Retention in Construction (UK): How It Works and What the Proposed Ban Means

How retention in construction works in the UK

On most commercial building contracts, the client pays the contractor in stages or monthly. From each payment, a percentage is held back. That is the retention.

Under the JCT Design and Build Contract, retention is released in two halves. The retention percentage and the defects period are set in the Contract Particulars. So both are yours to negotiate.

The same habit runs down the supply chain. A main contractor usually holds retention from its subcontractors too.

Why clients hold retention

Retention gives the client cash in hand if the contractor doesn't come back. Defects found after handover are the classic reason.

Without retention, a client's only lever after handover is a claim, which is slow and costly. With retention, the client can use the money held to put defects right if the contractor won't. It also keeps the contractor interested in the final snagging, because part of its money depends on it.

Why contractors and subcontractors dislike it

Here is the view from our side of the table. Building margins are thin. Retention is money a contractor has earned, paid its workers and suppliers for, and still hasn't received.

On a long job, that adds up. The contractor finances it out of its own cash. Then it often has to chase the release, sometimes long after the defects period ends. A subcontractor several layers down may wait longest of all.

Honest point for clients: a contractor short of cash is a riskier contractor. Heavy retention, late payment and thin margins together are part of why firms fail mid-job.

What happens to retention when someone goes bust

Construction has more company insolvencies than any other industry, 3,866 in the year to August 2026.

When a firm holding retention fails, the money is usually not ring-fenced. Unsecured creditors are paid only after the insolvency costs, secured creditors and preferential creditors (such as some employee and tax debts). If there are few or no assets, they get nothing back. That is how retention gets lost down the chain.

If your contractor fails, the retention you hold may help you finish the job. Our guide to what to do when a builder walks off the job or goes bust covers the steps.

The proposed retention ban: where it stands in October 2026

In March 2026, the government chose to make deducting and withholding retentions unlawful by amending the Construction Act. That plan is now in the Commercial Payments Bill.

Here is where it stands on 20 October 2026, from the UK Parliament bill page and legal commentary:

1. It is not law yet. The Bill started in the House of Lords in May 2026. The UK Parliament bill page lists third reading, its last Lords stage, on 20 October 2026. When we checked that day, no result and no Commons stage were listed. It still has to pass the Commons and get Royal Assent.
2. What it bans. Retention clauses in construction contracts, including terms in related agreements and terms not in writing.
3. What it still allows. Genuine staged and interim payments. Escrow or bank arrangements where a third party pays out money that is due, rather than holding it as security.
4. When. Commentators expect Royal Assent in 2027. A two-year transition follows commencement, during which retention clauses stay lawful. One firm expects the outright ban no earlier than 2030.
5. What happens to money held. Retention not repaid when due becomes a retention debt, with extra compensation and interest on top.

The Bill can still change. Check the position before you sign a long contract.

Alternatives to cash retention

If cash retention goes, clients still need protection against defects. These are the common options today.

1. Retention bond. A bank or insurer provides a bond instead of cash retention. The client can claim on it if defects aren't fixed. The contractor is paid in full and pays for the bond.
2. Performance bond. A wider bond that covers the contractor failing to perform the contract.
3. Staged payments tied to completion. Pay for each finished stage, checked by your own surveyor, and keep the final payment for snagging.
4. A strong defects process. A clear defects period, a response time and the right to bring in others at the contractor's cost.

On a funded scheme, your lender's development monitoring surveyor will also check work before money is released.

What to agree in your contract now

Until the ban is law and in force, retention stays a normal contract term. Agree it carefully.

Our guide to the JCT Design and Build Contract shows where retention sits in the standard form. An employer's agent can manage valuations, retention and release for you. For the earlier stages of payment, see how much deposit a builder should ask for.

Retention works best when both sides know the rules before the job starts. Planning your next scheme? Want payment terms clear before the job starts? Book a site visit.