Rethinking performance security: the implications of a retention free construction industry

The Government, via its press release dated 24 March 2026, has announced its intention to prohibit the withholding of retention payments under construction contracts, signaling a significant shift in the contractual and commercial framework that has long governed the construction sector.

The Government’s proposal is not yet final, with further consultation to follow and ongoing work with the Construction Leadership Council and the financial services sector to explore practical alternatives and strengthen the surety market. 

The proposal, issued on 24 March 2026 as part of the Government’s wider response to the Late Payment Consultation, forms one strand of a broader programme of reforms aimed at improving payment culture, strengthening cash flow across supply chains, and reducing the financial vulnerability of smaller companies. Whilst the intention is to effect these reforms across the UK, late payment is a devolved/transferred matter and so will require specific consent or legislation to take effect in Scotland, Wales and Northern Ireland. It is likely and presumed that the reforms will only apply to projects in England (and Scotland, Wales and Northern Ireland if adopted). 

Given the scale of the proposed change, it is important to understand the context in which retentions operate. This article outlines the purpose and mechanics of retention, examines the commercial pressures and cashflow challenges it creates for contractors, and considers why retention bonds, while an attractive alternative in theory, have not achieved UK wide adoption in practice. It also reflects on the perceived benefits of retention from an employer’s perspective, acknowledging the performance related rationale behind the mechanism.

Retention

Retention is the practice of an employer withholding a percentage of the amounts due under a construction contract, commonly around 3 – 5%, to provide security for the completion of works and the rectification of defects. Half is typically released at practical completion, with the balance paid after rectification of defects during the defects period. It functions as a simple, direct form of performance security for employers.

It provides an immediately accessible form of performance security, giving employers confidence that funds are available if defects arise or if works are not completed to the required standard. This direct control, without involving a third party surety, makes retention a familiar and straightforward tool for managing performance risk.

From the contractor’s perspective, avoiding the use of third party security such as a retention bond also means avoiding the associated costs and administrative requirements of arranging surety, which can offer some practical savings.

However, concerns about the impact of retentions on supply chain cashflow have grown. Late or withheld payments contribute to financial pressures on smaller companies. Industry bodies have also noted that contractors can face difficulties recovering retentions, particularly where funds are affected by upstream insolvency or non payment, which is one of the issues the proposed ban seeks to address. 

This growing concern is one of the key drivers behind the Government’s current proposal to prohibit the withholding of retention altogether. 

Drawbacks of retention

Contractors operate on consistently tight margins, and even modest delays or withheld sums can place significant pressure on cashflow. Late or withheld payments materially affect smaller businesses’ ability to meet payroll, pay suppliers, and invest in operations. 

Retention, as a withheld payment by design, adds to this strain, especially when combined with broader late payment practices across the supply chain. Although relatively small in percentage terms, withheld sums can accumulate to substantial amounts across multiple projects. When combined with broader late payment practices, retentions can contribute to solvency challenges throughout the supply chain.

While retention is intended to offer employers straightforward performance security, its cumulative impact on solvency and financial stability has long been a source of industry concern and a key driver behind calls for reform.

Following recent consultation, the Government has indicated its intention to prohibit the holding of retention under construction contracts. If implemented, this would leave parties free to consider alternative performance security, such as insurance or surety options, but without any mandatory requirement to adopt them.

Retention bonds: theory vs reality

Retention bonds are often presented as a cleaner alternative to traditional cash retentions. In theory, they provide the employer with security against defects while allowing the contractor to retain full payment, avoiding the cashflow impact associated with withheld sums.

In practice, however, whilst retention bonds are growing in use, they are not widely adopted. Employers frequently prefer the certainty of holding cash rather than relying on a third party surety, which may require additional procedural steps to call on the bond. There are also concerns around the availability, cost, and practicality of surety alternatives, as well as employer reluctance to introduce another party into the process. 

Furthermore, for smaller companies, accessing retention bonds can be challenging, as sureties typically require strong balance sheets, counter indemnities, and established credit relationships. These further limits the practicality of widespread adoption.

As a result, whilst retention bonds may appear attractive in principle, they have not replaced traditional retentions in practice. 

Other alternatives

If traditional retentions are removed, employers will still seek ways to manage performance risk, but the alternatives are likely to be more targeted and commercially balanced. It would be difficult for a single mechanism to replace retention; instead, a mix of financial and contractual tools might evolve across the industry. Example of some of those instruments are below:

• Surety and insurance based options – Performance bonds, retention bonds (as covered above) and insurance backed defect cover are the most obvious substitutes. These offer employers recourse for defective work while allowing contractors to maintain cashflow. Their use may grow, but availability, cost, and credit requirements, especially for smaller companies, will make it difficult for these to be universal.
• Parent company guarantees (PCG) and performance guarantees – For contractors within larger groups, PCGs and performance guarantees remain a practical, low cost option. They do not provide cash security, but they give employers reassurance that an entity with broader financial strength stands behind the contractor’s obligations.
• Contractual and process based controls – Some employers may rely less on financial guarantees and more on tightening contractual obligations, clearer rectification process, enhanced quality standards, staged acceptance procedure or extended defects liability periods. These do not provide immediate financial recourse, but for many projects they offer effective performance management without withholding cash.
• Stage payments – Some employers may simply choose to adopt a stage payments approach with the last stage being completion of making good defects. 
• A risk based approach – Where there is a long working relationship, employers may choose not to replace retention at all. Strong working relationships, robust administrative process and routine performance monitoring can provide sufficient assurance without formal security. 

Conclusion

The Government’s proposal to prohibit the withholding of retentions represents a significant shift in construction payment practice and is clearly aimed at easing cashflow pressures and reducing financial risk for contractors, particularly small businesses. Although the proposal has been welcomed by many across the sector, it is not yet final, and no timetable has been published, with further consultation planned before any legislative change is implemented.

If implemented, the prohibition of retentions is expected to be contractor friendly, improving solvency across the supply chain and contributing to a more stable financial environment for project delivery. At a time when late payment and restricted cashflow continue to challenge the industry, the removal of retentions has the potential to support greater resilience, investment and long term sustainability across the sector.

However, any transition away from retentions is likely to require a phased approach, as both employers and contractors adjust contract templates, procurement practices, and their wider approach to performance risk.