The UK Government’s consultation on late payment reforms sets out proposals that could change how businesses manage payments and cash flow.
With the issue costing the economy almost £11 billion annually, late payments are being recognised as a major barrier to small business growth.
For the construction sector, where late payments and retention abuse have long burdened smaller firms, these reforms could mark a turning point for a fairer system.
Our Construction Law expert, Adam Davis, explains how you can protect your business.
How retention reforms have impacted late payment costs
According to the Department for Business and Trade (DBT), over 1.5 million businesses were affected by late payments in 2024 and this remains as one of the biggest challenges faced by small businesses.
When subcontractors often operate on strict margins, even short payment delays can impact a business’s wages, supplier costs and stability.
The Government’s consultation recognised the imbalance and sought to address the gap between large firms and small contractors.
One of the most significant aspects of the consultation was the focus on retention payments, a source of contention within the construction sector for decades.
A retention payment was designed to ensure that an Employer can retain a percentage of the Contract Sum should defects arise after practical completion of the works.
If the contractor does not meet their contractual obligations to rectify defects, employers are eligible to claim between three and five per cent of the Contract Sum.
Retentions, whilst intended to guarantee performance and the rectification of defects, can often create cash flow pressures.
As well, funds can be delayed or lost entirely if an upstream contractor becomes insolvent or the contractor fails to release retention in a timely fashion.
The Government is now considering two key approaches:
- A full ban on retention payments and removing the practice altogether
- Offering retention protection schemes to safeguard withheld sums until release conditions are met.
Both approaches can bring stronger financial protection for smaller contractors and a change to future policies.
How can small firms protect themselves?
While these reforms are still being finalised, small businesses can take steps to improve their payment security.
Start by reviewing your existing contracts to understand the exact retention clause, release conditions and the timeframes that apply.
Contracts to understand the exact retention clause, release conditions and the timeframes that apply.
If the payment is unfairly withholding retention, consider initiating adjudication or mediation to help recover what you are owed.
For future deals, make sure you negotiate clear payment and retention terms in new contracts and seek legal advice before signing.
Our team can help you draft fair terms and manage the risks in compliance with the Housing Grants, Construction and Regeneration Act 1996.
How to make a stand for fairer payments?
The Government’s late payments consultation is a long-overdue change for fairness and accountability in the construction industry.
By combining proactive contract management and expert legal support, firms can safeguard their cash flow and focus on delivering successful projects.
Our expert team can help your business prepare for the late payment reforms and secure timely payments.
For further advice and guidance on construction law, please contact our specialist team today.