However, the proposed Small Business Protections Bill signals a potential turning point. With the Government placing greater emphasis on fair payment practices, particularly for small and medium-sized enterprises (SMEs), the traditional approach to retentions may be under significant pressure.

In this article, Richard Millard, Construction & Development Partner at Geoffrey Leaver Solicitors, looks at what these changes could mean in practice, how they may affect your projects, and what steps you can take now to manage risk and maintain healthy cash flow.

Why retention clauses are under scrutiny

Retention clauses have long been justified as a practical safeguard. In theory, they encourage contractors to finish work to the required standard and return promptly to address defects.

In reality, the picture is often quite different. Many SMEs experience delayed or withheld retention payments, sometimes well beyond the defect’s liability period. In more serious cases, funds can be lost entirely if a party higher up the contractual chain becomes insolvent.

These issues have led to growing criticism that retentions disproportionately impact smaller businesses, affecting liquidity and, in some cases, threatening their survival. The proposed reforms aim to correct this imbalance by ensuring that payment mechanisms are fair, transparent and reliable.

What the proposed reforms could look like

The draft Bill outlines two possible approaches:

A ban on retention clauses
One option is a complete prohibition on retention clauses in qualifying construction contracts. If adopted, this would mark a significant shift in how project security is managed.

Safeguarding retention funds
Alternatively, retention arrangements may still be permitted, but subject to stricter protections. This could include requirements for funds to be held in trust accounts or otherwise ring-fenced, reducing the risk of loss in the event of insolvency.

At this stage, the final shape of the legislation remains subject to consultation, but the direction of travel is clear: greater protection for SMEs and more accountability in payment practices.

The rise of retention bonds

If traditional retention clauses are restricted or removed, the industry is likely to move towards alternatives—particularly retention bonds.

Retention bonds provide security to the employer without withholding cash from the contractor. Instead of keeping a percentage of the contract sum, the contractor obtains a bond from a surety provider, which can be called upon if defects are not remedied.

Why this matters

• Improved cash flow: Contractors retain access to funds, supporting business stability.
• Reduced disputes: Clearer mechanisms can reduce disagreements over withheld payments.
• Continued protection: Employers still have recourse if work is not completed properly.

While retention bonds are already in use, these reforms may accelerate their adoption across the sector.

Wider changes to payment culture

The proposed changes to retention clauses are part of a broader effort to tackle late payments in the UK construction industry.

Other suggested measures include:

• Mandatory statutory interest on late payments
• A maximum payment term of 60 days
• Increased powers for the Small Business Commissioner to investigate and penalise persistent late payers

These developments reflect a wider cultural shift towards fairness and transparency in commercial relationships.

For further background on payment practices and enforcement, you can visit the UK Government’s website.

Practical steps for contractors and developers

While the legislation is not yet finalised, there are sensible steps you can take now:

• Review your contracts: Consider how heavily you rely on retention clauses and whether alternative mechanisms could be introduced.
• Assess your cash flow exposure: Understand how retained sums affect your financial position across ongoing projects.
• Explore retention bonds: Speak to brokers or advisors about availability and cost implications.
• Strengthen payment processes: Clear documentation and regular communication can reduce disputes and delays.

Being proactive now will help minimise disruption when the new rules come into force.

Conclusion

The proposed reform of retention clauses represents one of the most significant developments in construction payment practices in recent years. While the details are still evolving, the direction is clear: greater protection for SMEs, improved cash flow, and a fairer balance of risk across the supply chain.

For contractors, subcontractors and developers alike, now is the time to review your approach and consider how these changes may affect future projects. Those who adapt early will be best placed to navigate the transition and maintain strong, sustainable business relationships.

If you would like advice on how these proposals may affect your contracts or dispute strategy, seeking early legal guidance can help you stay ahead of the curve. For further information, please contact Richard Millard in the Dispute Resolution & Litigation team on 01908 689382 or email rmillard@geoffreyleaver.com

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.