On 24 March 2026, the UK Government announced a significant package of reforms aimed at tackling late payment practices, particularly within the construction sector. The proposals include a ban on cash retentions and the introduction of mandatory interest of 8% on late payments, alongside a 60-day cap on payment terms from larger businesses to smaller firms.
For SMEs and subcontractors, this marks one of the most substantial shifts in payment protection in decades.
What does it aim to solve?
Late payment has long been a systemic issue in construction, with serious consequences across the supply chain. The Government’s proposals are designed to address:
- Persistent late or non-payment of retentions
- Financial exposure caused by upstream insolvency
- Poor payment culture across large contractor and client organisations
The scale of the problem is significant. Late payments are estimated to cost the UK economy £11 billion annually. For many SMEs, delayed income means cash flow pressure, increased borrowing, and time lost chasing payments already earned.
The human and commercial impact is equally stark. Around 38 businesses close every day due to late payment. That equates to 266 per week and well over 1,000 each month.
Contractor’s perspective
From a contractor and subcontractor standpoint, these measures are largely positive.
Improved cash flow will be one of the most immediate benefits. Removing retentions eliminates a long-standing source of withheld income, often tied up for extended periods or lost entirely in insolvency scenarios.
The introduction of mandatory 8% interest on late payments also provides meaningful compensation and creates a stronger incentive for timely payment. Combined with the proposed 60-day cap, this should bring greater predictability to cash flow management.
Overall, the reforms reduce financial risk and strengthen the position of smaller firms within the supply chain.
Client’s perspective
For clients, the picture is more complex.
Retentions have traditionally served as a safeguard to ensure defects are addressed following practical completion. Without this mechanism, projects may carry increased risk during the defects liability period.
If defects are not remedied, without the traditional protection of a sum of retention money, clients could face the burden of arranging corrective works themselves and pursuing recovery through dispute resolution. This could potentially introduce additional time, cost and uncertainty.
Mitigations for both contractor and client
To adapt to these changes, both parties will need to strengthen their approach to quality assurance and contract administration.
Key considerations include:
- Enhanced quality control procedures to reduce both patent and latent defects
- More robust inspection and sign-off processes aligned with payment milestones
- Clearer links between payment assessments and workmanship standards
- Increased use of performance bonds or similar instruments to provide assurance during the defects period
These measures will help mitigate risk in the absence of retentions.
What to watch out for
While the direction of travel is clear, there are still important details to be defined.
The Construction Leadership Council is working closely with the Department for Business and Trade to shape implementation. One key area is the definition of what constitutes a “large” versus “small” business for the purposes of the 60-day payment cap. This distinction will be critical in how the legislation is applied and reflected in contracts.
There is also potential for an increase in disputes, particularly around interim payment notices being linked to quality and defects as works progress. Without the safety net of retentions, parties may experience greater scrutiny and challenge on each and every payment application which could lead to increased payment disputes.
These reforms represent a major cultural shift for the construction industry. For contractors, they offer long-overdue protection and improved financial stability. For clients, they require a rethink of how project risk is managed.
At CQS Solutions, we support both contractors and clients in navigating changes like these. From contract advice and payment mechanisms to risk management and dispute avoidance, having the right commercial strategy in place will be key as the industry adjusts.
If you would like to understand how these proposals could affect your projects, get in touch with our team.