Could Construction Retentions Finally Be Banned? What the Commercial Payments Bill Could Mean for UK Contractors
NTS Market Intelligence | August 2026
Cash flow has always been one of the defining commercial challenges in construction.
A contractor can have a healthy order book, profitable projects and growing turnover while still facing significant pressure on working capital.
The reason is simple.
Revenue, profit and cash are not the same thing.
Construction businesses regularly incur labour, material, subcontractor and operating costs long before all of the money owed for a project reaches their bank account.
Now, proposed legislation progressing through Parliament could significantly change that position.
A House of Lords Library briefing published on 27 August 2026 confirms that the Commercial Payments Bill is continuing through Parliament.
Among its most significant proposals are tighter limits on commercial payment periods, greater powers for the Small Business Commissioner and, particularly importantly for construction, a proposed ban on retention clauses.
If enacted in its current form, the legislation could represent one of the more meaningful changes to construction payment practices in recent years.
But it is important to be clear from the outset.
The Commercial Payments Bill is not yet law.
Businesses should therefore monitor its progress and prepare for the potential changes, but existing contractual obligations remain in force.
What is the Commercial Payments Bill?
The Commercial Payments Bill has been introduced to address late and extended payments between businesses.
For construction businesses, two areas are particularly important.
The first is payment periods.
Under the Bill's current wording, the permitted period for relevant construction payments would generally be:
30 days where the purchaser is a public authority
60 days where the purchaser is not a public authority
The government has described 60 days as a maximum rather than a target and continues to encourage businesses to agree shorter terms.
There has also been debate in the House of Lords over whether 60 days remains too long, particularly where smaller suppliers are effectively financing substantially larger customers.
The second major proposal is more specific to construction.
The Bill seeks to prohibit retention clauses in construction contracts.
That could have significant consequences throughout the construction supply chain.
Why construction retentions matter
Retention is common across construction contracts.
A proportion of the money otherwise due to a contractor or subcontractor is withheld, normally as financial protection against defective or incomplete work.
The principle is straightforward.
The practical effect can be more difficult.
For the business carrying out the work, retention means part of the value it has earned remains outside the business after labour, materials and other project costs may already have been paid.
Multiply that across several contracts and the amount of working capital tied up can become substantial.
It becomes particularly challenging for growing SMEs.
A contractor may be recruiting additional operatives, purchasing materials for the next job, paying subcontractors, running vehicles and funding overheads while simultaneously waiting for payment from completed work and carrying outstanding retention balances.
The business can therefore be profitable on paper while experiencing genuine pressure on cash.
What would happen to retentions?
The Commercial Payments Bill proposes making retention clauses in construction contracts void.
However, this would not mean every retention arrangement disappearing immediately if the Bill receives Royal Assent.
The current drafting includes a two-year transition period, together with additional provisions governing retention clauses and retained sums already within existing arrangements.
In practical terms, businesses would have time to adjust.
That transition is important because retentions are deeply embedded within construction contracting and procurement.
Main contractors, subcontractors, consultants, clients and insurers would all need to understand how contractual risk is managed in a post-retention environment.
For NTS and other regional contractors, the correct position today is therefore straightforward:
monitor the legislation, understand the potential impact, but do not alter existing contractual arrangements on the assumption that retentions have already been banned.
They have not.
Why this could matter for SME contractor growth
The potential benefit goes considerably further than receiving a few invoices sooner.
Improved payment practices can change the amount of growth a contractor can sustainably finance.
Consider what happens when a contractor wins a larger commercial contract.
The business may need to increase labour capacity, order materials, use additional subcontractors or allocate management resources before receiving the corresponding customer payment.
Each additional contract therefore creates a working-capital requirement.
If customers then operate extended payment terms or retain part of the contract value, growth can consume cash even where the underlying work is profitable.
That is why turnover alone tells you relatively little about the financial strength of a construction business.
A rapidly growing contractor with weak cash conversion can be considerably more exposed than a smaller company with disciplined margins, payment terms and credit control.
Reducing unnecessarily long payment cycles and progressively removing retention could therefore release cash that SMEs can use for productive purposes.
That might include recruitment, equipment, vehicles, materials, training, systems or simply maintaining an appropriate working-capital buffer.
But clients still need protection against poor work
There is another side to the retention debate.
Clients do not retain money simply because they enjoy withholding contractor payments.
Retentions have traditionally been used to provide leverage where defects remain unresolved.
If that mechanism disappears, contractors will still need to give customers confidence that defective or incomplete work will be rectified.
This is where the conversation moves from finance into operations.
A future without traditional retentions does not reduce the importance of quality.
Arguably, it increases it.
Clients will want confidence in the contractor's:
quality-control procedures
site and supervisor inspections
photographic records
completion documentation
defect-management process
communication
warranties where applicable
ability to return and resolve legitimate defects quickly
The strongest contractors should not need poor cash-flow practices to force them to complete work properly.
Quality assurance should already be part of the operating system.
Good records become even more valuable
This is particularly relevant to the direction in which commercial property maintenance is already moving.
Clients increasingly expect more than confirmation that someone attended site.
They want evidence.
That can include before and after photographs, job notes, materials used, labour records, completion status, recommendations, variations and records of any further work required.
Those records protect both sides.
The client can see what has been completed.
The contractor can demonstrate the work delivered and distinguish a genuine workmanship defect from a new or unrelated property issue.
At NTS, this is one reason we continue investing in the systems behind our delivery.
Jobs are managed digitally through Simpro, supporting scheduling, job records, photographic evidence, cost information and clearer operational oversight.
As contractors take on larger and more sophisticated customers, the quality of those systems increasingly becomes part of the service itself.
Fair payment and good contracting should work together
The debate around late payment can sometimes become unnecessarily adversarial.
Good clients need dependable contractors.
Good contractors need dependable clients.
A sustainable commercial relationship requires both sides to perform.
Contractors should deliver the agreed scope, maintain quality, communicate problems, provide accurate records and rectify legitimate defects.
Clients should approve work efficiently, manage variations properly and pay suppliers in accordance with fair contractual terms.
Neither side benefits from a supply chain that is permanently under financial stress.
Contractors struggling for working capital have less ability to invest in people, systems and service improvements.
That ultimately increases risk throughout the supply chain.
Fair payment should therefore be viewed as part of building a stronger contractor market, rather than simply as a concession to suppliers.
What should contractors do now?
The Commercial Payments Bill remains legislation in progress, so businesses should resist making premature contractual changes.
But there is plenty contractors can do now.
Review the payment terms within existing customer contracts.
Understand how much money is currently held through retentions.
Monitor debtor days and overdue balances.
Forecast the working-capital requirement associated with new contracts before committing to them.
Maintain disciplined invoicing and credit-control processes.
And, just as importantly, strengthen quality assurance and completion records.
If the industry moves away from retention as a mechanism for protecting clients against defects, contractors with strong QA, photographic evidence, job records and reliable defect close-out will be well positioned.
The wider lesson for contractor growth
There is a broader commercial lesson here.
Construction businesses understandably spend a lot of time trying to increase revenue.
Winning new clients matters.
Securing larger contracts matters.
Growing recurring maintenance income matters.
But growth is only sustainable when three things work together:
revenue, margin and cash.
Revenue without margin creates activity rather than value.
Margin without cash conversion can leave a profitable business unable to finance its own growth.
And cash without a healthy pipeline eventually runs out.
Strong construction businesses therefore need to manage the entire commercial cycle, from estimating and contract terms through delivery, invoicing, payment and defect close-out.
The Commercial Payments Bill may ultimately make part of that cycle considerably fairer for SMEs.
But legislation cannot replace good commercial management.
NTS view: monitor, prepare, do not change contracts yet
The proposed ban on construction retentions could represent a significant change for contractors across the UK.
For smaller regional businesses in particular, reducing the amount of cash trapped in retention and shortening excessive payment periods could improve working capital and create greater capacity to invest and grow.
But the Bill has not yet completed its Parliamentary journey.
Its provisions can still change.
NTS will therefore continue monitoring its progress while maintaining existing contractual arrangements and strengthening the operational controls that matter regardless of the final legislation.
That means clear scopes.
Accurate job records.
Photographic evidence.
Strong quality assurance.
Proper defect management.
Disciplined invoicing.
And active management of cash flow.
Because the strongest contractor businesses are not built on turnover alone.
They are built by delivering good work, protecting margin and converting that work into cash.
Building. Maintaining. Improving.
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