Retentions and development agreements – stronger measures ahead

In 2025 the government launched a consultation on stronger measures to tackle late payments across the business sector. Research carried out found that:

• late payments are estimated to cost the UK economy almost £11 billion per year;
• businesses are owed around £26 billion in late payments at any given time;
• 38 businesses close down every day because they are not paid on time;
• 133 million hours of staff time are spent across the economy each year chasing late payments.

The measures included a proposed ban on the withholding of retentions in construction contracts, to protect small businesses from losing retentions to insolvency or non-payment.

Retentions are used widely in construction contracts and are usually linked to:

• completion of work stages during the construction programme; and
• remediation of defects during the defects liability period (DLP) – typically a period of 12 months after completion of the works.

The retention is usually held by the employer; part is released to the developer/contractor as and when work stages are completed, and the balance is released at the end of the DLP, provided all defects have been remedied.

The risks for the contractor are that:

• as the retention is held by the employer, it is at risk if the employer becomes insolvent;
• notwithstanding the obligations of the employer to release the retention at the end of the DLP, the developer/contractor may still have to chase for the retention, even if all defects have been dealt with.

Employers will no doubt argue that retentions are a useful and longstanding mechanism for ensuring contract compliance. If a developer/contractor fails to comply with its obligations to put right defects, the employer can use the retention funds to carry out the works itself.

However, change is coming. Following the consultation, the Commercial Payments Bill was introduced by the government earlier this year and is currently going through the House of Lords. The bill proposes a ban on retention payments, which would be introduced in two stages:

There would be an initial two year transition period. During that period, retention clauses included in construction contracts entered into either before or during the transition period will continue to have effect. However, in light of the penalties at the

1. the parties instead considering other forms of security. Retentions in contracts entered into before or during the transition period will become ineffective three years after the start of the transition period.
2. After the end of the transition period, any new retention clause in a construction contract is void, and variations to pre-existing retention clauses will be void unless they are more favourable to the contractor.

If a retention sum is retained or withheld once the outright ban comes into force, penalties will be imposed, entitling the contractor to a fixed sum, being 50% of the unlawfully withheld retention (subject to a minimum of £40). In addition the retention must be repaid to the contractor, who can claim interest at 8% and late payment compensation. The parties will be unable to contract out of these provisions.

Additionally, any retention clause entered into before or during the construction period will become an ‘ineffective retention clause’ on the day after the ‘last retention day’, which is three years from the start of the transition period. Any related retention sums will automatically fall due for repayment within 30 days – with a final payment deadline of 30 days from that point for public authorities, and 60 days for private sector employers.

At present the bill is still going through the House of Lords, and is likely to be subject to further consultation and amendment. Nevertheless, employers and contractors need to be prepared for change. The use of retentions has been widespread in the procurement of construction works, and the measures set out in the bill mark a significant departure from current practice. In particular, the industry will need to look to other forms of security to replace retentions, such as project bank accounts, trust bank accounts, bonds, parent company guarantees and escrow accounts.