Retentions remain an important part of construction contracts. They protect Employers against latent defects and incomplete works, but poor practices around their use - particularly non-payment and insolvency losses - place unacceptable burdens on SMEs.

We welcome the Government’s commitment to legislate. Based on our experience as an FCA-regulated provider of construction escrow and retention deposit accounts, we believe the most effective approach is a blended model:

a) Prohibit retentions on smaller contracts (up to £100,000). The sums involved aremodest (£3,000–5,000) and the cashflow impact on SME’s is disproportionatecompared with any protection given to Employers.

b) Require third-party protection for all other contracts.  Retentions should continue to be permitted but must be safeguarded in a segregated, FCA-regulated account.  This ensures Employers retain protection, while eliminating the risk of upstream insolvency and non-payment.

Prohibition risks circumvention. Employers would likely under-value works or impose stricter completion standards. The DBT’s Options Assessment recognises these risks.

‍Protection addresses the root causes. The 2018 BEIS research found 44% of contractors had lost retentions to insolvency, and over 70% had suffered late or non-payment. Segregated accounts resolve both problems.

Segregation - unique, addressable accounts for each project, with transparency for all parties. 
‍Safeguarding - all funds held liquid and unencumbered at the Bank of England through FCA-regulated partners. 
‍Transparency - online portal showing monthly deposits, balances, and certification. 
‍Dispute resolution - compatible with adjudication, enabling quick release of funds on independent direction. 
‍Low cost - no fees at base rates of 3.75%+, otherwise a flat £25 per month + VAT per contract.

Clarify VAT treatment, requiring VAT on retentions to be paid into the account. 
Mandate FCA regulation for all providers to ensure safeguarding and capital adequacy. 
Extend adjudicator powers to direct the release of retentions directly from safeguarding institutions.

We strongly support the introduction of mandatory protection for retentions and stand ready to assist Government in demonstrating how a market-tested, regulated, and low-cost scheme can be implemented quickly and effectively.

Response: Strongly Disagree

While the Government is right to highlight the negative effects of poor retention practices, prohibiting the use of retention clauses would not address the underlying problem.

Retentions exist to provide the Employer with protection against defects that may only emerge once a project is in use. The 2018 BEIS research confirmed that retentions are the most widely used form of insurance against defects, with an average level of 4.85% of the contract value, and that more than 70% of contractors had experienced late or non-payment.

This evidences the importance of the mechanism, but also the risks of removing it altogether. If prohibition were introduced, Employers would inevitably seek alternative ways to protect themselves. In practice, this would most likely involve systematic under-valuation of interim works, or raising the bar for certification of practical completion.

Both outcomes would displace, rather than resolve, the problem. They would also reduce transparency, since undervaluation is much harder to measure and legislate against. Moreover, in the event of insolvency higher up the supply chain, downstream contractors would still lose out.

The DBT’s Options Assessment notes that banning retentions carries material risks of circumvention, as firms would restructure payment schedules to re-create the same commercial effect. We therefore believe that prohibition would drive the problem underground, leaving small contractors worse off.

A more effective reform is to require protection of retentions, rather than their abolition. We are the authors of the Retention Protection Pledge, an open pledge to which 16 construction companies have already signed up, which mandates a phased approach: 

-  Waiving retentions on smaller contracts (contracts of up to £100,000), on the basis that the retention of £3,000-5,000 is commercially not going to make any real difference to the quality of the works provided or the leverage that theContractor has;
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-  Protecting retentions on larger contracts (from £100,000+), so that they are held safeguarded by third parties and available to the supply chain at the end of the rectification period; and  
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- Committing to Fair Practice in respect of the treatment of retention. Find out more at https://www.retentionprotectionpledge.org/

If retentions were prohibited, Employers would inevitably look for other means of protecting themselves against defective work or contractor insolvency.

The most likely outcome would be systematic undervaluation of interim works during the monthly valuation process. Employers could routinely certify 3–5% less than the true value of work completed, thereby replicating the commercial effect of retention without transparency or accountability.

This practice would cascade down the supply chain, worsening cashflow for small contractors and subcontractors.In addition, Employers would be inclined to impose more onerous conditions for practical completion.

Traditionally, practical completion is recognised as “not perfect completion” because the retention serves to secure outstanding works. Without retention, Employers would insist on near-perfection before issuing a certificate of completion, exposing contractors to increased risks of liquidated damages or claims for delay.

Alternative instruments such as bonds and insurance policies are not realistic substitutes for retention in the UK market. As highlighted in DBT’s Options Assessment, such instruments are costly and are themselves premised on not paying out frequently.

Their widespread adoption would raise costs across the sector without solving the problem of delayed cashflow.

The evidence from the 2018 BEIS research found that 44% of contractors had experienced non-payment of retentions due to upstream insolvency.

A prohibition on retentions does not remove that insolvency risk; it merely shifts the mechanism by which Employers protect themselves, in ways that are harder to regulate and less fair to the supply chain.

Construction contracts are negotiated as packages of risk allocation and often run for several years.

It would not be fair or commercially reasonable to retrospectively apply a ban on retentions to contracts already in progress. Many Employers will have agreed concessions elsewhere in their contracts on the basis that they had the protection of retentions.

Accordingly, we recommend that any prohibition should only apply to contracts entered into after a prescribed “base date”. Contracts signed, or priced, before that date should not be affected.

For new contracts, however, no lengthy transitional period is required. A ban is not a measure that needs to be “built” or phased in. It is simply a matter of Employers ceasing to withhold retention and instead paying contractors in full.

The DBT’s Options Assessment similarly recognises that the administrative impact of a ban would be relatively straightforward for new contracts, with the main concern being the unintended behaviours it might trigger.

The only transition required, therefore, is contractual: to respect the terms already agreed before the legislation comes into force.

We consider it unlikely that a prohibition on retention would create significant direct administrative costs for firms.

Employers would simply cease deducting retentions and pay contractors in full. The real cost, however, lies in the behavioural changes that such a prohibition would trigger.

As explained in our responses to Q17 and Q18, Employers would be incentivised to protect themselves in other ways – primarily by undervaluing interim payments or by imposing stricter requirements for certification of practical completion.

Both practices would have material financial impacts on the supply chain, particularly for SMEs.

The DBT’s Options Assessment estimates the net business cost of a prohibition on retention at over £1 billion over ten years (central case: £1,080m), with a wide range of potential outcomes depending on market behaviour. This aligns with our concern that, while superficially simple, a prohibition would displace rather than solve the problem, and could increase costs for contractors compared to the current position.

By contrast, a properly regulated retention protection framework would deliver security for payees at negligible additional cost. Our Scheme already operates with no fees when the Bank of England base rate is 3.75% or higher, with only a £25 monthly fee in low-rate environments.

This demonstrates that protection can be delivered far more efficiently than prohibition.

Response: Strongly agree.

Protecting retention sums directly addresses the two core problems identified by Government:

1. The loss of retentions through upstream insolvency, and
2. Unjustified late, partial or non-payment.

The 2018 BEIS study found that 44% of contractors had experienced non-payment of retentions due to insolvency, and that over 70% of contractors had suffered late or non-payment. These issues cannot be solved by prohibition, but they can be solved by ensuring that withheld funds are segregated and safeguarded.

We have operated construction escrow and payment accounts since 2019 and launched the UK Retention Deposit Scheme in January 2025.

The Scheme already provides the functionality envisaged by the consultation:

Segregation – each project has a unique, addressable bank account with its own sort code and account number.
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Safeguarding – all funds are held liquid and unencumbered at the Bank of England through FCA-regulated partners.
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Transparency – both Employer and Contractor can view monthly payments and balances through a secure portal.
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Release mechanism – half of the retention can be released at practical completion and the balance at the end of the rectification period, or earlier if directed by an adjudicator.
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This structure ensures that retentions are available to contractors when due, while still giving Employers the protection they legitimately require. It reduces disputes, builds trust across the supply chain, and achieves the Government’s stated objectives of protecting SMEs and improving payment practices.

For the Employer, they simply make two payments a month; one to the Contractor and one to the Retention Deposit Scheme account. Each payment automatically reconciles and is visible in the project account portal.

For the Contractor, they can view all retentions payments each month and apply for the release of the retention (uploading any relevant documents) through the portal.

For the wider client team (eg, the Contract Administrator / QS / Funders), read-only access to the portal can be granted free of charge for project monitoring purposes.

Response: Segregated bank account.

A segregated bank account is the most effective and proportionate mechanism for protecting retentions.

Insurance and bonds are both expensive and inefficient. As the DBT’s Options Assessment recognises, these instruments are priced on the basis that not every claim will be paid, and they add recurring costs to projects without guaranteeing prompt recovery. In practice, claims can be delayed or disputed, while the underlying defect worsens or causes consequential losses.

By contrast, cash-based protection through a segregated bank account ensures that:

- Funds are immediately available for release on certification, or on the instruction of an adjudicator.
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- Costs are minimal – in our Scheme, fees are zero when the Bank of England base rate is at or above 3.75%, and otherwise no more than £20 per contract per month.
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- Safeguarding is absolute – all retentions are held liquid and unencumbered at the Bank of England, meaning protection even for balances far in excess of the £85,000 FSCS limit.
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- Transparency is enhanced – each project has a unique account with its own sort code and account number, so both payer and payee can see exactly when retentions have been deposited.

This approach directly meets the Government’s policy objectives: preventing insolvency losses, eliminating late or non-payment, and giving small firms the confidence to reinvest in skills, equipment and growth.

We consider that the transitional period for a protection requirement could be as little as 6-12 months.

For most Employers, the only practical difference is that they must pay the full contract valuation each month, with the retention portion going into a safeguarded account rather than being held in their own working capital. This is not a complex change.

The main adjustment will be for Employers arranging project finance. They will need to ensure that their facility agreements allow for cash drawdowns of 100% of certified works, rather than 95–97%. This requires alignment between funders and Employers at the project planning stage. A transitional period of up to 12 months would provide sufficient time for funders to adapt their models and for Employers to take account of the new cashflow profile when agreeing finance.

The DBT Options Assessment noted that protection mechanisms are administratively straightforward and largely mirror existing trust account models. Our own experience of operating retention protection accounts since 2020 confirms this: once set up, the system operates seamlessly for both payer and payee.

Accordingly, a short transitional period is all that is required to embed the measure effectively.

applicable to only the use of retention clauses in construction contracts (as defined by Part 2 of the Housing Grants, Construction and Regeneration Act 1996)
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Somewhat agree. Our Scheme Rules adopt the same definition of “construction operations”. However, we also permit excluded operations under s105(2) (for example, certain residential or engineering works), because the same risks apply.

We recommend that the scope of the measure should extend to as many construction operations as possible.

where the construction contract makes no such provision for the required protection measure, the Scheme for Construction Contracts will imply relevant terms

Strongly agree. This is the same mechanism used for payment cycles and adjudication under the Construction Act, which is familiar and effective.

a single retention sum is only permitted to be deducted and withheld from the final payment in respect of works until the expiry of the applicable rectification period

Strongly disagree. Ongoing monthly deductions are essential to protect Employers if a contractor becomes insolvent before completion. Our Scheme Rules support progressive deductions, while still protecting the sums for payees.

monies will be automatically segregated and held for the benefit of the payee when deducted and withheld

Somewhat agree. We agree with automatic segregation, but this must be done by an FCA-regulated entity with safeguarding and wind-down plans, to ensure protection in the event of the provider’s insolvency.

the market will deliver provision of any bank account or instrument of guarantee

Strongly agree. Our Scheme already does so, at minimal cost, demonstrating that this measure is commercially viable.

a single bank account may be used with separate ledger records for each payee and each contract

Strongly disagree. Separate, addressable accounts are required for audit, reconciliation, and transparency. Each of our accounts has a unique sort code and account number.

the retention sum is automatically released unless the required notification is made

Strongly agree. This is more efficient than manual release and consistent with our current process, subject to adjudicator or Employer notification.

any interest earned on the retention sum is owned by the payee

Neither agree nor disagree. We currently use interest to subsidise account costs, meaning our accounts can be free of charge or delivered at very low real cost. Mandating interest payments could restrict provision to banks only and exclude e-money/payment institutions, creating unnecessary market segmentation. We recommend leaving this to market forces.

the payer will be required to keep accounting and records for all retention sums held for the payee, and make these available for inspection within a reasonable period of time and without charge

Neither agree nor disagree. In practice, our portal already provides real-time records to both parties. We suggest requiring payers only to certify the amount of retention withheld, with verification and dispute resolution handled by adjudication.

the payer will be required to report to the payee on all retention sums held and the mechanism(s) of protection

Strongly agree. Transparency is essential. Our portal demonstrates how this can be achieved efficiently.

any disputes about the amount and timing of the release of retentions payments will be dealt with by existing dispute resolution processes

Strongly agree. Adjudication is quick and effective, and our Scheme Rules expressly allow an adjudicator’s decision to direct release.

We believe the costs of operating a protection framework can be very low, and in many cases nil.

Under the UK Retention Deposit Scheme, when the Bank of England base rate is 3.75% or higher, no fees are charged at all. Our operating costs are covered by the interest income on safeguarded deposits, as is the case in other statutory deposit schemes such as tenancy deposits.

If the base rate falls below this level, we apply only a flat £25 monthly fee per contract account, regardless of contract size.

This cost profile stands in marked contrast to DBT’s Options Assessment, which projects annualised compliance costs of £125m under a protection framework. Our experience demonstrates that these costs are materially overstated if protection is delivered via a market-tested, FCA-regulated platform using segregated accounts.

For Employers, the only “cost” is an adjustment to cashflow: they must pay 100% of certified sums each month rather than 95–97%.

For Contractors, the arrangement is entirely cost-neutral or better, since the retentions are visible, safeguarded and available for release at the appropriate time.

In short, a properly structured protection scheme eliminates the risk of loss at negligible cost to industry, while delivering significant benefits to cashflow certainty and trust throughout the supply chain.

Yes. We recommend that the following matters are addressed in the legislation and supporting guidance:

VAT treatment - If retention is paid into a third-party account, clarity is needed on how VAT should be accounted for. In our Scheme, we do not collect the VAT element to keep matters simple. However, in an insolvency situation a contractor may have to pay VAT on sums they have not physically received. We recommend that a statutory scheme require issue of a monthly VAT invoice, and that both the retention and the VAT element are paid into the protection account so that they are available to the supply chain in the event of a higher-up insolvency.

FCA regulation of providers - Any third-party administrator should be an FCA-regulated entity. This ensures compliance with safeguarding, wind-down planning, and capital adequacy requirements. Without this, retention monies could be exposed to the insolvency of the service provider itself. Requiring FCA regulation mirrors the standards already applied to e-money and payment institutions.

Adjudicator powers - We recommend extending the statutory powers of adjudicators so that they can order the release of retention directly from the protecting institution, with immunity for the institution in complying. This would preserve the “pay now, argue later” principle and ensure prompt dispute resolution.

Risk of circumvention - The DBT’s Options Assessment recognised that firms may seek to adjust valuation schedules or other payment terms to offset the effect of either prohibition or protection. Guidance should therefore make clear that such practices would be contrary to the spirit of the legislation and could be corrected by adjudicators.

By addressing VAT, regulatory standards, adjudicator powers, and circumvention risks, the framework can avoid loopholes and deliver the intended protections effectively.

We would recommend a blended approach that reflects both proportionality and practicality: 

1.    Prohibit retentions on smaller contracts– for contracts up to £100,000, the sums involved are typically modest(£3,000–5,000) and do not materially affect quality or leverage. Prohibition at this level would ease cashflow for SMEs and reduce administrative burdens, aligning with the Government’s policy objective of supporting small businesses. 

2.    Require protection for all larger contracts– for contracts above £100,000, retentions should continue to be permitted but must be safeguarded in a third-party account. This ensures Employers retain their legitimate protection while removing the risks of insolvency loss or non-payment, which the 2018 BEIS research showed had affected 44% of contractors. 

The UK Retention Deposit Scheme, launched in January 2025, already provides a market-tested, FCA-regulated platform capable of delivering this blended approach at minimal cost. Our structure mirrors the proposed features set out in the consultation: segregation, safeguarding at the Bank of England, transparency, and compatibility with adjudication.