itself:

• Late payment – not paying invoices within agreed payment terms
• Long payment terms – over 60 days
• Disputed payments – where payment is delayed or reduced
• "Unfair practice around retention payments" in the construction sector – with retained money lost through upstream insolvency or paid late, partially, or not at all.

All of these are interconnected and must be tackled together.

The eight proposed changes

In brief, these are:

1. Audit committees and board-level scrutiny of large company payment practices - this includes audit committees and company boards providing commentary and making recommendations to company directors about company payment performance
2. Maximum payment terms – preventing payment terms longer than 60 days (and this may reduce to 45 days after 5 years)
3. Deadlines for disputing invoices - a dispute over an invoice must be raised within 30 days of receiving it. Otherwise, payment must be in full and on time
4. Mandatory statutory interest - the statutory interest rate (currently at 8% above Bank of England base rate) must be paid on late payments. A lower rate cannot be agreed
5. Additional reporting on statutory interest – currently payment terms, including around retentions, must be reported by relevant companies by law. This will be extended to include further reporting by relevant companies on statutory interest liabilities, highlighting whether they are prompt payers
6. Financial penalties for persistent late payers – giving the Small Business Commissioner (SBC) powers to issue financial penalties to businesses that persistently pay their suppliers late
7. Other powers for the SBC – including to investigate poor payment behaviour, and the accuracy of payment reporting required by law. There would also be powers to arbitrate disputes and make arbitration awards about money owed and statutory compensation and interest due
8. Retention clauses in construction contracts – more on this next.

A shake up for retentions

While the list above would apply to construction, the future of retentions will evoke the greatest interest, debate, and potential transformation. Two options are being considered:

1. Prohibiting retention clauses in construction contracts – the government considers that instead of using retentions "payers could choose to seek alternative forms of insurance or surety, but this would not be mandated"
2. Protecting retention sums deducted and withheld under construction contracts – retention monies could be protected for the benefit of the party being paid. Payers could pay the money into a separate bank account. Or protect the money through an "instrument of guarantee (insurance or surety bond)".

For this second option, further points are set out, which are considered necessary to make this work – that long list includes:

• if the construction contract doesn't make appropriate provisions around retentions, then the terms will be implied into the contract by law
• a single retention sum can only be deducted and withheld "from the final payment in respect of works until the expiry of the applicable rectification period"
• the retention would be segregated automatically, and held for the party being paid, when deducted and withheld
• it would be automatically released, unless a required notification is made (but there is no further information on this at this stage)
• interest earned belongs to the party being paid.

Whichever route is followed – whether banning or reforming retentions - a transitional period is suggested, to give the market time to adjust.

What comes next

Vicky McCombe, Partner in Womble Bond Dickinson's Construction & Engineering Team, reflects:

"As a construction lawyer, I see first-hand the strain that late payments and retention practices can place on contractors and the broader supply chain. However, the use of retentions in particular can be a useful tool to incentivise the rectification or defects and provide some protection for employers which also needs to be balanced in any reform, particularly when other forms of security are becoming increasingly expensive and difficult to obtain. It is also worth noting that there is often a difference between what the law or a contract says as opposed to actual payment practices, so any change needs to be meaningful. Once the government decides what reforms are needed and sets them out in law, there needs to be a clear and comprehensive communication to the industry, and a sufficient transitional period to adapt."

You can respond to the consultation here until 23 October. The government then plans to provide a response 12 weeks after this.