A blanket ban on construction retentions would remove one protection against defective work, but it would not by itself solve late payment, wrongful withholding or insolvency. Francis Ho’s argument is that policymakers should test less drastic measures first: a maximum retention, legally protected custody of the money and a quicker, cheaper route for small disputes.
That is an argument about policy design, not a settled finding that retentions are harmless. The practical question is how to preserve genuine defect security without leaving subcontractors exposed when money is delayed, disputed or lost in an upstream insolvency.
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What is a retention in a construction contract?
A retention is a percentage of a construction payment that the paying party withholds until a later contractual milestone. The money is intended to give the employer or main contractor security if defects appear or outstanding work is not completed. In the United Kingdom, Ho says the usual rate is 3% or 5% of each payment instalment.
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- An interim valuation is agreed, for example £100,000.
- The contract applies its retention percentage. At 5%, £5,000 is held back and £95,000 is paid.
- The withheld amount accumulates through the project rather than being paid with each valuation.
- One release may occur at practical completion, with the balance released after the defects-liability or rectification period, subject to the contract’s conditions.
The exact release events, notice requirements, certificate wording and entitlement to set-off depend on the contract. A retention is therefore not simply a discount: it is money that remains contractually due if the release conditions are met.
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Why parties use it
- Defect security: the withheld balance can fund remedial work if a contractor fails to return and correct defects.
- Completion leverage: it gives the paying party an incentive to ensure minor outstanding items are finished.
- Familiar administration: many standard construction forms already contain retention machinery.
Those benefits are strongest where the retained amount is proportionate, held transparently and released promptly. They are weakest where a small supplier is carrying the cash-flow burden for a long period or where the payer can use a technicality to delay release.
Why are construction retentions controversial?
Release can be late or incomplete
A subcontractor may finish its work but wait months or years for the final release. Certification disputes, unfinished work elsewhere on the project, missing paperwork and arguments about minor defects can all postpone payment. A retention can also be paid only in part, leaving the supplier to decide whether a relatively small balance justifies formal proceedings.
The money can be at risk in an insolvency
If the party holding the retention becomes insolvent before release, the supplier may rank with other unsecured creditors rather than receiving the money in full. The same risk can arise higher up the payment chain: a subcontractor may have performed properly while the main contractor or employer fails before passing the retention down.
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Critics say some payers use retention as leverage unrelated to genuine defects, apply it inconsistently or fail to keep a clear account of the balance. A clause can therefore create both a cash-flow problem and an information problem: the supplier may not know exactly how much is held, where it is held or what event will trigger release.
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Do retentions cause contractor insolvency?
Ho’s commentary reports evidence from a 2017 Pye Tait study commissioned by the Department for Business, Energy and Industrial Strategy. As Ho summarises it, 44% of surveyed contractors who had experienced retentions being withheld had also suffered non-payment following an upstream insolvency during the preceding three years. The corresponding insolvencies affected around 1% of relevant contracts.
Those figures must be read narrowly. The 44% is not the share of all contractors or all contracts; it concerns a subset of surveyed contractors with experience of withheld retentions. Ho says the study found no strong evidence that holding retentions directly caused insolvency, although retention pressure could contribute to financial distress. The original study’s sample and methodology are not independently assessed here, so the figures should not be treated as a causal estimate.
The evidence nevertheless identifies a real exposure. A retention may be only 3% or 5% on one valuation, but repeated deductions accumulate while the supplier still pays wages, materials, tax and finance costs. The commercial harm is greatest when release is delayed across several projects or when a supplier has little negotiating power.
What ban is being discussed?
Ho wrote on 6 October 2026 that the Commercial Payments Bill had passed committee stage and proposed a phased UK ban on retention clauses. That is the status described in his commentary, not an independently verified account of later parliamentary proceedings. He also says the policy intention was UK-wide even though construction payment rules engage devolved matters.
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The Scottish contrast
According to Ho, a Scottish Short Life Working Group had firmly rejected a ban about five years earlier. Instead, it suggested an independently run custodial deposit scheme, subject to a business case. The contrast matters because a single UK rule may interact differently with procurement practice, contract forms and devolved legislation.
International claims need care
Ho describes cash retentions as common internationally and says New Mexico was the only jurisdiction with a ban, subject to minor exceptions. He also warns that back-loaded payments could potentially circumvent such a prohibition. These are claims made in the commentary rather than a verified global legal survey; any jurisdiction-specific decision should be checked against current primary law.
Why Ho says a blanket ban is too simplistic
It removes a function before replacing it
Eliminating a retention clause removes a familiar source of security for defects and incomplete work. The policy would need to replace that security with something that works for employers, main contractors and subcontractors across different project types. Otherwise, the risk may simply move into higher prices, larger advance guarantees, insurance requirements or more severe payment terms.
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Contracting parties may find workarounds
Ho warns that parties could respond with back-loaded payments or systematic undervaluation of interim applications. A contract might contain no clause labelled “retention” while still withholding a similar amount through its valuation process. Enforcement would therefore depend on how the law defines prohibited conduct and how readily suppliers can challenge disguised withholding.
A single remedy may not fit every project
A national housebuilding programme, a specialist engineering package and a small refurbishment contract have different defect risks, payment chains and administrative capacities. Ho says government findings published in 2020 produced mixed feedback among smaller businesses and found no alternative universally suitable across sub-sectors or project sizes. He invokes the Green Book’s business-as-usual benchmark to argue for further appraisal and consultation before a ban.
Alternatives to an outright ban
| Option | Defect security | Insolvency protection | Abuse or circumvention risk | Administration and remedies | Likely fit |
|---|---|---|---|---|---|
| Ban retention clauses | Removes contractual retention security; parties must use another safeguard. | Stops the specific retention balance from being trapped, but does not protect ordinary unpaid invoices. | Back-loaded payments or undervalued applications could recreate the effect. | Requires clear definitions, monitoring and enforcement; a disputed balance may still require proceedings. | Potentially simple for standard contracts, but less obviously suited to projects with material defects risk. |
| Cap the retention | Preserves some security while limiting the cash-flow burden. | Reduces the amount exposed, but money can still be lost if the holder fails. | Less incentive to over-withhold; valuation manipulation remains possible. | Relatively familiar to contract administrators; release rules still matter. | Adaptable where a modest security balance is considered necessary. |
| Statutory trust or custodial deposit | Retains a defect fund without leaving it mixed with the payer’s working capital. | Can ring-fence the money from the holder’s insolvency, subject to the legal design. | Lower commingling risk, but parties may dispute eligibility or release instructions. | Needs an independent operator, records, fees and a workable release process. | Potentially suitable where payment chains are long; setup may be disproportionate on small jobs. |
| Short-form adjudication for low-value disputes | Does not create security, but can resolve whether security or release was properly applied. | Cannot recover money that has disappeared in insolvency. | Quicker decisions can discourage tactical withholding. | Capped fees and streamlined evidence could make small claims viable; procedure must remain fair. | Particularly useful for smaller suppliers and modest retention balances. |
Ho’s point is not that one of these options has been proven superior. It is that each addresses a different failure: the cap limits exposure, custody protects the fund, and faster adjudication improves access to a remedy. A ban addresses the existence of the clause but may leave the underlying payment-chain risks untouched.
Retention caps
A cap can be expressed as a percentage of each payment, a maximum percentage of the contract sum or both. It should also specify when deductions stop, how the cap is calculated after variations and when each tranche must be released. Ho notes that a cap amendment was proposed at committee stage and rejected by the government, according to his account.
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Protected custody or trust
A statutory trust or independently operated custodial deposit would separate retention money from the holder’s general funds. The legal framework would need to answer who must deposit the money, who pays administration costs, how interest is treated, what evidence permits release and how competing claims are handled. Ho cites New Zealand as an example and the Scottish proposal as conditional on a business case.
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Quicker resolution of small disputes
Large court or arbitration costs can exceed a small retention balance. Ho suggests adapting low-value claim schemes already operated by nominating bodies into a short-form adjudication route with capped fees. To be credible, such a route would need short timetables, accessible forms, proportionate evidence rules and an enforceable decision, while preserving a route to correct serious legal errors.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How subcontractors can protect retention money now
Until legislation or a contract changes, suppliers can reduce exposure through disciplined contract administration. These steps do not guarantee payment and cannot eliminate insolvency risk.
Before signing
- Identify the retention percentage, the maximum aggregate amount and every release trigger.
- Check whether the clause permits set-off against unrelated contracts, other subcontractors or alleged defects outside your scope.
- Ask whether the retention must be held in a separate account, trust or custodial arrangement, and obtain the mechanism in writing.
- Align your subcontract’s release dates with the payment and completion events in the head contract where possible.
- Price the financing effect of a delayed release rather than treating the headline contract value as immediately collectible.
During the works
- Reconcile every payment notice, pay-less notice and retention deduction against your valuation.
- Keep contemporaneous records of inspections, testing, approvals, instructions and completed snagging items.
- Request a running retention statement showing deductions, releases and the balance held.
- Escalate missed release dates promptly; delay can make evidence harder to obtain and recovery harder after an insolvency.
When completion approaches
- Confirm in writing the date on which practical completion or the relevant release certificate was achieved.
- Submit the documents required by the contract for the first and final releases.
- Separate genuine defect items from unrelated commercial disputes and ask for a quantified explanation of any withholding.
If the payer shows financial distress
Obtain advice quickly on suspension rights, notices, security of payment procedures and insolvency priorities. Do not assume that an invoice, retention statement or verbal promise makes the money protected. The available remedy depends on the contract, the parties’ jurisdiction and the insolvency stage.
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| Project characteristic | Policy concern | More proportionate starting point |
|---|---|---|
| Small contract with a modest retention balance | Legal costs can exceed the amount in dispute. | A low-cost, short-form adjudication route and a low cap. |
| Long supply chain with several payment tiers | Upstream insolvency and commingling can strand money. | Protected custody or trust, with clear pass-through obligations. |
| Work with substantial latent-defect or commissioning risk | The employer may need credible post-completion security. | A proportionate cap or protected fund rather than an unqualified ban. |
| Short, low-risk refurbishment | Administrative machinery may cost more than the risk it manages. | No retention or a very small, time-limited holdback with automatic release. |
These are decision principles, not measured outcomes. Ho’s underlying warning is that policy should be tested against actual sectors, contract sizes and payment chains instead of assuming one mechanism will perform equally everywhere.
What policymakers should establish before legislating
- How a ban would define disguised retention, back-loaded payment and systematic undervaluation.
- Whether the rule applies identically to private contracts, public procurement and different tiers of the supply chain.
- Who bears the cost of a custodial system and how small projects can use it without disproportionate administration.
- How suppliers recover money when a payer becomes insolvent before a release date.
- Whether a capped, protected retention combined with fast adjudication produces better cash-flow outcomes than prohibition.
- How devolved responsibilities and differences in Scottish, Welsh, Northern Irish and English practice would be handled.
- What evidence will be collected after implementation: release times, insolvency losses, dispute frequency, project pricing and use of workaround payment structures.
Ho characterises the government’s approach as having chosen “the most radical option” and says “less drastic and more tried-and-tested alternatives ought to be seriously considered first”. That is his policy judgment. The defensible conclusion for contract users is narrower: a retention ban may be justified only after the replacement protections, enforcement rules and cross-border effects have been demonstrated to work.
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