The construction supply chain celebrates as Ministers announce the introduction of legislation to tackle late payments and protect small businesses.

In May, Ministers introduced a landmark Bill aimed at ending the scourge of late payment and setting clear boundaries around payment practices. The Commercial Payments Bill1 was introduced in the House of Lords on 19 May. The aim is to strengthen payment discipline across the UK economy by imposing maximum payment periods, making statutory interest on late payments mandatory, and banning retention clauses in construction contracts.

The Bill marks the toughest crackdown on late payment in a generation, putting a clear duty on large firms to pay smaller suppliers on time and giving small businesses the certainty they need to continue investing, supporting jobs and growing their communities.

Government is responding to evidence that late payments cause 38 businesses to close every single day. Construction data from FIS shows that 58% specialists supplying major house builders are stressed about payment most of the time. These businesses are forced to spend hours chasing invoices instead of running their businesses, putting jobs, livelihoods and health at risk. They are also denied of the vital funding and confidence needed to invest in people and innovation.

Sweeping reforms to improve fairness and cashflow
The Bill has the potential to fundamentally change payment practices, putting an end to excessive delays and unfair practices that hit small firms hardest. Reforms include a clear 60-day cap on payment terms on all large firms paying smaller suppliers, mandatory interest on late payments set at 8% above the Bank of England base rate, and a ban on the practice of withholding retention payments under construction contracts.

This latter part will be music to the ears of many in the construction supply chain who have been campaigning for retention reform for decades. In his recent speech at the FIS Contractors Awards, FIS, Chief Executive, Iain McIlwee, paid tribute to Peter Aldous, who attended as Guest of Honour. The Aldous Bill, introduced by Peter during his time as an MP in 2019, sought to tackle retentions head on. Peter garnered significant support from FIS, other specialist trade bodies and industry representatives,
but a period of political and social instability, followed by a General Election, saw him lose his seat before the Bill could be introduced.

Iain noted that Peter’s efforts provided the sector with a rallying point and a sense of hope, and that this latest iteration would not have been possible without his efforts. Iain also thanked Professor Stuart Green, who provided valuable data through the Reading Report on both retention and late payment in the finishes and interiors sector.

A lawyer’s perspective
Taking a legal eye to the Bill, Sam Beer, Legal Director Construction and Engineering at Hill Dickinson, says: For the construction sector, the Bill’s provisions are best characterised as a continuation of the ongoing battle to tackle and improve cashflow in the industry.

Overview of key changes
The following are the headline points to note from the Bill relating to construction contracts:
1. When the Bill comes into force it is currently intended that it will be named “The Commercial Payments Act”.
2. The Late Payment of Commercial Debts (Interest) Act 1998 will be renamed the Commercial Payments and Interest on Late Payment Act 1998 (CPILPA 1998).
3. The bill seeks to amend various legislation including: a. CPILPA 1998; b. The Housing Grants, Construction and Regeneration Act 1996 (the Construction Act); and c. The Enterprise Act 2016.
4. CPILPA will be amended so the final date for payment for construction contracts must be within the permitted period (i.e. if public authority 30 days, otherwise 60 days). There are exceptions including advance payment, transitional retained sum and if the Procurement Act applies. CPILPA will include meanings of terms relating to construction contracts and the Construction Act (s110 and s110B) are also amended to reflect this period.
5. CPILPA will provide that a term that purports to exclude or vary the right to statutory interest (currently 8% plusBank of England base rate) will be void.
6. Amendments to the CPILPA and Construction Act will not apply to contracts entered into before the date the amendments come into force. So has prospective effect only.
7. The Construction Act will be amended to provide for a ban on the use of retention (see below).
8. There are further proposed amendments to the Construction Act in Schedule 2, Part 1 to s110B (default payment notices), s111 (requirement to pay notified sum) and s116 (reckoning periods of time). Retentions

The Bill’s provisions in respect of retentions, when in force, will arguably represent an historic and seismic change. Developers/ funders/employers will be considering practical alternatives to retention.

The Bill introduces the new measures to deal with retentions through proposed amendments to the Construction Act i.e. new sections 113A to 113F. These amendments:
1. Introduce a wide definition for retentions (Section 113A (1))
2. Introduce a two-year transition period from the date section 113B comes into force before a full ban. During this period retention clauses will be permitted in contracts.
3. Any retention clauses included in construction contracts after the end of the transition period would be void (s113C).
4. Once the ban is in force (i.e. after transition period), variations to preexisting retention clauses would be void unless the provision makes the retention clause more favourable for the payee (s113D).
5. At the end of a three-year period ( “the last retention day”), such retention clauses will be ineffective and s113B provides for the repayment of the “transitional retained sum”.
6. After the transition period, if there is a breach of these provisions and deduction of an unauthorised sum (a so called “retention debt”), there is an implied term imposing a penalty of the higher of £40 or 50% of the retention debt (in addition to any interest payable and compensation for late payment) (s113E).

Why this is important?
While the wheels are in motion, there is no set timeframe for the Commercial Payments Act coming into force. We understand there will be a consultation process on the Bill, which is likely to focus on the process rather than the underlying principles.

However, if it comes into force later this year, retentions in new contracts could be banned at some point in 2028, with any transitional retained sums repaid in 2029. The legislation cannot be contracted out of. On this basis, parties need to begin considering how to address these issues within their projects. More broadly, the industry will need to consider existing contracts, including standard forms, and assess how the reforms can be implemented in practice

Experts and industry leaders respond to the new bill
We spoke to, Iain McIlwee, and Steve Bratt, Group Chief Executive Officer at the Electrical Contractors’ Association and lead for the Business Models and Fair Practices workstream for the Construction Leadership Council, all of whom highlighted the importance of tackling a culture of late payment that has constrained growth, damaged relationships, and placed unnecessary pressure on businesses throughout the supply chain.

This is what they had to say. Steve, explained that the direction of travel for payment and retentions legislation in UK construction is clear: a decisive shift towards fairness, transparency and protection of the supply chain. Recent proposals — including stricter payment terms and the planned ban on retentions — mark the most significant reform in a generation.

Steve said: “But this is about more than payment. It is about resetting how the industry operates. Construction is fundamentally driven by cash, and for too long many businesses — particularly across the supply chain — have been operating on thin margins, often effectively financing projects through withheld or delayed payments. When cashflow is constrained, investment in skills, quality and innovation is the first casualty.

“That approach is no longer sustainable. The emerging legislative framework is pushing the industry towards earlier engagement, stronger collaboration and a more mature allocation of risk — one where it is actively managed, not dumped on the tiers below. Fair and predictable payment is the foundation that makes this possible.

“This aligns directly with the intent of the Building Safety Act, which places accountability and competence at the centre of project delivery. Competence cannot be achieved in a system that erodes margins, destabilises businesses and discourages investment in the people, processes and assurance needed to deliver safe buildings.

“As a result, we must rethink procurement. Selecting partners on the basis of value, capability, financial viability and long-term performance — rather than lowest cost — will be essential. Early supply chain engagement will enable better design, clearer risk management and improved outcomes.” The proposed changes to retentions, in particular, will not be universally welcomed. For some, they represent a significant shift away from established practices and familiar risk controls, noted Steve.

He said: “We know the current ways don’t work, and the direction of travel is clear and should be welcomed, as it is vital that the industry responds constructively. There will rightly be a strong focus on maintaining and improving quality as these changes are implemented, and the transition period provides an opportunity to embed this — refining standards, strengthening assurance and ensuring the right behaviours are in place.”

Steve concluded by saying: “Industry leadership will be critical, with organisations such as the Construction Leadership Council supporting a positive and collaborative transition. “Ultimately, legislation alone will not deliver this change. The industry must embrace it—working together to implement reform in a practical and positive way. By doing so, we can create stronger, more sustainable businesses and a more resilient supply chain, delivering better, safer outcomes for all.”

Iain, said: “This is a historic and very good day for all in construction who have suffered from Late Payment and Retentions Abuse. It isn’t the end, we have to make sure the Bill makes it through Parliament, but my strong hope and belief it is the beginning of the end and an opportunity for the sector to grasp and use to find a better way to do business and remove the frictions associated with the dash for cash and behaviours that have undermined relationships and constrained opportunity to evolve. I’d like to thank colleagues from within the Department and across the sector who have tirelessly championed better and brought us to this moment.”

To read the governments press release in full visit: www.gov.uk/government/news/largest-crackdown-on-latepayments-in-over-25-years-as-landmarkbill-enters-parliament