The persistent issues of late payments and retentions in the construction sector have once again been brought into focus, as The Department for Business and Trade (DBT) opens a new consultation.
This proposes a series of reforms aimed at addressing unfair payment practices in business-to-business dealings by setting out eight central proposals, plus one administrative change to existing legislation.
Collectively, these are designed to improve transparency, reduce excessive payment terms, penalise chronic late payers and overhaul how retentions are managed in construction contracts.
Previous attempts at reform
Unfortunately, late payments have been a persistent issue within the construction industry.
DBT points out in its consultation that late payments cost UK businesses and the wider economy around £10.7 billion every year and that 16 companies close their doors each day because of delays.
Construction is especially vulnerable, given its reliance on cashflow. In 2024 it recorded 4,032 insolvencies, the highest of any industry, accounting for almost 17 per cent of the national total.
Efforts to improve payment practices are nothing new though, as past measures have included Part 2 of the Construction Act 1996 (amended in 2011), the Late Payment of Commercial Debts Act 1988, the Prompt Payment Code of 2008 (replaced by the Fair Payment Code in 2024) and the 2017 Reporting on Payment Practices and Performance Regulations.
There have also been moves to reform retentions, including a consultation in 2018 and private members’ bills in 2017 and again in 2021–22, though these failed to gain traction.
However, early evidence suggest that these latest reforms, built on the experience of New Zealand’s Construction Act, may be more meaningful.
The main proposals currently under consultation will see:
- Greater board-level scrutiny of payment practices in large companies
- A cap on payment terms of 60 days, reducing to 45 days in future
- A statutory 30-day limit to dispute invoices
- Making the current 8% statutory interest on late payments mandatory
- Additional reporting on statutory interest owed and paid
- Giving the Small Business Commissioner (SBC) enhanced powers to investigate, arbitrate and fine
- Financial penalties for persistent late payers
- Reforming retentions, either by banning them entirely (the Government’s preferred option) or requiring protection measures such as segregated accounts or bonds
- Reducing the requirement for large firms to report payment data from twice a year to once a year
Dealing with late payments now
The Government has promised to review consultation responses and provide feedback by the end of 2025, but any legislative reforms will take time to design, pass and implement.
In the meantime, businesses facing late payment issues must use existing legislation and best practice to address the issue of late payments. If you would like guidance on the legal action that can be taken to recover late payments within the construction industry, please get in touch.