Industry divided as law targets retentions and late payments

The Commercial Payments Bill, which aims to tackle late payments and phase out cash retention clauses over three years, has divided the construction industry with some backing stronger protections for small firms and others warning it could undermine project quality and risk management.

The legislation, hailed as “historic” in the “long battle against late payment and regressive practices in construction” by Debbie Petford, director of legal and commercial at trade body BESA, seeks to give businesses certainty while protecting jobs.

The Small Business Protections Bill, currently passing through the House of Lords as the Commercial Payments Bill, imposes a 60-day cap on payment terms for large firms, mandates interest on late payments, and bans the withholding of retention payments in construction.

Under the law, retention clauses will be phased out over two years, followed by a one-year transitional period for existing agreements.

The law could see firms that continue to withhold money under prohibited retention clauses face a penalty of 50 per cent of the retained sum, on top of statutory interest.

Public-sector clients must release transitional retained funds within 30 days, private-sector payers within 60, with measures covering certain existing contracts and safeguards against attempts to bypass the rules.

“There have been a series of voluntary codes of conduct and pledges from big businesses to mend their ways over the years, but we always felt that only proper, targeted legislation would really get to grips with the problem,” said Petford.

She added that late payment and retention clauses “lead directly to business failures”, and that the Bill’s second reading is now crucial to start protecting “hard-pressed firms struggling to cope with a series of challenges in the current economic environment”.

The Bill also strengthens the Small Business Commissioner’s powers to investigate late payment practices, adjudicate disputes, and fine repeat offenders, with penalties potentially reaching tens of millions.

Government research estimates late payments cost the UK economy nearly £11 billion annually and contribute to around 14,000 business closures each year, with the Department for Business & Trade noting 38 closures occur daily due to delayed payments.

While the reforms are widely welcomed, some in the industry warn of potential drawbacks.

Sam Bensted, assistant director of policy at Real Estate:UK, warned it “fails to understand why [retentions] currently exist and are necessary”, noting they ensure projects are delivered to appropriate safety and quality standards.

Paul Rickard, chief executive of Pocket Living, added: ““Retention payments are one of the most effective tools available for holding contractors to the quality they promise…For SME developers, that protection is vital. A ban would strip that lever away at the worst possible moment, with SMEs already stretched in a difficult market.”

BCIS chief economist Dr David Crosthwaite noted that clearer payment timelines could boost confidence across supply chains and among lenders, helping small firms manage cash flow and investment planning.

“The direction of travel towards faster and more transparent payment practices is clear,” he said.

“The challenge for the industry will be ensuring reforms strengthen supply chain confidence without simply shifting commercial pressure elsewhere in the project life cycle.”

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