Contract Retentions – is this the end?
Put simply, a retention is a contractual mechanism whereby a specified amount of money is withheld from the contract sum to give the employer a pot of leverage (and, occasionally, comfort) to deal with defective work during a set period after practical completion whether that means getting the contractor back on site, or paying someone else if they don’t fancy returning your calls.
With our weather eye on developments in the construction industry, we are keeping tabs on the government’s recent proposals to ban retentions in UK construction contracts. Alongside this, the same package of reforms has been trailed as limiting payment terms to a maximum of 60 days, coupled with a requirement for commercial contracts to include late payment interest at 8% above the Bank of England base rate.
That last point is not entirely new: statutory interest of that nature already exists under the Late Payment of Commercial Debts (Interest) Act 1998. However, in practice parties often agree alternative contractual provisions provided they amount to a substantial remedy for late payment.
The policy direction follows industry debate over whether retentions should be (a) protected by being held in third-party arrangements (such as escrow-style accounts) or replaced with retention bonds or (b) banned outright. The current mood suggests the government is looking seriously at the latter.
So, what’s the impact if this goes ahead?
For many contractors, particularly smaller subcontractors with less cash flow, this could be cause for celebration. A number of subcontractors have been stung in recent years by upstream insolvencies and the practical reality that “your retention is safe” is sometimes said moments before it becomes a historical concept. For small businesses, cash flow is everything, and being paid for work properly completed to spec is, on the face of it, fair.
Sure, but what does that mean for the employer?
One of the key facets of many construction contracts – certainly in the JCT forms we commonly see, is the ability for the employer (via the contract administrator) to withhold a small proportion of the contract sum, typically 5%, across interim valuations. This usually serves a two-pronged purpose:
Firstly, it encourages timely achievement of practical completion, triggering release of the first tranche (often reducing retention to 2.5%). Secondly, it provides a financial nudge to ensure the contractor returns to deal with patent defects identified during the rectification period (often 6 or 12 months after practical completion), before the final balance is released.
For employers, that retention can feel like a security line many would rather not live without, particularly on projects where seasonal commissioning and “it only fails when it’s cold/wet/hot” issues are a real risk. Without a retention, the employer may have to rely more heavily on enforcement of contractual rights, negotiation, and – where agreement can’t be reached, formal dispute resolution. In longer-tail scenarios, claims can also end up engaging the Limitation Act 1980, the Defective Premises Act 1972 (for dwellings), and, depending on the circumstances, the Building Safety Act 2022.
The utopia for any construction project is simple: the employer gets a good job at a fair price, on time and to the desired quality; the contractor gets paid for delivering it. If both parties hold up their end of the bargain, why bother with retentions?
To answer that, it’s worth looking back at the origins of retentions. During Victorian Britain’s mid-19th Century expansion of railway infrastructure, employers faced a mix of enthusiastic new contracting firms, variable workmanship, and defaults. Withholding part of payment became a way of keeping contractors engaged until the job was truly finished.
Is 2026 any different? Yes and no.
Taking UK housebuilding as an example, what can retentions do to protect the end user? In simple terms, the housing market, whether delivered through one-off private schemes, developers, or registered providers – is not entirely immune from turning out poor-quality stock. When did you last admire a new development on your commute and think, “that looks like it’s been built with quality and appearance in mind”?
Leaving aside the usual explanations be it skills shortages, loss of quality control through the diminishing presence of the humble clerk of works, and amplified costs, the commercial reality is that contractors and developers want to get paid. Projects can get rushed, and the occupier can end up arguing the shortfalls with warranty providers, snagging processes, and whoever still answers emails.
The complexities of retentions in developer-led housing can be saved for another day. But for private schemes, would a more Victorian retention approach tighten the belt and incentivise quality delivery? Potentially. On the other hand, disenfranchising housebuilders is unlikely to help meet the government’s ambitious housing targets.
The government has yet to publish full implementation detail on the abolition of retentions. Employers and contractors alike need to be protected, and to fulfil their respective obligations if projects are to run smoothly. For now, it will be interesting to watch how matters unfold in the coming months.
