For construction businesses, managing cash flow can be every bit as important as managing the projects themselves.
Long payment periods, late payments and money held back through retentions can leave contractors and subcontractors funding work for considerable periods before receiving the cash they are owed.
The Commercial Payments Bill could bring significant changes to that system and is central to the Government’s plan for small and medium-sized businesses.
Partner, Rachel Hay at Forrester Boyd looks at the detail behind the Bill and the potential impacts for those in the construction sector.
Introduced to Parliament in May 2026, the Bill is designed to tackle poor payment practices between businesses. While its provisions extend beyond construction, the sector is specifically affected by proposals covering payment terms and the use of retentions.
The Bill is still progressing through Parliament and the detail could therefore change before becoming law. However, construction businesses should already be considering what the proposals could mean for their contracts, cash flow and working capital.
Under the current proposals, construction contracts would generally have a maximum period between the payment due date and final date for payment. For payments by a public authority, the final date for payment would generally need to fall within 30 days of the payment due date. For other construction payments, the proposed maximum is generally 60 days, subject to exemptions within the legislation. Where contractual terms fall outside the permitted limits, those terms could become ineffective and statutory provisions would apply instead.
For subcontractors and smaller businesses further down the supply chain, receiving money sooner could make a significant difference.
Construction businesses often incur labour, material, plant and subcontractor costs well before they receive payment themselves. Reducing lengthy payment periods could therefore release cash into the supply chain sooner and reduce some of the pressure on working capital.
For businesses accustomed to relying on longer payment terms, however, the impact could work in the opposite direction. Main contractors and other businesses will need to consider whether their existing cash reserves and funding arrangements are sufficient to meet payments more quickly.
The proposed end of retentions
Potentially the biggest change for construction is the Government's proposal to phase out retentions.
Retentions are commonplace in the industry. A percentage of the amount due to a contractor or subcontractor is withheld and released later, often partly at practical completion and partly following the defects liability period.
From the perspective of the party withholding the money, this provides financial protection if defects need to be corrected. For the business waiting to receive it, however, it means money it has earned can remain tied up long after the work itself has been completed.
The Bill proposes a two-year transition period once the relevant provisions come into force. After that period, new retention clauses would generally be prohibited and existing arrangements would ultimately be phased out.
The Government has confirmed that the changes to retentions will not take effect immediately if the Bill becomes law. Instead, they will be introduced at a later date through separate regulations, giving the construction industry time to prepare. The Government also plans to work with the Construction Leadership Council and other industry bodies to agree how the changes will be introduced and consider alternative ways of providing financial protection in place of cash retentions.
For many subcontractors, the changes could be significant. Money previously locked away as retention could remain within the business, while tighter payment periods could mean invoices are converted into cash more quickly. That could improve working capital and give businesses greater capacity to meet wages and supplier costs, invest in equipment and take on new work without relying as heavily on external finance.
But there is another side to the equation.
A business that currently holds significant amounts of retention money on behalf of subcontractors may effectively have the use of that cash for a considerable period. Removing that source of working capital while also requiring faster payments could create additional pressure.
Construction businesses therefore need to look at the impact from both directions.
How much cash is currently being withheld from them and how much are they withholding from others?
For some businesses, the net effect could be positive. For others, it could expose a working capital requirement that has previously been supported by the existing payment structure.
The Bill also strengthens the rules around interest on overdue commercial debts.
It proposes making statutory interest an implied contractual term and preventing businesses from contracting out of that right. The Government's proposals provide for statutory interest at 8% above the Bank of England base rate.
This gives businesses another reason to review the way invoices, applications for payment and payment approvals are managed.
It is not simply a question of having enough cash available. Finance and project teams will need processes capable of identifying amounts due, resolving queries and authorising payments within the required timescales. Poor administration could become increasingly costly.
The Commercial Payments Bill has not yet completed its passage through Parliament and implementation of the retention provisions will follow a transitional timetable.
That does not mean businesses should wait before considering the potential impact.
Construction businesses may want to review their current contracts and payment cycles, understand the value of retentions both held and receivable and model what their working capital position could look like if payment timings change.
It may also be sensible to consider whether existing finance facilities remain appropriate and how the business would respond if cash retentions are replaced by alternative forms of security.
The proposed reforms are intended to get money moving through UK supply chains more quickly. For construction businesses that have historically had substantial sums tied up in retentions or outstanding payments, that could be welcome. But changing when cash enters and leaves a business can have a significant impact on its financial position.
Understanding that impact before the new rules take effect will give construction businesses time to adjust their cash flow forecasts, funding arrangements and commercial processes rather than reacting once the changes arrive.
If you would like to understand how changes to payment terms and retentions could affect the cash flow and working capital requirements of your construction business, speak to your local Forrester Boyd adviser.
To keep up to date on the latest with regards to The Commercial Payments Bill, follow the updates here:
https://bills.parliament.uk/bills/4128
Read more from gov.uk here
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.
