Are Retention Clauses coming to an end? What the 2026 Reform means for construction

On 24 March 2026, the Department for Business and Trade (DBT) announced that the government intends to amend Part 2 of the Housing Grants, Construction and Regeneration Act 1996 (the ‘Construction Act’).  The proposal follows a wider consultation on measures aimed at addressing late payment and cash-flow pressures within UK supply chains.

If implemented, the reform would represent a significant shift in how risk and performance security are managed across the UK construction industry.

What are retention clauses?

Retention clauses are commonly used in construction contracts to allow an employer or main contractor to withhold a percentage of the contract sum, typically 3-5%, until completion of the works or expiry of the defects liability period.

The purpose of retention is to:

  • Provide security for contractor performance
  • Incentivise contractors to remedy defects promptly
  • Protect employers against defective or incomplete works

While widely used, the government considers that the practice can place financial strain on subcontractors and small businesses. Issues arise when sums are withheld for extended periods or become irrecoverable due to insolvency higher up the contractual chain.

Proposed reform

Following the consultation, the government has announced its intention to prohibit retention clauses.

Under the proposed approach:

  • Retention clauses would become unenforceable in construction contracts.
  • Payers could no longer deduct or withhold retention sums from payments due to contractors or subcontractors.
  • Parties seeking performance security would instead need to rely on alternative arrangements such as performance bonds, parent company guarantees, or insurance-backed products. These would not be mandatory but may become more widely used where employers and developers seek additional protection.

How the proposed reform may affect you

If implemented, the reforms would significantly change how risk allocation and cash flow are managed in construction projects. Employers and developers will need alternative ways to secure contractor performance.

Key implications include:

  • Payments in full: Contractors and subcontractors would receive certified payments without retention deductions, improving cash flow and reducing the risk of funds being lost where insolvency occurs higher up the contractual chain.
  • Alternative forms of project security: Employers and developers will need to rely on alternative mechanisms to secure performance. Given the potential additional costs and administrative requirements, these options will need to be considered when determining funding and the most suitable security structure for a project.
  • Due diligence: Financial due diligence when appointing contractors is likely to increase, together with reviews of procurement and contract management practices, to ensure project risks remain appropriately managed in the absence of retention.

Looking ahead

It is important to note that the proposal has not yet been enacted into law and no commencement date has been confirmed. Parliamentary approval is required, so implementation is unlikely before 2027.

If enacted, the legislation will specify a commencement date for the new provisions. In the meantime, stakeholders should monitor developments, assess potential project impacts and consider alternative security and funding mechanisms.

 

The content of this article is intended to provide a general guide to the subject matter.

If you would like to discuss any of the matters raised in this article please contact one of the Construction team.