Why Construction Firms Should Review Unpaid Retentions Before Payment Rules Change

The Commercial Payments Bill [HL] is working through Parliament and includes a major construction change: a proposed ban on retention clauses in construction contracts. For subcontractors, specialist contractors and smaller firms, this matters because retentions can leave earned money sitting with a customer or main contractor long after the work is complete.

The Bill was introduced in the House of Lords on 19 May 2026, with its second reading listed for 9 June 2026. It is not yet law, and the ban will not take effect immediately. The Bill includes a 2-year transition period before the ban on new retention clauses applies. It also contains separate transitional rules for retained sums, including a “last retention day” defined as 3 years from commencement of the relevant provision.

Money already withheld under existing contracts will not automatically be released because the law changes. If you are owed retention on live, completed or recently completed projects, now is the time to identify it, document it and recover it.

The Scale Of The Problem

Government figures estimate that 44% of SME invoices are paid late. Late payments cost the UK economy almost £11 billion a year and are linked to around 14,000 business closures annually.

Retention is usually a percentage of the contract value withheld as security against defects or incomplete work. It is commonly set at 3% or 5%, usually with release linked to practical completion and the defects period.

For a subcontractor on tight margins, this can affect payroll, supplier payments, VAT and the next job. It also becomes much harder to recover if the business holding the money becomes insolvent.

What The Bill Would Change

The Bill makes 3 construction changes worth noting.

First, it restricts payment periods for construction payments. For public authorities, the final date for payment must fall within 30 days after the payment due date. For other purchasers, it must fall within 60 days after the payment due date.

Second, it creates a framework for making retention clauses ineffective and then banning them. Retention clauses agreed during the transition period, or varied during that period, can become ineffective after the last retention day. New retention clauses agreed after the end of the transition period will be void.

Third, where an unauthorised retention debt arises after the transition period, the payee may be entitled to a fixed sum. That fixed sum is the higher of £40 or 50% of the retention debt. This sits alongside statutory interest and late payment compensation where those rights apply. At the current Bank of England Bank Rate of 3.75%, statutory late payment interest is 11.75% per year where the regime applies.

Why Reviewing Now Is Urgent

The transition period is not a reason to wait. Existing retentions remain governed by existing contracts until the new rules apply or the relevant payment becomes due. If the defects period has ended and the retention has not been released, it is already a debt that needs active recovery.

The risk is that retentions fall between site teams, finance teams and project managers. The job is finished, the team moves on, and the sum remains unpaid.

Insolvency risk makes delay more dangerous. Retentions are rarely ring-fenced. If the business holding your retention enters administration or liquidation, your claim may sit alongside other unsecured creditor claims.

Run Companies House checks for credit control on every contractor or employer holding material retention sums. If you see late filings, charges, director changes, court judgments, winding-up activity or a sudden change in payment behaviour, review Signs that you need a commercial debt collection agency urgently and act before the position worsens.

Key Timeline

Conduct A Full Retention Audit

Create a complete retention schedule. List every active, completed and recently completed project. For each contract, record the contract value, retention percentage, total sum withheld, amount already released, practical completion date, defects liability period end date, release mechanism and person responsible for authorising payment.

Good aged debtors reporting that drives action should treat retention separately from normal invoice debt. Compare your ledger with payment notices, interim certificates, final account documents and project manager emails.

Request Release Of Every Sum That Is Due

Where practical completion has passed, check whether the first half of the retention should have been released. Where the defects liability period has ended, check whether the second half should now be released.

Do not rely on informal calls. Send a written request that identifies the contract, project, retained amount, release trigger and payment deadline. Attach the key evidence.

If the payer raises defects, ask for details in writing. Genuine defects should be addressed quickly and recorded. Vague references to “snagging” or “client issues” should not delay payment indefinitely. The step-by-step disputed invoices resolution process gives you a useful structure.

Issue Formal Demands And Escalate

A retention that is due and unpaid is a commercial debt. Where the statutory late payment regime applies, you may be able to reclaim late payment interest at 8% above the Bank of England base rate, plus fixed compensation.

A formal statutory demand letter should set out the amount withheld, the date it became due, the contractual basis for release, the interest claimed and the deadline for payment. This creates a clear paper trail.

Construction debtors may rely on deductions, contra-charges or alleged defects. Understanding set-off and counterclaims in business debt recovery helps you separate genuine deductions from tactics designed to reduce or delay payment.

If correspondence fails, adjudication under the Construction Act can be effective. Not every case needs adjudication. Mediation versus litigation for unpaid invoices can help you compare options by speed, cost and outcome. Where a debtor is avoiding contact, a pre legal visit service may also help prompt engagement.

Act Fast If Insolvency Risk Appears

The worst time to chase retention is after insolvency has already started. Once a main contractor or employer enters administration or liquidation, your options reduce sharply.

Recovering debt from insolvent customers explains what may still be possible, but prevention is better than joining a long creditor queue. If a payer is showing signs of distress, escalate to commercial debt recovery quickly.

Where appropriate, insolvency services may also be relevant, including creditor pressure and statutory demands.

Manage Cash Flow During The Transition

Even with the Bill moving forward, construction firms will still need to manage retentions for some time. If unpaid retention is creating pressure across multiple projects, invoice discounting may help release cash against other receivables while disputed sums are pursued.

A wider plan to improve business cash flow is also important. Retentions should be built into forecasting, not treated as surprise money. What are the 5 steps to measure, monitor and manage cash flow gives you a practical framework.

For sector-specific support, construction debt collection services can help you recover unpaid retentions with the right sector context.

FAQs

Will The Retention Ban Automatically Release Money Already Withheld?

No. Existing retained sums will not simply be released automatically because the law changes. You still need to check the contract, identify when the money became due, request release and escalate where payment is not made.

What Happens If A Contractor Uses A Retention Clause After The Ban?

Under the Bill as introduced, retention clauses agreed after the end of the transition period will be void. If an unauthorised retention debt arises after the transition period, the payee may be entitled to a fixed sum of the higher of £40 or 50% of the retention debt, alongside statutory interest and compensation where applicable.

Can I Claim Interest On Overdue Retention?

Yes, where the statutory late payment regime applies and the retention sum is due but unpaid. Interest is currently 8% above the Bank of England base rate.

Do Not Leave Retention Money On The Table

The proposed retention ban is important, but it is not a substitute for action today. The firms most likely to benefit are the ones that already know what they are owed, when it became due and which debts need escalation.

Taurus Collections is a debt collection agency UK construction businesses across the supply chain work with to recover unpaid retentions, overdue valuations and disputed commercial debts. Get in touch today to find out how we can help you recover what you are owed before the payment landscape changes around you.