The Commercial Payments Bill,
and the end of cash retention.

The Commercial Payments Bill would ban retention in construction contracts in England, Wales and Scotland. A retention clause agreed after a two-year transition would be void. Final dates for payment would fall within 60 days of the due date, and statutory interest could no longer be written out of a contract. The Bill passed the House of Lords on 20 October 2026 and is now before the Commons. It is not yet law.

What the Commercial Payments Bill is

The Bill is the government’s late payment reform, presented by the Department for Business and Trade. Government announcements also call it the Small Business Protections Bill. It began in the House of Lords on 19 May 2026.

For construction it does three things. It amends the Housing Grants, Construction and Regeneration Act 1996 to ban retention. It caps payment terms, with rules of their own for construction contracts. It rewrites the Late Payment of Commercial Debts (Interest) Act 1998, which it renames the Commercial Payments and Interest on Late Payment Act 1998.

No amendment to the retention clauses was agreed in the Lords. At Committee the minister said the government was not proposing any exceptions to the ban. The Commons has still to debate the Bill, and it can change there.

What the retention ban covers

The Bill inserts new sections 113A to 113F into the Construction Act. Section 113A describes the practice being banned: one party deducting or keeping back a percentage of what is due to another, until a condition for release is met. The percentage can be taken from any of three things:

• A payment due for goods, services or works supplied.
• An interim payment.
• The contract total.

The release condition can be the end of the defects period, the payee meeting all its obligations, or meeting conditions the contract specifies. That covers retention as the industry knows it, released in halves at practical completion and at the end of the defects period. It covers it whether the clause is in writing or not.

Retention is withheld from money already earned. After the transition, the Bill treats it as money that should have been paid.

When the retention ban would start

The ban arrives in two steps, both counted from the day the retention sections come into force. That day is set by regulations after Royal Assent, and no date has been announced.

During the two-year transition, retention can still be agreed and deducted. A clause agreed in that window, or an older clause varied in it, stops working after the last retention day, three years from the start. Any sum kept back under it from the start of the transition, and still held, then becomes payable. The payment due date is 30 days after the last retention day. The final date for payment is 60 days after that, or 30 where the payer is a public authority.

Once the transition ends, a new retention clause is void. So is any term dealing with release: its timing, its conditions and its mechanism. A pre-existing clause cannot then be varied, unless the change makes it more favourable to the payee.

What happens to retention already held

A retention clause agreed before the transition starts is left in place. Sections 113B to 113D do not touch it, unless it is varied during the transition or after it. Retention on a job running today is released on the terms of today’s contract, at practical completion and at the end of the defects period.

That makes the money already held the part of retention most easily lost. Retention under older contracts will be falling due for years after the ban, on jobs that have closed. The retention calculator gives both release dates from practical completion, and retention and the final account covers collecting the second half.

Half the retention, as a fixed sum

Section 113E adds a sanction. After the transition, where a sum should have been paid as the notified sum and is instead kept back as retention, the party owed it can recover a fixed sum. That sum is the higher of £40 and half of the amount held back.

It is in addition to statutory interest and the fixed compensation sum under the 1998 Act. A contract term cannot exclude or reduce it, although a court can remit it where justice requires. The Bill applies this term to construction contracts made before the transition as well as after it.

Which contracts the ban covers

The ban applies to construction contracts under Part 2 of the Construction Act. That reaches main contracts, subcontracts at every tier and consultants’ appointments. There is no threshold for contract value or firm size, and no exception for the public sector.

• Contracts with a residential occupier, for work on the home they live in or intend to live in, sit outside Part 2 and so outside the ban.
• Contracts excluded from Part 2, such as those excluded by order, stay outside it.
• The retention sections extend to England and Wales and Scotland. Northern Ireland has its own construction contracts legislation, which they do not amend.

Ministers keep a power to amend the definitions by regulations, after consultation. In the Lords the government said genuine staged payments stay lawful, and that it will work with surety providers on alternatives such as performance, retention and warranty bonds. How retention bonds work.

The 60-day cap on construction payment terms

The Bill fixes how far the final date for payment can sit from the due date. Under a construction contract it must fall within 60 days, beginning with the day after the payment due date. Where the payer is a public authority, the limit is 30 days.

A contract term that sets a later final date is void. The Scheme for Construction Contracts fills the gap, and its final date for payment is 17 days after the due date. On a public contract under the Procurement Act 2023, the final date becomes the last day of the 30-day period instead. A side agreement that tries to waive the limit, such as a settlement, is caught as well.

The cap covers contracts entered into after it comes into force. Contracts already signed keep their terms. Outside construction, the Bill sets a general limit of 60 days for business to business payment terms. Its narrow exemptions apply to construction contracts as well.

Statutory interest you cannot contract out of

Today a contract can replace statutory interest with its own rate, provided that rate is a substantial remedy. The Bill removes that route. For contracts made after it comes into force, any term that excludes or restricts statutory interest, sets a different rate or starts it later would be void. That holds where the payment is disputed too.

The rate itself does not change: 8% a year over Bank Rate, fixed by the half-year in which the debt went late. Neither does the fixed compensation sum of £40, £70 or £100 per invoice. For a construction debt, interest would run from the day after the final date for payment. The late payment interest calculator works out both under the law as it stands.

Other changes in the Bill

• The Small Business Commissioner gains powers to investigate larger businesses that persistently pay poorly, with penalties of up to 1% of annual turnover.
• An adjudication scheme run by the Commissioner for small businesses in payment disputes with larger ones.
• Late disputes: outside construction, a buyer that raises a dispute late owes a fixed sum of the higher of £40 and 1% of the contract price.
• Acceptance and verification: a procedure not completed within 30 days of the work counts as complete, unless a longer period is fair and reasonable.

When it would come into force

The Bill needs to pass the Commons and receive Royal Assent. Most of it then comes into force on days set by regulations. The government’s consultation response said the 60-day limit would apply no earlier than 2027.

The retention ban is the slowest part. The full ban starts two years after the retention sections come into force, and transition clauses run for a further year. A subcontract signed this year, under today’s law, will still be releasing retention years from now.

What to do now

Three things are worth doing before the Bill is law, because they matter under the current law as much as under the new one:

• List the retention held on every job, with its percentage, the sum held and both release dates. Retention on today’s contracts outlives the ban.
• Read the payment terms on new subcontracts. A final date for payment more than 60 days after the due date is a term the Bill would void for contracts signed after commencement.
• Record every notice with its date. The new sanctions turn on the same machinery as today: the notified sum, the pay less notice and the final date for payment.

This article follows the Commercial Payments Bill as amended on Report in the House of Lords and passed by the Lords on 20 October 2026. The Bill can change in the Commons, and nothing in it is law until Royal Assent and commencement. It is general guidance rather than legal advice.