For something that rarely makes the front pages, retention has an outsized grip on the construction industry. It sits quietly in almost every building contract, shapes the cash flow of tens of thousands of firms, and at any given moment ties up billions of pounds that the businesses who earned the money cannot touch. For decades it was treated as an immovable fact of life. In 2026, that finally changed.
If you run a subcontracting business, manage projects, or sit on the finance side of a main contractor, retention is one of those topics worth understanding properly — not least because the rules around it are now being rewritten. This article explains what retention actually is, where the practice came from, why it has attracted so much criticism, and what the government’s recent decision to ban it means for the industry.
What is retention in construction?
A retention is a sum of money that one party to a construction contract holds back from another as security. The idea is straightforward: the client (or the main contractor higher up the chain) keeps a slice of each payment due, so that there is a financial incentive for the contractor below them to finish the job properly and to come back and fix anything that turns out to be defective.
In practice it works on a percentage basis. A typical retention rate is 5% of each interim payment. That money accumulates as the project progresses. When the work reaches practical completion — the point at which the building is finished and usable — roughly half of the retention is usually released. The remaining half is held through the defects liability period, commonly twelve months, and is only released once any defects that emerge during that period have been put right.
So a roofing subcontractor on a £200,000 package might have £10,000 withheld over the life of the job, see £5,000 returned at completion, and wait another year for the final £5,000. On a single project that is an inconvenience. Across a portfolio of jobs, with money trickling back slowly from dozens of clients who are in no hurry to release it, it becomes a serious drag on working capital — and that is where the trouble starts.
An unusual origin: the railway boom of the 1840s
Retention is not a modern invention. It dates back to Railway Mania, the frenzied railway-building boom that swept Britain in the 1840s. The sheer scale of railway construction created enormous demand for contractors, and a wave of new, inexperienced and often unqualified firms rushed in to meet it. Many of them simply could not deliver. To protect themselves against contractors defaulting or doing shoddy work, the railway companies began holding back a portion of payments — and not a modest portion either. Retention rates of up to 20% were used to keep contractors honest and to cover the cost of completing work if a firm walked away or went bust.
Nearly two centuries later, the mechanism that emerged from Victorian railway anxiety is still embedded in the majority of construction contracts. The percentages have fallen, but the logic — withhold money now, release it once you are satisfied — has barely changed.
Why retention became so controversial
On paper, retention is a reasonable risk-management tool. In practice, the way it is administered has turned it into one of the construction industry’s most resented features, particularly for small and medium-sized enterprises further down the supply chain.
The headline problem is the amount of money involved. Estimates suggest that somewhere between £3.2 billion and £5.9 billion is held in retention each year in England alone. That is money that has been earned but cannot be spent, invested, or used to pay wages and suppliers. For SMEs operating on thin margins, having that much capital permanently locked away is a structural weakness.
The deeper problem is what happens to that money. Retention is rarely ring-fenced. It usually sits in the main bank account of the client or the upstream contractor, mingled with their general funds. If that business becomes insolvent before the retention is released, the money is gone — the subcontractor who earned it joins the queue of unsecured creditors and, in most cases, recovers little or nothing. The collapse of Carillion in 2018 dragged this issue into the spotlight, wiping out retention monies owed to a long tail of smaller firms who had done nothing wrong except work for the wrong main contractor.
Then there is the simple matter of release. Even where there is no insolvency, getting retention back can be a battle. Final payments are delayed, disputed, or quietly forgotten. Some subcontractors write off the final tranche entirely because the cost and effort of chasing it outweighs the sum involved. Late payment of this kind is part of a wider problem that the government estimates costs the UK economy around £11 billion a year.
Construction has been trying to deal with the quality issues that retention is meant to address through better methods, not just financial penalties. Improved inspection technology is a good example, and it is a theme explored in this episode of the UK Construction Blog podcast, which looks at how drones and AI are being used to map heat loss across buildings. Tools like these allow defects and performance issues to be spotted earlier and more objectively than a manual snagging inspection ever could — and they hint at a future where the case for holding money hostage against defects is far weaker than it was in the 1840s.
Decades of failed reform
Retention reform has been “coming” for a very long time. After Carillion, a series of Private Members’ Bills tried to fix the system. The Construction (Retention Deposit Schemes) Bill 2017–2019, often called the Aldous Bill after the MP who introduced it, proposed forcing retention monies into a government-approved, ring-fenced deposit scheme so they would be safe from upstream insolvency. The Construction Industry (Protection of Cash Retentions) Bill pursued a similar trust-based approach. A later Construction (Retentions Abolition) Bill went further and proposed scrapping retention altogether. None of them made it through Parliament.
Industry tried to lead where legislation could not. In 2018, Build UK and the Civil Engineering Contractors Association published a “Roadmap to Zero Retentions,” setting the ambitious target of abolishing the practice by 2025 and issuing minimum standards to improve transparency in the meantime. The roadmap shifted the conversation, but voluntary action only goes so far when the parties who benefit from holding retention have little incentive to stop.
The reason reform stalled so often is that opinion within the industry was genuinely divided. Larger contractors and public sector clients worried that removing retention would push up the cost of alternative security such as performance bonds, or reduce confidence in quality. Insurers questioned whether bonds and similar instruments could be made affordable and accessible to the smallest firms. Everyone agreed retention was flawed; almost no one agreed on what should replace it. That deadlock held for years.
2026: the turning point
The picture began to shift with greater transparency. From 1 March 2025, the Reporting on Payment Practices and Performance Regulations were amended so that large companies entering qualifying construction contracts had to disclose, through the government’s online portal, how they handle retention — including the proportion of sums withheld. Sunlight, the theory went, would discourage the worst behaviour.
The decisive moment came soon after. Between 31 July and 23 October 2025, the Department for Business and Trade ran a major consultation on late payment, with retention squarely in its sights. It offered two options: prohibit retention clauses outright, or mandate a protection scheme that ring-fenced the money while still allowing it to be used for quality assurance.
On 24 March 2026, the government published its response, titled Time to Pay Up. The findings were striking. Of the responses received, 87% favoured reforming the retentions regime, and of those, just over half indicated they could live with either option. Having weighed the evidence, the government chose the more radical path: a ban on the deduction and withholding of retention payments under construction contracts. Ministers described the package as the most ambitious legislation to tackle late payments in over 25 years, framing the ban as a way to stop small firms losing money to insolvency and chronic late payment.
You can read the government’s full reasoning, including the consultation responses and the rationale for choosing prohibition over a protection scheme, in the official government response on GOV.UK.
This sits within a broader reform package that also includes mandatory statutory interest on late payments and new powers for the Small Business Commissioner to investigate and fine persistent late payers. The retention ban is expected to be delivered by amending the Housing Grants, Construction and Regeneration Act 1996 — the “Construction Act” that has governed payment in the sector for nearly three decades. The government has signalled that it will consult further on exactly how the ban is implemented before finalising it, and respondents broadly favoured a transitional period of twelve to twenty-four months to let contracts, financial planning and alternative assurance mechanisms catch up.
What it means in practice
A ban on retention does not magically remove the underlying need it served, which is making sure work gets finished and defects get fixed. Expect the industry to lean more heavily on alternatives: performance bonds, retention bonds, parent company guarantees, project bank accounts, and tighter use of defect rectification clauses. Standard form contracts such as JCT and NEC will need updating, and the quality-control culture of the industry will have to adapt to a world where money is no longer the lever.
There is genuine debate about whether these alternatives will be affordable and accessible for the smallest firms — the very businesses the reform is meant to protect. But the direction of travel is now unambiguous, and after almost two centuries, the default assumption that you simply hold back 5% is on its way out.
Practical tips for managing retention right now
Until the ban takes effect, retention is still very much live in your contracts. A few practical steps can protect your position:
- Track every penny. Maintain a retention register listing every contract, the amount withheld, the practical completion date, the defects liability period, and the date each tranche is due back. Money you do not track is money you will not chase.
- Diarise release dates. Set calendar reminders for the end of each defects liability period and submit your release application promptly. Retention is rarely paid out unprompted.
- Read the release mechanism before you sign. Check exactly what triggers release — certification, a fixed date, completion of a defects schedule — and remove vague or open-ended language where you can negotiate.
- Resist onerous downward terms. Main contractors sometimes pass on retention at a higher percentage than they themselves suffer, or for longer periods. Push back on terms that are worse than the ones above you.
- Consider a retention bond as an alternative. Offering a bond instead of cash retention keeps your working capital free while still giving the client security. Many clients will accept this if you ask.
- Use adjudication. If retention is wrongfully withheld, the Construction Act gives you the right to adjudicate, a fast and relatively low-cost route to a decision. Do not assume the only options are writing it off or going to court.
- Improve your defect evidence. Strong handover documentation, photographs, and objective inspection data make it far harder for anyone to justify holding your money.
A few unusual facts to leave you with
- Retention was born out of Victorian railway chaos, where companies withheld as much as 20% of payments — four times today’s typical rate.
- Retention is often used as cheap project finance: the party holding it effectively gets an interest-free loan from the supply chain, which is part of why it has been so hard to give up.
- Retention “cascades.” A main contractor who has 5% held by the client will frequently withhold retention from its subcontractors too — sometimes at a higher percentage — so the same risk multiplies down the chain.
- Despite decades of reviews, there was, until very recently, no legal requirement in the UK to ring-fence retention, secure it, or release it within any defined timeframe.
- The money held in retention across England in a single year — up to £5.9 billion — is comparable to the annual turnover of some of the country’s largest contractors.
Retention has outlived the railways that created it, survived Carillion, and shrugged off a string of reform bills. The 2026 decision to ban it suggests its long run may finally be ending. For the firms who have spent years chasing their own money, that change cannot come soon enough.
