Retention payments are commonly used in construction contracts as a means of incentivising contractors or sub-contractors to complete the works and return to rectify any snagging issues in a prompt manner.
Typically, an employer will retain some monies from each interim payment certificate at a rate agreed between the parties until practical completion. At that point, half of the retention monies are released with the other half released at a date to be agreed between the parties (e.g. the issuance of a Certificate of Making Good Defects).
Some protections have already been put in place to regulate against contractors delaying the release of retention monies until they get their own retention back. In particular, section 110(1A) of the Housing Grants, Construction and Regeneration Act 1996 ("the Construction Act")prohibits the release of the balance of retention to a sub-contractor being linked to the completion of works under the main contract.
Similarly, the Reporting on Payment Practices and Performance (Amendment) Regulations 2025 introduced requirements for certain "qualifying" companies to publish information on their standard terms for holding retention monies and retention payment performance statistics on their qualifying construction contracts.
Reform
Despite this, it remains the case that late payment of retention monies and poor payment practices in general are still an issue for the construction industry.
In a recent survey by the Department for Business and Trade dated July 2025, it was found that "…late payment of retentions appeared to be commonplace in the construction sector, affecting 71% of contractors surveyed with experience of having retentions held. More than half of the survey participants reported experience of partial or full non-payment of retentions…"
In another report by the Department for Business & Trade dated July 2025, it was noted that "…the impacts of poor retention payments practices, and the risk of non-payment due to insolvency, include higher business overheads, weakened relationships throughout the construction supply chain, and increased costs of construction projects, as firms price in the risk of losing retentions, all of which constrain business growth…"
The government is currently considering reforms to legislation around retention payments as part of a wider effort to crack down on poor payment practices. Specifically, it is considering amending the Construction Act to either prohibit the use of retentions, or to introduce requirements to protect retention funds deducted and withheld from insolvency and late or non-payment.
A consultation has been opened inviting comments on the proposals on the use of retention clauses in construction contracts, which will run until 23 October 2025.
Comment
There have been a number of attempts over the last 20 years to address poor payment practices in relation to retention monies, however none have been passed as an Act of Parliament. It is not clear from the government commentary whether this represents another false dawn or whether this represents a firm commitment to change. Whilst there are other options that are intended to have a similar effect (such as parent company guarantees or performance bonds), their efficacy and suitability as an alternative to retention must be carefully considered, not least as it has been reported that these mechanisms are often used in addition to retention, rather than in place of it.
