The government has confirmed it's banning cash retentions in construction. Here's what the Commercial Payments Bill actually changes, when, and what to do about your cash flow now.
Somewhere between three and six billion pounds of contractors' money is being held as retention in England right now. Not the government's money. Not the client's. Yours — earned, certified, and sitting in someone else's account, often long after it should have come back.
For thirty years that's just been how it works. You price a job knowing 5% will be withheld, half released at practical completion and half at the end of the defects period, and you spend the next two years chasing the second half off a main contractor who's in no hurry to pay it. Most small contractors I know have written off retention at least once — decided the cost of chasing it exceeded the sum itself, and swallowed it.
That's about to change. And while the headline is good news, the detail is where you need to pay attention.
On 24 March 2026, the government published its response to the Late Payment Consultation and confirmed its intention to ban the withholding of cash retentions under construction contracts. This isn't a vague aspiration — it's now sitting in draft legislation.
The Commercial Payments Bill was introduced to the House of Lords on 19 May 2026, had its second reading, and was debated in the chamber on 9 June. It's the biggest package of payment reform the industry has seen in over 25 years, and it does three things that matter to you:
The Bill envisages a two-year transition period, so nothing switches off overnight. But if you're pricing work now that runs into 2027 and beyond, you're already pricing into a world where retention as you know it is going away.
Retention has always hit small contractors hardest, for a simple reason: it's a fixed percentage of your value, but your margins are thinner than the tier ones above you. A 5% retention on a job you tendered at 8% margin is holding back more than half your profit until the defects period ends. If that job is worth £400,000, that's £20,000 of your money gone for up to two years — money you can't use to buy materials for the next job, pay your people, or smooth the cash-flow gap that kills more small firms than lack of work ever does.
Removing that is genuinely significant. For a contractor running three or four jobs at a time, the release of retention across the portfolio could be the difference between needing an overdraft and not.
Here's where thirty years of watching this industry makes me cautious about a pure victory lap.
Money doesn't stop being at risk just because you rename the mechanism. The reason retention exists — rightly or wrongly — is that clients and main contractors want security that you'll come back and fix defects. Take away retention, and that need doesn't disappear. It moves.
What replaces it? Almost certainly more of the following:
So the honest position is this: the ban improves your cash flow on existing work, which is real and welcome. But it may raise the bar to win work, and it shifts the cost of defect security onto instruments that aren't free. Whether you come out ahead depends on how well you manage the transition — not on the headline.
There's a second-order effect too. A sudden change to how retention works tends to generate disputes while everyone learns the new rules. Contracts written under the old regime will collide with the new one. Expect a bump in adjudications as the industry beds this in.
You've got a two-year runway. Use it. Here's the practical list.
1. Know your current retention exposure — to the penny. Most small contractors can't tell you, across all live jobs, how much retention is outstanding, when each tranche is due for release, and which ones are overdue. That number is your money. If you don't track it, you won't chase it, and you certainly won't be ready to renegotiate as the rules change. This is the single most important thing on the list.
2. Review your standard contracts and tenders. Understand what your current contracts say about retention release, and start thinking about how you'll price work that spans the transition. If a bond replaces retention, who carries the cost, and have you priced it?
3. Model the cash-flow upside. Work out what releasing retention across your portfolio does to your cash position. If it eases a genuine squeeze, that changes decisions about overdrafts, material buying, and how much work you can safely run at once. See our guide on cash-flow forecasting for how to build the picture.
4. Get your financial standing presentable. If clients are going to ask for accounts and credit evidence, make sure yours tell a good story. That's a conversation with your accountant now, not when you're mid-tender.
5. Tighten your defect and close-out process. The stronger your snagging and close-out discipline, the weaker the argument for holding security against you at all. Contractors who demonstrably close out well have more leverage in the new world.
At Construction AI, retention is tracked on both main-contract and subcontract payment applications — every tranche, when it's due, what's outstanding, on both sides of your ledger. That means the number in point one above isn't a spreadsheet exercise you dread; it's live, all the time. As the reforms land, the contractors who can see their exposure at a glance will be the ones who renegotiate from a position of knowledge rather than guesswork.
The retention ban is coming, and on balance it's good for the small contractor who's spent thirty years being the industry's involuntary bank. But "good on balance" still has to be managed. Know your number, price the transition properly, and don't assume that because the headline favours you, the detail will look after itself. It never does.
When is the construction retention ban coming into force?
The Commercial Payments Bill was introduced to Parliament on 19 May 2026 and is progressing through the legislative process. It envisages a two-year transition period, so the ban is expected to take full effect around 2028 — but contractors pricing long-duration work should plan for it now.
How much retention money is currently withheld in UK construction?
Between £3 billion and £6 billion is held as retention in England at any one time — cash earned by contractors and subcontractors but held by the party above them in the chain.
What will replace retention after the ban?
Clients and main contractors are expected to rely more on retention bonds, performance guarantees, warranties, and tighter financial checks at tender stage to secure defect obligations. Some of these carry a cost, so the ban is not a straightforward saving.
Does the reform affect payment terms and late payment too?
Yes. Alongside the retention ban, the reforms introduce a 60-day payment cap for large firms paying smaller suppliers, statutory interest at 8% above the Bank of England base rate on overdue invoices, and stronger enforcement powers for the Small Business Commissioner.
What should small contractors do to prepare?
Track your total retention exposure across all live jobs, review contracts and tender pricing for the transition, model the cash-flow upside of retention release, get your financial accounts presentable for client scrutiny, and strengthen your defect close-out process.
Stephen Mckenna MCIOB
30+ years in UK commercial construction, from site management to director level. Now building the project management tools he wished he'd had.
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