Construction Retentions: Reform on the Horizon

28 May 2026 · 4 min read · Contracts

Retentions are one of construction's most contentious commercial mechanisms. An estimated £1.2 billion is held in retentions across the UK construction industry at any given time, and the long-running campaign for reform may finally be approaching a resolution with the 2026 review of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act).

How Retentions Work Now

Under standard JCT and NEC contracts, the employer deducts a percentage — typically 3% of interim valuations — as security against defective work and non-performance. Half is released at practical completion, with the remainder released at the end of the defects liability period (usually 12 months later).

The mechanism cascades through the supply chain: main contractors deduct retention from subcontractors on the same basis. The problem is that retention sums are not held in trust or ring-fenced. If the holding party becomes insolvent, the retention is lost — an unacceptable risk that has destroyed thousands of subcontractors over the past decade.

Industry research indicates that approximately 28% of subcontractors report never fully receiving their retentions. This is not a marginal issue — it represents a systemic failure of the current mechanism to protect those who have earned the money.

The Reform Proposals

The 2026 Construction Act review is considering several reform options:

• Mandatory retentions deposit scheme — analogous to the tenancy deposit scheme. Retentions would be held in an independent, ring-fenced account, protecting them from the holding party's insolvency. This is the preferred option of the tier 2/3 supply chain.
• Project bank accounts (PBAs) — already used on public sector projects, PBAs hold all project funds in a single ring-fenced account from which the employer, main contractor, and named subcontractors are paid directly. Retention can be held within the PBA structure.
• Retention bonds — an on-demand bond from a surety replaces the cash deduction. The subcontractor's cash stays in their business, and the employer's security is the bond. Already available under JCT and NEC but underused.
• Abolition for low-value contracts — banning retentions on contracts below a threshold (proposed at £50,000–£100,000) to reduce the administrative burden on small businesses.

The Employer's Perspective

From the employer's standpoint, retentions provide critical leverage during the defects period. The threat of withholding the retention is often the only effective mechanism for ensuring the contractor returns to rectify defects. Reform must balance supply chain protection with the employer's legitimate need for security.

For most developers, the practical risk is not the reform itself but the transition period. If a mandatory deposit scheme is introduced, existing contracts may need to be amended mid-life, and the administrative burden of operating dual systems (old contracts on cash retention, new contracts on the deposit scheme) will fall on QS teams.

Practical Steps Now

1. Audit live retention positions — compile a schedule of all outstanding retentions, both held by you (as employer) and held against you (as contractor/subcontractor). Ensure release dates are tracked proactively, not left to the holding party's discretion.
2. Consider retention bonds on new contracts — particularly for subcontract packages above £50,000. The cost of a retention bond (typically 1.5–3% of the bond value per annum) may be less than the cost of the cash being tied up for 12–24 months.
3. Review contract draft retention clauses — ensure that the release mechanism is clear and time-limited, with automatic release provisions rather than requiring application.
4. Chase overdue retentions aggressively — in the current market, holding parties are increasingly reluctant to release. Formal demand letters with interest claims are often necessary to trigger release.
5. Prepare for the deposit scheme transition — if a mandatory scheme is introduced, ensure your accounts and systems can handle it. The administrative overhead will be significant for organisations managing multiple live contracts.

Sources: BEIS Construction Retentions consultation (2023–2025); Construction Act 1996 (Housing Grants, Construction and Regeneration Act) and amendments; JCT 2024 suite retention provisions; NEC4 retention options; BuildUK retentions campaign data; Pythia retention loss research (2025); CITB construction insolvency statistics (2026). This article is for general guidance only and does not constitute legal advice.