Key takeaways
Government launches consultation on late payment practices
Industry feedback will shape future payment regulations.
Retention reform remains a key discussion point
Possible changes could impact cash flow and risk management.
Contractors urged to review payment terms
Proactive steps can mitigate exposure to legislative changes.
The consultation on late payments relates to a package of 8 (+1) proposed legislative measures to address late payment, long payment terms, disputed payment terms and unfair practices around retention in relation to business to business (B2B) payments. DBT research suggests that late payments cost UK businesses and the wider economy £10.7bn per year (DBT (2025) – Estimating the total economic cost of late payments and their impact on the UK economy) (16 businesses a day fail sue to long/delayed and late payment). The consultation runs from 30 July 2025 to 23 October 2025.
This article summarises the 8+1 measures and what it means for construction contracts.
Late payment and withholding of retentions are longstanding issues in the construction industry and have a huge impact on cashflow. SMEs are particularly vulnerable to these problems as they have lower cash reserves. It’s sadly no surprise that construction experienced the highest number of insolvencies of all sectors in 2024 (4,032, 17% of cases).
Over the years, there have been numerous attempts to improve payment practices in the UK including Part 2 of the Construction Act (in force in 1996 and amended in 2011); the Late Payment of Commercial Debts Act 1988 (Late Payment Act); the Prompt Payment Code 2008 (replaced with the Fair Payment Code in 2024) and the Reporting on Payment Practices and Performance Regulations 2017.
There have been previous attempts to reform retentions through a consultation on retentions in 2018 and private member bills in 2017 and 2021-2022 but these have come to nothing.
However, this time feels different. There is more confidence that there is a real appetite for change and reform is clearly on the government’s agenda. There are also real life case studies supporting alternative ways to deal with retentions based on what is happening in New Zealand (which has its own version of our Construction Act).
The 8 proposed measures are summarised below:
Proposed policy | Description |
|---|---|
1. Audit committees and board-level scrutiny of large company payment practices. | The government seeks views on how to increase discussion and scrutiny of payment practices. |
2. Maximum payment terms. | The policy will amend the Late Payment Act removing the exemption that allows businesses to agree to payment terms longer than 60 days if considered not ‘grossly unfair’. This will effectively limit payment terms between UK businesses to 60 days. The policy will subsequently reduce this limit from 60 days to 45 days, after 5 years. This will reduce freedom to contract but protect against unfair contract terms. |
3. A deadline for disputing invoices. | The policy will amend the Late Payment Act, introducing a 30-day invoice verification period. This aims to reduce frivolous disputes but not clear how this will be reconciled with the notices provisions under the Construction Act. |
4. Mandatory statutory interest | The policy will amend the Late Payment Act, making the statutory interest rate payable on late payments mandatory (currently 8%). This is a significant change as it usual to see lower rates of interest in a contract. The 8% rate would act as a deterrent. |
5. Additional reporting on statutory interest | The policy will amend The Reporting on Payment Practices and Performance Regulations 2017 to include additional reporting requirements around how much statutory interest is liable and how much has been paid. This increases transparency giving SMEs another indicative flag of whether the large business is a viable risk and is an incentive for large businesses to change their payment practices. |
6. Financial penalties for persistent late payers | The policy will introduce new legislation, which gives the SBC powers to issue fines to businesses who persistently pay their suppliers late. The policy will use payment behaviour data submitted by businesses under The Reporting on Payment Practices and Performance Regulations (2017) to identify and issue financial penalties to persistently late-paying businesses with fine amounts based on businesses’ unpaid statutory interest liability. The reporting regulations now monitor the number of invoices paid late and the value of invoices being paid within 0-30, 30-60 and 60+ days. A benchmark test for when fines will be applied will need to be established. |
7. Additional powers for the Small Business Commissioner (SBC), including assurance of payment reporting data | The policy will amend The Enterprise Act 2016 to give additional powers to the SBC and improve the SBC’s ability to conduct investigations into poor B2B payment behaviour (beyond its current complaints scheme), allow it to provide legally binding arbitration in disputes and impose fines or award damages after an investigation or arbitration. The policy will also enable the SBC to investigate the accuracy of the payment reporting data that large businesses provide under The Reporting on Payment Practices and Performance Regulations 2017. This policy aims to strengthen the SBC. However construction contracts (within the definition in the Construction Act) – mainly B2C - fall out of scope for the SBC as there is the statutory right to adjudication. |
8. Use of retention clauses in construction contracts | The policy will amend Part 2 of the Construction Act, to either (i) prohibit the use of retentions altogether (the government’s stated preferred option according to the cost analysis) or (ii) to introduce mandatory requirements to protect retention funds deducted and withheld from insolvency and late or non-payment (i.e. through segregated accounts, bonds or insurance products). Either option will have a significant impact and need amendment to the underlying contracts and current payment practices. Developers and funders may resist these changes given that they will bear the risk of defects, but it is acknowledged that retention funds do not commonly mitigate the value of defects or motivate contractors to return to remediate. |
9. Large firms are required to file payment reports twice a year would only need to do so once a year. | The policy will amend The Reporting on Payment Practices and Performance Regulations 2017 to reduce the current bi-annual reporting requirement to once a year. This change would reduce the administrative burden on large firms who have to report, but equally mean the data within those reports is less relevant as it goes out of date. |
What next?
The first step will be to collate the responses to the consultation and for the government to report back. The government has said that this will be within 12 weeks but don’t hold your breath. If changes are to be made there will need to be new legislation including to amend existing legislation including the Construction Act, Late Payments Act and the Enterprise Act. This will take time. The construction industry will also need time to adjust and adapt so it will likely need a transitional period. The Construction Act had a two-year implementation period and the 2010 amendments 12-months, so we would expect any transitional period to give a reasonable period for the market to adjust and prepare.
Rob Driscoll, ECA Director of Legal & Business (CLC Business Models group and former Cabinet Office Adviser on payment) says:
”For the most part, we see the measures as simply correcting the existing law, by closing-off loopholes and ensuring the current requirements to report are; monitored, enforced and that the data is credible. There are some complexities around 30-day disputing invoices or the SBC’s jurisdiction which are yet to be reconciled, but generally we see the improvements as measures which will ensure the commercial stability of supply chains and lead to improved resilience within the industry.
Finally retentions – which have failed for all parties to work as they should for decades - are getting sorted one way or another, so the question is which is the better, more realistic solution for all parties.”
