UK Construction Retentions Ban 2026: What Contractors and Subcontractors Need to Know

The UK government announced on 23 March 2026 that it will ban construction retentions — the practice of withholding a percentage of payments from contractors and subcontractors until the end of a defects liability period. Announced by the Department for Business and Trade (DBT), the ban is part of the most significant overhaul of UK payment law in over 25 years, and affects every business operating in the construction supply chain.

What Are Construction Retentions and Why Are They Being Banned?

Retentions are typically 3–5% of contract value withheld from interim payments to contractors and subcontractors. In theory, they protect clients against defects. In practice, they have long been criticised as a systemic cash flow problem that disproportionately harms smaller firms in the supply chain.

According to the Construction Leadership Council, approximately £4.5 billion is tied up in retention payments across UK construction contracts at any given time. This capital lock-up forces subcontractors to finance their operations at a premium, and leaves them exposed when upstream contractors collapse — as happened dramatically when Carillion went into insolvency in 2018, leaving an estimated £800 million in unpaid retentions unrecovered.

The government's decision, announced on 23 March 2026, follows a public consultation held between July and October 2025. The ban forms part of a broader package of payment reform measures that include statutory interest of 8% above the Bank of England base rate on all late commercial payments and enhanced powers for the Small Business Commissioner to investigate, adjudicate, and fine persistent late payers.

What the Retentions Ban Means in Practice

From the effective date (implementation timeline still under development by DBT in consultation with industry), no construction contract will be permitted to include a retention clause. This means:

• Clients can no longer withhold a percentage of payments pending practical completion or end of defects liability period
• Contractors can no longer deduct retentions from subcontractor payments
• Any contract clause attempting to impose retentions will be unenforceable

The ban applies across the construction supply chain — from main contractors dealing with clients, to specialist subcontractors dealing with main contractors. Critically, it does not abolish the need to protect clients against defective work. Industry bodies including the National Federation of Roofing Contractors (NFRC) are working with DBT to develop alternative mechanisms, such as insurance bonds, to provide defect protection without locking up cash.

The government describes this as "the biggest change to construction payment law in a generation." The announcement was made by the Department for Business and Trade and details are available via GOV.UK.

Legal Implications for Contractors and Subcontractors

For businesses operating in UK construction, the legal implications are significant and require careful attention:

Existing contracts containing retention clauses will need to be reviewed. In most cases, contracts signed before the effective date will continue to operate under their existing terms until completion. However, any contract renewals, extensions, or new works orders should be drafted in compliance with the new rules from the implementation date.

New contracts must be drafted without retention provisions. Standard form contracts widely used in UK construction — including JCT, NEC, and FIDIC — will need to be updated by their publishers. Until updated standard forms are issued, businesses should seek legal advice on how to amend their contract templates.

Cash flow modelling for projects currently in procurement or early construction phase should be revised. The removal of retention deductions will improve working capital for subcontractors but may also require renegotiation of payment schedules with clients.

Dispute resolution procedures may need updating. Retentions are currently a common source of adjudication disputes in UK construction. As the mechanism disappears, new dispute triggers may emerge around alternative defect liability arrangements.

A solicitor specialising in construction law can assist with contract reviews, compliance advice, and negotiation support as the industry transitions to the new regime.

The Broader Payment Reform Package

The retentions ban does not stand alone. The government's payment reform package also addresses late payment — a problem the government says costs the UK economy £11 billion annually across all sectors.

Key measures alongside the retentions ban include:

• Statutory interest of 8% above Bank of England base rate on overdue commercial invoices (applicable across all sectors, not just construction)
• Small Business Commissioner powers: The Commissioner will be able to investigate payment practices proactively, not just respond to complaints, and will have authority to impose fines of tens of millions of pounds on persistent late payers
• Board accountability: Large companies will be required to explain poor payment performance and corrective actions in their annual reports, adding reputational pressure to the existing statutory obligations

For SME contractors and subcontractors, the combination of the retentions ban and the late payment measures represents a material improvement in their legal position. However, realising the benefits will require understanding the new rules — and knowing when to seek legal advice when clients attempt to circumvent them.

What Should Your Business Do Now?

The window between the announcement and implementation is the right time to act:

1. Audit your current contracts: Identify which active and upcoming contracts contain retention clauses and model the cash flow impact of their removal
2. Review your standard terms: Update your company's standard subcontract and supply chain terms to comply with the new rules once implementation dates are confirmed
3. Engage your supply chain: Communicate the changes to subcontractors and suppliers — they will need to adjust their invoicing and payment tracking processes
4. Consult a construction solicitor: Complex projects, ongoing disputes about existing retentions, or uncertainty about how the ban applies to your specific contract structure warrant specialist legal advice
5. Monitor DBT guidance: The Department for Business and Trade will publish implementation guidance and transitional provisions — subscribe to industry body communications to stay current

Disclaimer: This article provides general information only and does not constitute legal advice. Construction law is complex and fact-specific. Consult a qualified solicitor for advice on your specific contracts and circumstances.

A Landmark Shift for the Industry

The construction retentions ban marks a genuine shift in how UK construction contracts will be structured and how cash flows through the supply chain. For the thousands of SME subcontractors who have absorbed the risk and cost of retentions for decades, it is a significant legal protection.

The transition will require businesses to update contracts, renegotiate terms, and develop new approaches to defect liability management. A specialist construction lawyer can help your business navigate the change and ensure you are positioned to benefit from — rather than be caught out by — one of the most significant reforms in UK construction payment law in a generation.