Retentions ban set to reshape contractor cashflow and SME access

The news

In May the government introduced the Commercial Payments Bill, which would ban retentions under construction contracts. The bill would also cap payment terms at 60 days for large firms paying smaller suppliers and 30 days for public bodies. It would introduce mandatory interest on late payments at 8 per cent above the Bank of England base rate. Rider Levett Bucknall’s procurement trends report found that 63 per cent of contractors expect to apply more stringent performance criteria to SME subcontractors once the legislation is introduced.

What's at stake

Retentions are sums withheld under construction contracts, usually to protect clients against defects or incomplete work. Specialist contractors have long argued that the practice squeezes cashflow and increases insolvency risk. The proposed ban forms part of a wider crackdown on late payment to small firms. Rider Levett Bucknall warned that the reforms could limit opportunities for SMEs, suggesting that clients and main contractors are likely to be more cautious about supply chain finances and push for greater financial security.

Almost half of contractors surveyed, 49 per cent, said they would look to put security measures in place with their supply chains, while 43 per cent said the ban would place more focus on quality of delivery. Without markets adjusting, the ban may have the unintended consequence of throttling the SME market, according to the consultancy.

The case for

Banning retentions would improve cashflow and reduce insolvency risk for specialist contractors. Removing the practice would end the long-standing squeeze on working capital that specialist firms say drives insolvencies. The Commercial Payments Bill would replace withheld sums with mandatory interest on late payments at 8 per cent above the Bank of England base rate, giving contractors stronger protection against delayed settlement.

The case against

The ban could limit SME opportunities as contractors demand bonds and tighter financial checks. Rider Levett Bucknall’s survey shows 63 per cent of contractors expect to apply more stringent performance criteria to SME subcontractors. Almost half of those surveyed, 49 per cent, said they would introduce security measures with their supply chains, suggesting clients and main contractors will seek alternative financial protections that could raise barriers for smaller firms.

Why it matters now

If the bill passes, contractors will adjust procurement practices before the ban takes effect, potentially narrowing the pool of approved SME subcontractors. If it does not pass, the existing retention system and current payment terms will remain in place. The legislation is already before Parliament following its introduction in May.

Further reading

constructionnews.co.uk

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