In our article at the end of April 2026 we covered the proposed ‘retention ban’ that arose from the government’s consultation on late payment. We were sceptical about how soon such a ban could take effect but, in a surprisingly speedy turn of events, the government has now published the draft text of a bill giving effect to various recommendations of the late payment consultation: The Commercial Payments Bill. This article summarises the key points from that bill for the construction sector.
The Commercial Payments Bill, introduced in May 2026, is currently making its way through parliament.
The bill is long and detailed and the points highlighted below are just those that appear likely to have the biggest effect on construction businesses. A common theme is that, upon initial analysis, there appear to be a number of drafting points that may require clarification as the bill progresses through parliament. We therefore expect the detailed drafting to change, but the direction of travel is clear: cash retentions banned, payment periods tightened and wider payment practices under much closer scrutiny.
At the heart of the bill is the introduction of mandatory limits on the period from the due date to the final date for payment:
30 days where the payer is a public authority; and
60 days in all other cases.
Any contract clause which puts the final date for payment outside that period will be void, with the provisions of the Scheme for Construction Contracts filling the gap. This also applies to other agreements relating to construction contracts, such as side letters or settlement agreements.
If enacted as drafted, construction businesses will have much less discretion to negotiate bespoke payment provisions. That may require a rethink of how project cash flow is managed, particularly where extended payment profiles have traditionally been used as a financing or risk management tool.
There is however, a notable exception to the rule above, in that the 30/60 day limit will not apply in contracts where the paying party is a smaller business than the receiving party - categories of micro, small, medium and large-undertaking are introduced. This however is less usual, and so the effect of the bill on most construction contracts will be to limit payment periods.
Only time will tell if parties hoping to retain longer payment periods delay the due dates for each payment as a means of retaining longer payment periods, though this may well be harder to negotiate once the bill is passed into law.
One of the most consequential elements of the bill for construction is the proposed phased removal of cash retentions. The bill provides for:
a transition period during which retention clauses can continue to operate.
a subsequent prohibition, rendering retention clauses void; and
statutory provisions dealing with the release of retained sums over time.
This much is no surprise given the outcome of the late payment consultation. However, the way that the bill is currently drafted casts the net very wide in what exactly would be banned.
The definition of ‘retention clause’ includes any provision which allows the payer to “deduct or retain sums of money equating to a percentage of” the contract price or any interim payment of it until a condition is met. This could possibly inadvertently catch milestone payments if structured by reference to a percentage of the total contract price, and even standard condition precedents such as signed collateral warranties, before parts of the contract price fall due.
There is also a heavy fixed penalty for those wrongly withholding retention: 50% of the retained sum on top of repayment of the retained sum and interest on it.
The bill also strengthens the consequences of late or withheld payment by increasing the interest due on late payments, and forcing disputes to be raised quickly.
In respect of the interest on late payment, the bill provides that the statutory interest rate of 8% over base will apply to every qualifying debt arising under contracts caught by the bill, including most commercial contracts, and that this cannot be contracted out of. This is significant as it forces payers into much higher interest rates than we often see negotiated. For example the JCT 2024 suite of contracts currently imposes a contractual interest rate of 5% above base, and this is often changed to an even lower percentage in employer-led schedules of amendments.
Whilst we expect some development of the bill as it progresses through the legislative process, taken together, the proposals point to a notable change in how payment related risk is managed in construction:
Payment terms will be significantly shorter in some contracts.
Consequences of late payment will be greater.
In the absence of retentions, alternative protective measures for employers will invariably evolve. For instance, we may see a marked increase in the use of retention bonds and other third party security instruments.
These changes have significant implications not just for how contracts should be drafted, but also for wider considerations around contract administration, project structuring, funding arrangements and internal payment processes.
We will continue to monitor the progress of the bill and provide updates when the text is closer to its final form. Although the implementation of the bill is still some way off, those involved in construction projects may wish to start considering whether existing contract forms remain appropriate, how to manage payment and performance risk without retentions, and how internal contract management processes and standard contract terms may need to be adapted once the new regime is in place.
For further information, please contact our construction team.
