The government is cracking down on cash retentions in construction – the toughest action on late payment in 25 years. Reform is no longer a question of 'if'. It’s 'when'. The Commercial Payments Bill will change how retained cash works under construction contracts. Before looking at what might replace it, it’s worth understanding why the current model causes problems.

What could this mean for the construction sector, and what is the government seeking to achieve? To answer that, it is necessary to understand the problem with the current model.

How does the current cash-retention model work in practice?

Typically, the main contractor will withhold 3–5% of the amount due to the subcontractor as security against defective work. The issue is not the protection itself, but how the retained cash is managed. Where no defects are identified, payments due may still be withheld until project completion, long after the work has been performed. That delay squeezes working capital.

The other side of the coin is that retained cash props up main contractors’ working capital. That creates an imbalance across the supply chain and potentially exposes subcontractors to long-term consequences. The Insolvency Service reported 3,933 construction company insolvencies in the 12 months to October 2025. Construction accounted for 17% of insolvencies where the industry was recorded - the highest proportion of any sector. This highlights a key weakness in the existing model: if an upstream contractor becomes insolvent, subcontractors may lose amounts withheld from them.

Is the government banning construction retentions?

No. Retentions aren’t being scrapped - just reformed. The direction of travel is fairer forms of protection across the supply chain, not the removal of security altogether.

This means businesses need alternatives that protect against defective work without placing the same cash-flow burden on subcontractors.

What are the alternatives to cash retentions in construction?

Performance bonds

Retention and performance bonds are established options and may be the most obvious alternatives for contractors. A bank or insurer provides security for the amount that would otherwise have been retained. Although this can ease the cash-flow pressure created by cash retentions, it would replace one risk with another.

For many businesses, cash retentions already constrain working capital. Bonds may release that cash, but banks and insurers will assess the applicant’s financial strength and available surety capacity before issuing them. A financially strong subcontractor may benefit from this model. A smaller or financially stressed business may find suitable cover difficult or expensive to obtain.

Performance bonds already feature on projects and under Joint Contracts Tribunal (JCT) and New Engineering Contract (NEC) contracting arrangements, so wider use is a realistic option.

Escrow accounts

Escrow accounts are another, less common, option. Under this arrangement, retained funds are held by an independent third party rather than by the main contractor. This can protect subcontractors against the loss of retained sums through upstream insolvency or non-payment, but it does not accelerate access to the cash. For an SME, however, a delay of six to 12 months can still create significant cash-flow pressure.

The proposed Commercial Payments Bill would permit escrow accounts that facilitate payment. However, an arrangement that withholds and effectively recreates a retention would be prohibited.

Contracts and payment structure

A more fundamental response may be to reconsider the contract itself. A robust, clearly structured payment plan linked to independently verified milestones could provide security while allowing payment to follow completed work more closely.

Where the Bill stands and why planning ahead matters

The Commercial Payments Bill entered the House of Lords on 19 May 2026. It completed report stage on 15 September 2026 and third reading on 20 October 2026. It now moves to the Commons before Royal Assent.

Royal Assent won't mean instant change. The government needs to consult on implementation timing, so businesses should not assume a fixed transition date yet.

The shift is significant for the industry. Subcontractors may benefit from improved cash flow and less insolvency exposure. Main contractors lose a funding source and face additional costs or security requirements.

Businesses should therefore review their contract terms, payment structures and security arrangements now, including the impact on working capital (for example, by assessing net retention positions under existing contractual terms).

The ban would do more than fix subcontractor cash flow. It forces main contractors and subcontractors to renegotiate how risk, payment and security are shared, redistributing funding costs and administrative burden across the whole supply chain.

To discuss what this means for your business, contact Kelly Boorman or your usual RSM adviser.

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