If retentions are banned, payment risk will move - not disappear.
The government’s March 2026 response to the late payment consultation proposes to prohibit the deduction and withholding of retention payments under construction contracts, subject to further consultation on implementation. The response states that the measure is intended to prevent loss through insolvency, late payment and non-payment, but also confirms that further consultation will take place before a final decision is taken on implementation.
For contractors and subcontractors, that is potentially significant. Retentions have long been one of the construction industry’s most persistent cashflow pressure points. They delay access to earned value, create uncertainty over release, and expose the receiving party to insolvency risk higher up the contractual chain. But if retentions are removed, the underlying commercial risk will not simply disappear. It is likely to move.
For Legalbuild clients, the practical question is not only whether the proposed reform improves cashflow. The sharper question is how employers, main contractors and funders may replace the security function that retentions currently perform. That may mean greater use of performance bonds, parent company guarantees, stricter completion controls, more aggressive defect regimes, tighter certification processes, expanded set-off provisions, more onerous final account mechanisms or heavily negotiated security clauses. The legal mechanism may change. The commercial instinct to protect against performance, defects, insolvency and completion risk will remain.
Why the proposal matters
Retention has traditionally operated as a form of withheld security. A percentage of sums otherwise due is retained during the project, usually with staged release around completion and the expiry of defects-related periods. In practice, this has often placed pressure on contractors and subcontractors by delaying cash recovery even where work has been carried out and value has been created.
The proposed prohibition therefore matters because it would challenge one of the industry’s most familiar cashflow structures. If implemented, it could reduce a recurring source of payment friction and prevent sums being trapped in the supply chain. The government has also linked the reform to a wider late payment package, including stronger late payment controls, payment reporting and enforcement proposals. But contractors should be careful not to read reform as risk removal. Retentions exist because paying parties want security against non-performance, defects, incomplete work, insolvency and downstream exposure. If that security can no longer be held by withholding retention, it is likely to be sought elsewhere. That is where the commercial risk changes shape.
Where the risk may move
The most immediate area is likely to be contract security.
Employers and main contractors may seek greater use of performance bonds, parent company guarantees, advance payment bonds, collateral warranties, step-in rights or other security instruments. These may be more expensive, more difficult to procure, or more demanding for smaller contractors and subcontractors than a conventional retention mechanism. Commentary following the government response has already noted that alternatives such as bonds and parent company guarantees may become more important, but may not be equally available or affordable across the market.
The second area is likely to be price.
If the paying party can no longer retain cash as security, it may seek to price that risk into the tender process. Contractors may face sharper negotiation on preliminaries, margins, risk allowances, defects obligations or security costs. A contract with no retention is not necessarily a lower-risk contract if the same commercial protection has been recovered through harder pricing or more onerous obligations.
The third area is likely to be payment certification.
Where retention is unavailable, paying parties may become more disciplined, or more aggressive, in deciding whether sums are due at all. That may increase pressure around valuation, work completion, quality, defects, substantiation and evidence. Instead of withholding retention from certified sums, disputes may arise earlier over whether the relevant sum should be certified or paid in the first place.
The fourth area is likely to be set-off and deduction wording.
If retention clauses are prohibited, some contracts may attempt to preserve economic leverage through broader rights to deduct, withhold, set off, counterclaim or adjust payment. For contractors, the key issue will be whether those provisions become retention by another route, or whether they create new forms of payment risk that must be identified and negotiated before signature.
The fifth area is likely to be completion and defects control.
Retentions are often justified by reference to defects and incomplete work. If that mechanism is removed, paying parties may try to strengthen the contractual gateway for practical completion, sectional completion, defects rectification, making good, final certification or release of security. That could shift disputes toward evidence of completion, snagging, defect causation and whether the contractor has satisfied the conditions for payment.
Why “no retention” may not mean “better payment”
A contract without retention may look cleaner. It may also look commercially improved. But contractors should not stop the review there. The real question is whether the risk has been removed or merely redistributed. A contract may contain no retention clause but still include:
a more expensive bond requirement;
a broad parent company guarantee;
tighter payment certification discretion;
extended defects obligations;
aggressive set-off wording;
stronger final account conditions;
wider indemnities;
delayed release mechanisms for other forms of security;
more onerous practical completion gateways;
bespoke amendments shifting payment risk back onto the contractor.
That is why the proposed reform should be treated as a contract review issue, not only a policy development. For Legalbuild clients, the issue is not whether the word “retention” appears in the contract. The issue is whether the contract creates an equivalent commercial hold over value, security or recovery.
The practical message for contractors
The practical lesson is that payment reform should be reviewed alongside the whole contractual risk structure. If retention clauses are restricted or removed, contractors should look carefully at what appears in their place. Before signing, contractors should ask:
What security is being required?
If a bond, guarantee or other instrument is required, what is its cost, duration, trigger and release mechanism?
Has the cost of replacement security been priced?
A retention-free contract may still impose additional security costs that need to be reflected in the tender.
Are payment rights genuinely improved?
The contract should be checked for broader deduction, set-off, certification or valuation mechanisms that may reproduce the same cashflow pressure in another form.
Are completion and defects obligations becoming more onerous?
If payment security shifts into completion controls, contractors need clear evidence of completion, handover, snagging, defects response and compliance.
Does the final account process create delayed recovery risk?
Removal of retention does not assist the contractor if final account recovery becomes more heavily conditional, discretionary or evidence-dependent.
Are amendment schedules reintroducing retention economics by another route?
Bespoke drafting should be reviewed carefully. The risk may not be called “retention”, but it may still operate as a mechanism for withholding value.
Why evidence discipline will still matter
Retention reform would not remove the need for disciplined project administration. In some respects, it may make it more important. If paying parties cannot rely on retention as a general security buffer, disputes may focus more sharply on the factual basis for payment, completion, defects and deductions.
That means contractors will still need strong records around:
payment applications;
valuation support;
variations;
instructions;
completion evidence;
snagging records;
defects allegations and responses;
photographs and site records;
notices;
final account substantiation.
The underlying discipline remains the same. The contractor must be able to show what was done, what was instructed, what was complete, what was due, and why deductions are not justified. That is where value is protected.
Legalbuild’s view
For Legalbuild, the real significance of retention reform is not simply the potential removal of a familiar payment mechanism. It is the redistribution of commercial risk. If retentions are prohibited, contractors should welcome the improvement in principle. The construction industry has long recognised the cashflow strain and insolvency exposure caused by withheld retention. But contractors should also expect the market to respond. Employers, main contractors and funders will still seek protection against performance risk, defects risk, completion risk and insolvency risk. The strongest contractors will not treat reform as a reason to relax contract review. They will treat it as a reason to examine the contract more carefully.
The critical question will become: where has the risk moved?
If security moves into bonds, guarantees, set-off wording, certification controls, defects obligations or final account conditions, contractors need to know that before signing, price it properly and manage the evidence during delivery. A better statutory payment regime may improve the environment in which contractors operate. But it will not remove the need for contractual discipline, cashflow protection and recovery readiness. If retention disappears, payment risk does not disappear with it. It moves into the wider contractual structure. Contractors need to know where.
Source note: This article is based on the government response to the late payment consultation, Late payment consultation: time to pay up — government response, published on 24 March 2026, and the wider statutory payment framework under the Housing Grants, Construction and Regeneration Act 1996. The government response proposes to prohibit the deduction and withholding of retention payments under construction contracts, with further consultation on implementation.
