Late payments and retention clauses have always caused pain in the construction industry. With the UK Government’s Late Payments Consultation proposing stricter payment legislation, now is a good time for contractors, developers and legal advisors to rethink how they protect performance and manage cash flow – and here’s the import bit - without adding unnecessary complexity or additional cost.
Why This Matters
The Department for Business & Trade (DBT) consultation, closed on 23rd October, aims to tackle poor payment practices that cost the UK economy £11 billion annually and disproportionately impact SMEs. Among the proposals:
- Mandatory maximum payment terms (60 days, potentially reducing to 45).
- 30-day deadline for invoice disputes.
- Mandatory statutory interest on late payments.
- Board-level scrutiny and reporting obligations.
- Construction-specific reform: either ban retention clauses or require retention sums to be segregated and protected.
For construction, this is significant. Retentions, which are typically 3–5% of contract value, are meant to safeguard against defects and incomplete works. But they often:
- Delay cash flow for subcontractors.
- Create administrative burden.
- Expose funds to insolvency risk upstream.
- Push final payment back to Practical Completion (PC), which can be delayed indefinitely.
Understanding Supply Chain Cash Flow and Retentions
Supply Chain Cash Flow refers to the movement of money through all tiers of the construction supply chain, from developers and main contractors down to subcontractors and suppliers. It is critical because construction projects involve multiple layers of subcontracting, and delays at the top can cascade downstream, leaving SMEs vulnerable to insolvency. Healthy cash flow ensures projects stay on schedule, reduces disputes, and maintains trust across the supply chain.
Retentions are sums (typically 3–5% of the contract value) withheld by the payer until practical completion or the end of the defect liability period. They are intended to safeguard against incomplete or defective work. While this provides security for the payer, retentions often create significant challenges: they delay subcontractor cash flow for months or even years, expose funds to insolvency risk if the main contractor fails, and add administrative complexity. For SMEs, this can mean financial strain and increased risk of failure. Reform is being considered because, although retentions offer protection, they are widely seen as outdated and harmful to smaller businesses.
The Real Problem
The biggest challenge isn’t just late payment. It’s actually subcontractor insolvency. When smaller firms fail, the impact cascades through the supply chain. Retention bonds and surety instruments are getting more expensive, and Project Bank Accounts (PBAs) have not been the silver bullet that they promised to be. Recent cases show funds still not reaching the supply chain even when PBAs were in place. [REF: Dispute taken to Claims Court]
Sentiment from industry leaders is clear: “Just let us get on and build.” From a recent roundtable event attended by contractors, funders and legal advisors, the message was delivered through somewhat gritted teeth because, whilst there was profuse agreement around the room that the sentiment surrounding the DBT consultation was applauded, there’s an even stronger belief that solutions – if any - must be simple, fast, and effective. The bigger concern: if changes are to come; who’s going to pick up the tab?
Practical Alternatives That Aren’t Burdensome
As I sat in the room with Quantity Surveyors, Lawyers, Funders and Builders much more knowledgeable than me, I was left with one thought ringing in my ears: the sector needs payment expertise and education. It is crying out for evolution of this often misunderstood but hugely important part of the process: how are people getting paid?
Shieldpay takes an agnostic view when it comes to the consultation. However, we do welcome any initiatives that improve the UK economy, the transparency of payment processes and the ability to move money from A to B, safely, securely, and in a timely manner.
Here are some options that protect cash flow and performance without adding layers of admin:
1. Ring-Fenced Payment Accounts
- Funds held securely for the benefit of the payee.
- Conditional release based on objective milestones (e.g., completion certificates, defect liability expiry).
- Automatic release unless valid notice is lodged.
- Revenue share earned credited to the subcontractor.
Why it works: Removes insolvency risk and complexity compared to retention bonds. Quick to set up, no lengthy escrow process.
2. Milestone-Based Payment Structures
- Break down payments into smaller, verified stages rather than holding large sums until PC.
- Aligns with Gateway 2 and other project assurance frameworks.
Why it works: Improves cash flow for SMEs and reduces disputes
3. Digital Approval & Audit Trails
- Platforms that provide immutable records of approvals and payment triggers.
- Supports compliance with upcoming reporting obligations and board-level oversight.
Why it works: Transparency without manual paperwork.
4. Income Share or Revenue Pass-Through
- Where funds are held, ensure income gains flow to the subcontractor.
Why it works: Offsets cost of delayed release and aligns with proposed reforms.
What’s Next?
The consultation outcome is expected around Easter 2026, with phased implementation likely. But waiting isn’t an option:
- Retention reform is coming either through prohibition or mandatory protection.
- Payment certainty and transparency will become non-negotiable.
- Risk and administrative burden becomes unpalatable.
This is where Shieldpay offers the construction sector optionality. Talk to our team if you’d like to hear more from our payments experts on setting up escrows, payment accounts or other regulated payments processes that could help you ensure your construction schemes go ahead.
Shieldpay’s Role
Shieldpay’s Payment Account offers the construction industry:
- Segregated funds and conditional release.
- Full audit trail for compliance.
- Quick setup, no complex escrow process.
- Ability to safeguard funds against upstream insolvency risk (subject to confirmation).
For law firms advising on construction, this is a ready-now solution to help clients stay ahead of reform and protect supply chain relationships.
Bottom line: The industry doesn’t need more complexity, it needs practical, compliant ways to keep cash flowing and projects moving. Ring-fenced accounts and milestone-based payments are the future. The question is: will you lead or wait?
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