The retention ban: the lesser of two evils?

On 24 March 2026, the Department for Business and Trade published the outcome of its consultation around late payment. The consultation outcome contains a number of plans to address late payment issues, most notably a plan to prohibit the withholding of cash retention from sums otherwise due under construction contracts.

The response has been predictably divided, with contractors and subcontractors largely pleased by how the plans will ostensibly improve their cashflow. Developers meanwhile have expressed some concern about the impact of the ban on their security and commercial leverage under construction contracts.

For the reasons that follow, contractors and subcontractors may need to temper their euphoria given the likely alternatives which may be imposed instead.

This article examines the government’s proposed ban on construction retentions, explores its likely impact on contractors and developers, and considers whether the alternative security mechanisms that may emerge could prove more demanding than the current system.

Current status of the ban

Some of the coverage of this consultation to date has spoken about the retention ban as if it's already in force. This is somewhat premature: the ban is not yet in force, and we do not yet even have the draft text of legislation giving effect to the government’s intentions.

That said, the government’s position on this is that it will “legislate as soon as Parliamentary time allows” although it also recognises that a further consultation on the specific effects of the proposed retention ban will be necessary.

This means that, in reality, we may not see a draft statute until the end of 2026, and perhaps not at all if the consultation on the effects of the ban indicates the ban would not achieve the government’s objectives. By the time any draft bill has received the necessary approval in both the House of Commons and House of Lords, and royal assent, it could well be some way into 2027 before we see any retention ban actually take effect.

However, we expect to see the impending ban affect construction contract negotiations, and all the more so as a potential implementation date approaches. Contractors and subcontractors may well start referring to the ban as a means of justifying lower retention amounts, or seeking to avoid retention entirely. Clients will obviously not be bound by the ban until it takes effect, but may nevertheless be persuaded to explore retention alternatives pre-emptively, given the direction of travel.

What are the likely consequences if a retention ban takes effect?

If the ban takes effect, and on the assumption that it applies as a blanket prohibition on the interim withholding of sums due to contractors, clients and developers would no longer be able to retain cash as 'retentions' or hold any other sums as security for the contractor’s completion of the works under the contract. Currently retention amounts are held to secure performance and used as commercial leverage and security in respect of the remediation of defects.

However, and as alluded to above, developers are unlikely simply to accept such a fundamental shift in the commercial and risk profile of projects: they will likely seek alternative ways of achieving retention’s function.

Equally, main contractors, although no doubt pleased not to have retention sums withheld by clients, may discover that they are in the same boat given that they will be unable to withhold retention sums from their subcontractors, particularly as evidence shows that insolvency risk increases further down the supply chain.

The benefit of not having retention of monies imposed by clients may be less than the benefit of being able to withhold such amounts from subcontractors, leaving main contractors holding more risk following the ban. Main contractors may therefore be as interested as client to seek retention alternatives.

What alternative will emerge as the new industry standard remains to be seen, but we suggest three potential alternatives below.

Staged payments
If a proportion of the amounts due to contractors cannot be withheld as retention, clients may well simply seek to delay when sums become due to contractors by ‘backweighting’ the payment profile of projects.

In the energy sector for example it's common for payments to become due by reference to milestones. We may see milestone payment schedules used more extensively in the construction sector, possibly with a specific milestone linked to satisfactory remediation of defects. For example, as a means maintaining payment security and commercial leverage, without using retention.
Bonds
Although bonds still remain in fairly regular use in the construction industry, they may become even more prevalent as a means of obtaining security for the client towards the end of a project, whether this is by retention bonds specifically, if not outlawed too, or a more generic ‘warranty bond’ issued on completion.

However, bonds require payment of a premium and often require a cross-indemnity to be given by the contractor to the bank or surety. It may be initially that clients are willing to bear the additional cost, but at a time where construction costs are already high, clients may push for bond costs to be absorbed across the supply chain. This will inevitably put more pressure on already tight margins.
Project bank accounts/escrow
Another alternative is the use of project bank accounts, already provided for under the new engineering contract (NEC) forms of contract but not in widespread use, and escrow accounts. Payments to the contractor are made into a third‑party project bank account or escrow account. These amounts may be adjusted from time to time. The contract then sets out which funds the contractor is entitled to withdraw from the account, as well as the specific triggers for the release of those funds. Often those provisions prevent the contractor from withdrawing all funds, with the balance remaining in the account pending completion or resolution of defects and claims.
Arrangements which do not provide for a full release of amounts due to the contractor/sub-contractor may fall foul of the eventual retention ban, depending on how it's worded on the statute books, but if not, could present a loophole, given the existing NEC architecture.

That said, project bank accounts and escrow accounts come with a cost. This involves both the time required to set up the account and draft the governing agreement, as well as practical challenges for the parties, including ongoing administration and the possible need for professional advice.
That further cost and complexity would again be unwelcome for a sector already feeling the squeeze.

The lesser of two evils?

On the one hand, given that retention is open to misuse and exploitation, and does often put significant financial strain on contractors and subcontractors, especially small and medium enterprises, the government’s proposed ban is addressing a genuine issue in the industry.
On the other hand, the effects of the ban should be considered carefully, as the alternatives that will inevitably develop would initially appear to come with more cost and complexity than the retention they may replace.

Our initial view, cautiously expressed, is that whether considered from the perspective of contractors or developers, retention may prove to be the lesser of two evils depending on the scope of the legislation, and the ban may prove to be a greater burden on the industry in the long run than retention itself.

A third way?

We have already seen the effect of legislation in the assured shorthold tenancy sector requiring landlords to secure renters deposits under a government-backed scheme. Perhaps this might be a template for ensuring that contractors and sub-contractors are able to secure the release of retention sums, whilst also balancing the needs of the client to access monies for rectification works in the event of insolvency or breaches of contract.

However, whether the government has the appetite to fund the creation, never mind the ongoing operation, of such a scheme in the current financial climate remains to be seen. There was no indication in the consultation outcome that this was currently being considered.

Conclusion

Retention payment provisions are currently ’baked into’ many forms of industry standard construction contracts and clients will be reluctant to lose the security they provide. For contractors and sub-contractors they can be a frequent source of abuse and a cash-flow impediment.

However whilst the headline of retention provisions being banned may sound like good news to contractors and subcontractors, the cost, complexity, and availability of the likely alternatives may limit the intended benefits to contractors’ cash flows from being fully realised.

For further information please contact our construction team.