UK construction late payment and retention plans demonstrate ‘hardened stance’ by government

The government described measures as the “toughest crackdown” on late payment in more than 25 years.

Kofi Atta, a construction specialist at Pinsent Masons, commenting following the announcement, said:

“The proposals will result in a huge change to construction contract incentivisation,”.

Retentions, commonly used in standard form construction contacts including those issued by the JCT and NEC, are a payment mechanism used as an incentive for contractors to fulfil contractual obligations. They are a percentage of the contract sum – usually 3% to 5% – that is withheld from each interim payment or, where relevant, milestone payment. Half is often released back to the contractor at practical completion, and the rest withheld to the end of the defects liability period, which is often 12 months later.

“Retentions are often used to keep the contractor incentivised to come back to site and rectify any defects and fulfil contractual obligations. They can also be used as a buffer in the event of insolvency,” said Atta.

The government hopes that the ban will result in “fairer contract terms” as well as “more transparent practices” and strengthened relationships across the construction supply chain for both public and private sector parties.

The changes to late payment procedures aim to protect small businesses across all sectors. The plans include a 60-day cap on payment terms on all large firms when paying smaller suppliers. The announcement further sets out new mandatory interest on late payments, with all commercial contractors required to include statutory interest set at 8% above the Bank of England base rate. Late payments cost the UK economy £11 billion annually and contributing to the closure of 38 small businesses every day, according to government statistics.

The measures also include proposals for large fines to hold big businesses and persistent offenders to account for late payments to small and medium sized business owners. These powers would be given to the Small Business Commissioner alongside powers to investigate poor payment practices and adjudicate payment disputes.

Under the proposals, boards or audit committees of late paying firms would be required to publish explanations for poor payment performances, and set out actions planned to address the issues.

Atta said: “The measures will be welcomed by many in the industry. This is due to cash flow strain on contactors that can be caused by late payments and withholding of retentions”. However, he warned that “the industry should be alive to the potential consequences of the proposals, including the possibility of loopholes and the availability of alternative forms of security in the absence of retentions”.

The government has not yet indicated when the changes will be introduced.