The Commercial Payments Bill: what it means for construction payments and retention

Late payment has been part of construction for as long as anyone can remember. The Commercial Payments Bill is the government's attempt to change that, and it goes further than anything since the Construction Act in 1996. For subcontractors, the headline is simple: cash retention would be banned. For everyone, payment terms would be capped and late payment interest would stop being optional.

Where the Bill has got to

The Bill started in the House of Lords on 19 May 2026. It had its second reading on 9 June, finished committee stage on 21 July and had its third reading on 20 October. It now goes to the House of Commons. Commentators expect Royal Assent in early 2027, and the government has said the cap on payment terms will start no earlier than 2027.

So nothing changes on your contracts today. But subcontracts being negotiated now could still be running when the new rules arrive, which is why it is worth understanding them.

The retention ban

This is the part that matters most to construction. As introduced, the Bill amends the Construction Act (the Housing Grants, Construction and Regeneration Act 1996) to stop one party withholding a percentage of the money owed to another as security for defects or completion. In other words, the traditional 3% to 5% held back on every payment application.

• A two-year transition. As introduced, retention clauses would stay lawful for two years after the rules start, and after that they would be void.
• Money already held gets paid. Retention held at the end of the transition would have to be paid out within set periods (30 days for public sector payers and 60 days for private sector payers, in the Bill as introduced).
• Penalties for holding it anyway. Withholding retention unlawfully would carry a fixed penalty on top of statutory interest.
• Wording does not get round it. The ban looks at what an arrangement does, not what it is called, so renaming retention in a subcontract is unlikely to work.
• Great Britain only, for now. The retention ban covers England, Wales and Scotland. Northern Ireland has separate provisions and the ban does not currently extend there.

Because the ban works through the Construction Act, the Act's existing tools would enforce it: payment and pay less notices, the right to suspend for non-payment, and adjudication.

Main contractors and clients will still want security against defects, so expect more retention bonds, performance bonds, parent company guarantees and defects insurance in their place. Some of these cost money to arrange, and who pays for them is likely to become the next negotiation.

A 60-day cap on payment terms

Larger businesses paying smaller suppliers would not be able to agree payment terms longer than 60 days (30 days in the public sector). A term that tries to go beyond the cap would be void. There are exceptions, for example where both parties are large companies.

For construction, remember that most subcontracts already set out the payment mechanism the Construction Act requires: a due date and a final date for payment for each application. The cap is another limit on how far apart those dates, and the payment, can be pushed.

Late payment interest becomes mandatory

Today, a contract can set its own late payment interest rate, as long as it gives a "substantial remedy". Under the Bill, statutory interest at 8% above the Bank of England base rate would be mandatory, and any term that excludes or reduces it would be void. Subcontracts that set a lower rate, or none at all, would be overridden.

The Bill would also penalise queries raised at the last minute: an invoice dispute raised less than 8 days before the payment date could cost the payer 1% of the disputed amount or £40, whichever is higher. That is aimed at "we've found a problem" emails the day before payment is due.

Stronger powers for the Small Business Commissioner

The Small Business Commissioner would be able to investigate businesses that pay late, fine persistent offenders up to 1% of turnover, and settle payment disputes for suppliers with fewer than 50 employees. Construction contract disputes are expected to stay with adjudication, which already gives a decision in 28 days. Large companies would also have to report more about how they pay, including the late payment interest they pay out.

What does not change

The Construction Act's payment rules stay exactly where they are. You still need to apply on time, the payer still needs to issue a payment notice and any pay less notice on time, and the final date for payment still matters. If anything, the paperwork matters more: the new rights would be enforced through the same notices and deadlines, and a missed notice is still the quickest way to lose an argument about money.

What subcontractors can do now

• Know what retention you are owed. Add up the retention held on every subcontract, with its release dates. Retention that is due now is not affected by the Bill, so chase it. Our guide to retention in construction explains how it is worked out and released.
• Read new subcontracts with 2027 in mind. A subcontract signed today could run into the transition. Check the retention terms, release dates and payment terms carefully.
• Keep your notices and evidence tidy. Applications, payment notices, pay less notices and the dates they arrived are what any future claim would rest on.
• Use the interest rights you already have. Late payment interest can already be claimed today, at the contract rate or the statutory rate.

What main contractors can do now

• Plan for cash flow without retention. Retention held across a supply chain is often a quiet source of working capital. Work out what releasing it would mean for your business.
• Review your subcontract templates and your security. Think about which alternatives you will ask for, and how they will be priced.
• Tighten your assessment process. With last-minute disputes penalised and interest mandatory, applications need assessing promptly, with clear reasons and notices issued on time.

How Constructicore helps

Constructicore keeps the record the new rules will rely on. For subcontractors, it tracks the retention held on every subcontract with reminders when releases fall due, works out due dates and final dates for payment, reminds you before every notice deadline and calculates late payment interest. For main contractors, it puts every subcontractor's application in one format, lets your QS assess it line by line with reasons, and reminds you before each payment notice and pay less notice is due.

We will update this guide as the Bill goes through the Commons.

Sources

• House of Lords Library: Commercial Payments Bill [HL], HL Bill 4 of 2026 to 27
• House of Lords Library: Commercial Payments Bill, progress in the Lords
• Small Business Commissioner: Late Payments Bill introduced to Parliament

Published 22 October 2026.