By Legal Futures Associate dospay
The Department for Business & Trade is consulting on major changes to retentions in construction. The consultation runs until 23 October 2025. This is a once-in-a-generation opportunity to secure fair treatment for contractors and subcontractors – the DBT wants to hear from anyone who is involved in construction, including all of the professional services and ancillary support functions.
If you haven’t yet given your views on retention reform, you can do so here.
The Government’s consultation on late payments in construction marks a welcome moment of focus for a sector long plagued by misuse of retentions. For decades, retention clauses have provided employers with protection against latent defects and incomplete works. Yet the way in which these sums are withheld (and all too often never returned) has evolved into a systemic risk for contractors, particularly SME’s.
Reform is not only timely; it is essential. But of the options available, only one delivers both fairness and functionality without introducing unnecessary complexity or cost. The UK Retention Deposit Scheme (‘UKRDS’) is already in place, regulated, and demonstrably effective. It represents not just a better option, but the best outcome.
Retention abuse: A systemic weakness
Each year, approximately £4.5 billion is tied up in retention payments across UK construction contracts. Originally intended as a means to ensure post-completion performance, these funds have increasingly been treated as a form of working capital by employers or as bargaining chips at the end of a project. The result: widespread late payment, non-payment, and losses through insolvency.
Government-backed research has found that more than 70% of contractors have experienced delayed or withheld retentions. Alarmingly, 44% have lost retentions entirely due to insolvency further up the supply chain. For small firms operating on slim margins, such losses are not merely inconvenient; they can be existential.
Prohibition vs. protection
Some have called for a total ban on retentions. At first glance, this appears appealing: eliminate the mechanism and you eliminate the abuse. But construction is not a perfect science. Defects may take time to emerge, and employers need some assurance that remedial work will be undertaken.
In reality, prohibition would likely drive the problem underground. Employers could simply undervalue interim payments or delay certification, replicating the financial impact of a retention while removing all transparency. It would be far harder to detect and regulate these behaviours, placing even greater pressure on contractors and subcontractors to carry risk they cannot afford.
Instead, the focus must be on protection: ensuring that retention monies are ringfenced, visible, and only used for their intended purpose. This is where the UK Retention Deposit Scheme comes into its own.
UKRDS: Secure, regulated, and ready
Launched in January 2025, the UK Retention Deposit Scheme is already delivering the precise solution that policymakers, employers, and contractors need. Built to align with the principles laid out in the DBT’s consultation, UKRDS combines financial safeguarding, regulatory compliance, and administrative simplicity.
The Scheme is:
- FCA-regulated: UKRDS is operated by an authorised payment institution, subject to capital adequacy requirements, wind-down planning, and safeguarding rules.
- Bank of England-backed: All funds are held in liquid, unencumbered form through banking partners with access to the central bank.
- Project-specific: Each contract is allocated its own unique sort code and account number, providing total clarity for auditing, certification, and reconciliation.
- Integrated with adjudication: Funds can be released on certification or by adjudicator decision, upholding the “pay now, argue later” principle.
- Cost-effective: The Scheme is free to use when the Bank of England base rate is above 3.75%, and otherwise attracts a modest fee of £20 per contract per month.
These features do more than tick boxes. They fundamentally shift the landscape, restoring trust to contractual relationships and giving SME’s in construction the confidence to invest, deliver, and grow.
A balanced legislative path
UKRDS, through the Retention Protection Pledge, advocates a blended model of reform. It supports Government action to prohibit retentions on smaller contracts (those below £100,000), where the sums withheld offer minimal protection but place disproportionate strain on small businesses. For larger contracts, UKRDS recommends that retentions be allowed only if held in a protected, third-party account.
This strikes the right balance. Employers retain their legitimate right to withhold funds for defects, but contractors are protected from misuse and insolvency risk. It is an outcome that supports quality, reduces disputes, and enhances liquidity across the supply chain.
From policy to practice
Legislation without infrastructure leads to delay. But here, the infrastructure already exists. The UKRDS model has been tested, regulated, and refined in live construction settings. It works.
The Scheme has the scalability to serve projects large and small, and the operational simplicity to integrate seamlessly into standard contract administration processes. Funders, contract administrators, and clients can monitor retention status through a secure portal, with real-time visibility of deposits, balances, and release requests.
This is not theory. This is working practice.
A call to Government and industry
The construction sector does not need to wait for an entirely new regulatory regime. Nor does it need to gamble on untested alternatives. The UK Retention Deposit Scheme is not only fit for purpose; it is the right solution, in place now.
We urge Government to adopt a legislative model that mandates protection rather than prohibition, and to recognise UKRDS as a delivery vehicle already capable of implementing that reform. We also invite contractors, developers, and funders to engage with the Scheme directly, and see how retention can work for everyone.
For more information or to arrange a demonstration, visit: https://www.retentiondepositscheme.org
