Commercial Payments Bill: Could the end of retentions finally be in sight?

The Commercial Payments Bill is progressing through Parliament and, if enacted in its current form, could bring significant changes to payment practices across the construction industry.

The proposals include:

• A maximum 60-day payment period for private-sector contracts within scope

• The phased removal of construction retentions

• Stronger powers to address persistent poor payment practices

• Greater support for SMEs in resolving payment disputes

With the Bill continuing through Parliament, businesses across the construction supply chain are beginning to consider what the proposed changes could mean for their contracts, projects and cashflow.

A potential end to construction retentions

The proposed removal of retentions is perhaps the most significant change for the construction sector.

Retentions have traditionally been used to provide a degree of financial protection against defective or incomplete works, with a proportion of the payment due to a contractor or subcontractor being withheld until certain contractual conditions have been met.

While retentions can provide useful protection for those making payments, they can also create cashflow pressures further down the supply chain and contribute to delayed payments and increased financial exposure for contractors and subcontractors.

The Bill proposes a transition period before the use of retention clauses is ultimately prohibited. If the proposals become law in their current form, this would represent a significant change to a practice that has been embedded in construction contracting for many years.

Is the issue really just about retentions?

Although the proposed retention ban has attracted considerable attention, retentions are only one part of the industry's wider payment challenge.

Payment disputes, contractual practices and behaviours throughout the supply chain can all have a significant impact on cashflow. The Bill therefore seeks to address wider payment practices alongside the proposed changes to retentions.

For clients, developers and contractors, the potential removal of retentions also raises an important practical question: how will performance and defect protection be managed if retentions are no longer available?

The answer will depend on the nature of each project and its contractual arrangements. Alternative forms of security and risk management may need to be considered, while ensuring that payment arrangements remain commercially workable for the supply chain.

What should businesses be considering?

Although the Bill has not yet become law and its provisions may continue to change as it progresses through Parliament, the proposals provide a useful opportunity for businesses to review their current approach to payment and risk.

In particular, clients and project teams may wish to consider:

• How existing payment and retention provisions operate in practice

• What risks current retentions are intended to manage

• Whether alternative forms of performance or defect protection may be appropriate

• How payment disputes are managed

• The potential impact of shorter payment periods on project cashflow

Taking time to consider these issues now can help businesses understand where changes may be required if the proposed legislation comes into force.

How we can support

Monaghans can support clients and project teams in assessing the potential impact of the proposed changes, reviewing payment and contractual arrangements, and considering practical approaches to managing performance, defects and cashflow as the industry moves towards a potential retention-free environment.

If you would like to discuss the potential implications for your business or projects, please contact alan.nock@monaghans.co.uk