The proposed retention ban and other new payment legislation (UK construction focus) - Dentons

The UK government introduced the Commercial Payments Bill [HL] into Parliament on 19 May 2026, alongside Explanatory Notes. The Bill follows a period of consultation on government proposals to deal with "the scourge of late payments" across UK industry and also includes specific provisions that will affect payment terms and ban retentions under construction contracts.

The Bill, referred to as the Small Business Protections Bill in the government's press release, would, if enacted, restrict payment terms in relevant commercial contracts subject to exemptions, introduce a mandatory interest rate of 8% above the base rate of the Bank of England on late payments and, significantly for construction businesses, amend key payment provisions of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) including the introduction of the long- and often-discussed ban on retentions.

The Bill should come as no surprise to the construction industry. Multiple UK governments over the last three decades have legislated to deal with the problems that late and poor payment practices create for businesses. This includes, for example: Part 2 of the Construction Act (which introduced payment rights and notice requirements, the enforcement of which continues to be supported by a bespoke adjudication process for disputes arising under construction contracts); the Late Payment of Commercial Debts (Interest) Act 1998 (LPA) (which implies a right to interest on late payments in qualifying contracts); and the Reporting on Payment Practices and Performance Regulations 2017 (2017 Regime) (which requires twice-yearly payment reporting by large companies). And yet, payment issues have persisted not only in construction, but also across all UK sectors.

The reform of construction retentions is not new to the table. For example, the government reviewed construction retentions in 2017/2018 and 2020. CECA and BuildUK proposed a retentions ban by 2025 in their Road to Zero Retentions. There have also been various attempts to legislate on the practice of retentions over the last few years, some via private members bills. However, this time around, given the government's resolve as evidenced in its March press release, a ban on retention clauses now seems likely.

Summary of the Bill's key provisions

The Bill "strengthens existing legislation and introduces new measures to improve commercial payment practices and address persistent late payment of commercial debts in the United Kingdom". It is divided into three parts: Part 1, which deals with commercial payments (chapter 1) and payments under construction contracts (chapter 2); Part 2, which deals with the Small Business Commissioner (SBC); and Part 3, which comprises general provisions about the Bill including transitional provisions.

The Explanatory Notes, which are provided to be read alongside the Bill, summarise the Bill's effect as making changes to:

a. Changing its title, to reflect the changes made by this Bill to the 'Commercial Payments and Interest on Late Payment Act 1998 [(CPILPA 1998)]' ;

b . Setting payment terms in commercial contracts at a maximum of 30 days for public authorities (where the contract is not covered by the Procurement Act 2023) and 60 days for non

public authorities, subject to limited exemptions;

c. Implying a term into contracts that allows a supplier to recover a fixed sum from a purchaser where a dispute is raised late or without sufficient information; and

d. Prohibiting contractual terms that exclude or vary the right to statutory interest for late payments;

2. … the [Construction Act] through:

a. Aligning the late payment provisions with existing payment and dispute resolution legislation for construction contracts, including introducing a requirement for the Pay Less Notice to

be issued no later than seven days before the final date for payment, and amendment to payment reckoning periods of time;

b. The creation of a ban on contractual provisions which permit the deduction and withholding of retention sums under a construction contract;

c. Introducing a transition period for retention clauses agreed in the two-year period leading up to the coming into force of the retentions ban and creating a new requirement for any

remaining retentions sum withheld under these contractual clauses to be returned before the end of the stated period; and

d. Establishing an implied clause in a construction contract for a fixed sum payable to the supplier for any unauthorised deduction of a retention sum, in addition to any entitlement to

statutory interest and compensation arising;

3. ... the powers of the [SBC] by:

a. Introducing powers for the [SBC] to investigate larger businesses suspected of persistently engaging in poor payment practices and breaching payments legislation, make

recommendations and take enforcement action where appropriate (including the power to give directions and impose financial penalties);

b. Introducing powers for the [SBC] to adjudicate contractual payment disputes between small and larger businesses outside of the court process and making binding interim decisions;

c. Introducing powers for the [SBC] to take enforcement action against larger businesses that are in breach of their statutory publication requirements set out in regulations made under section 3 of the Small Business, Enterprise and Employment Act 2015."

From a construction perspective, note the following:

Right to adjudicate under the Construction Act: The SBC adjudication scheme is not intended to replace construction adjudication. The Explanatory Notes indicate that the SBC would not consider a dispute where a small business already has a statutory right to refer a dispute to another person for adjudication or arbitration (such as where a payment dispute arises under a construction contract).

New restrictions on payment periods: The Bill would address the timing of pay less notices and payment periods. Contractual payment timetables will therefore need to be reviewed alongside retention clauses.

The retention ban provisions apply to retention clauses in construction contracts within the definition of the Construction Act regime. The Bill also covers agreements related to construction contracts such as side letters, settlement agreements or other associated documents – whether in writing or not – which are often used to address retention release arrangements. The Bill aims to ensure that such agreements cannot be used to provide a way of working around the retention ban.

The transition period for the construction retention ban: The Bill will be introduced in stages.

A transitional period of two years will start when the relevant transitional retention provisions come into force. The ban on retention clauses will come into force at the end of that two-year period.

The Bill will be introduced in stages. A transitional period of two years will start when the relevant transitional retention provisions come into force. The ban on retention clauses will come into force at the end of that two-year period. Retention clauses agreed or varied during that two-year transition period remain effective until the "last retention day" which is three years from initial commencement of the relevant transitional provisions.

The Bill then sets out the process for any retained sums still held on the "last retention day" to be paid. Essentially, any "transitional retained sums" still outstanding after that date are brought within a statutory payment mechanism, under which the due date and final-date-for-payment rules apply.

After the expiry of the two-year transition period, parties will not, generally speaking, be able to vary pre-existing retention clauses or related release provisions, except where the proposed variation is more favourable to the payee.

Definitions of retention practice/clause: Power is reserved to the Secretary of State to legislate on these definitions in future using secondary legislation. Such power could be used to address any contractual or commercial measures that might attempt to re-create the effect of retentions in other ways.

Territorial application: The Bill's key amendments to the Construction Act apply in England, Scotland and Wales. The Bill sets out separate provision to amend the corresponding legislation in Northern Ireland.

When would the ban take effect if the Bill is enacted?

The Bill has only just started its progress through Parliament and may change before Royal Assent is given. If it remains as drafted, the retention provisions would come into force in stages as described above. Regulations would be needed to commence the transitional retention provisions which would start the two-year transition period. The ban on new retention clauses would come into force at the end of that two-year period alongside a further mechanism for dealing with transitional retained sums outstanding on the "last retention day".

The Bill is not generally retrospective regarding the new provisions dealing with payment terms and interest. Note, however, that the specific transitional rules cover those retention clauses agreed or varied in the two-year period before the ban takes effect.

While it could be a while before the ban is effective, lead times (particularly on larger projects) tend to be long. It would be prudent for the construction supply chain to start considering now how they will manage risk when retention clauses are no longer an option. Parties should review which of their current and proposed projects, including framework agreements, might still be live at the start of the transition period and when the ban takes effect.

Read more here about the practical significance of the proposed retention ban for those entering construction contracts.

To discuss any of the issues above, please get in touch with one of the Key Contacts.