Late payment reform: What UK construction developers and contractors need to know

The Government has confirmed major reforms to tackle late payments - and the construction industry will feel the impact more than most. New legislation, intended to be UK wide, will be introduced as soon as Parliamentary time allows and Government proposes to work with devolved administrations under the Late Payment Common Framework. The time frame for implementation of these reforms is unclear, although changes to maximum payment terms will not be earlier than 2027.

This Legal Update will consider the proposed changes, what affect they will have and the likely response and adoption of alternatives by the industry. 

Why late payment is back on the legislative agenda

The Government has committed to introduce the most significant late payment legislation in the UK in over 25 years, following a 2025 consultation that received 867 responses, including 238 from construction stakeholders. In its recent response to the consultation, Late payment consultation: time to pay up – government response (web version) - GOV.UK, the Government identifies late payment as a curb on productivity, with an estimated £11bn annual economic cost and 14,000 business closures each year.

Overview of proposed changes

Key changes impacting construction include: 

• A full ban on retention payments under construction contracts, aiming to end cash flow pressure caused by withheld funds. 
• A hard 60 day maximum payment term between businesses, cutting down long supply chain waits. 
• A firm deadline for disputing invoices, preventing tactical disputes being used to delay payment.  
• Mandatory statutory interest (8%+ base rate) on every late payment - no exceptions. 
• Stronger powers for the Small Business Commissioner to investigate, enforce, and fine persistent late payers. 
• More reporting obligations for large firms, including disclosure of unpaid interest. 

These changes are designed to boost cash flow, protect SMEs, and drive a cultural shift toward fair payment across the industry.

Retentions: Outright ban proposed

Government proposes to prohibit the deduction and withholding of retention payments under construction contracts and will consult further on implementation details. Consultation responses indicated broad support for reform, with a majority viewing a ban as simpler to legislate and enforce than protection schemes. Industry feedback highlighted the need for a 12–24 month transition and development of alternative surety solutions to address build quality. The Government proposes to work with the Construction Leadership Council and financial services sector on quality and surety market development.

Retention provisions will need to be deleted from standard form contracts such as the JCT and NEC, or ‘nil’  specified. Developers and contractors should also plan for retentions to be removed from pricing and risk models, and for them to be replaced by targeted quality assurance, performance bonds, project bank accounts, or agreed alternative surety once consulted upon. 

Maximum 60‑day terms: Hard stop with limited exemptions

Government intends to legislate for a maximum 60‑day payment term between businesses, replacing the current “grossly unfair” test, with narrowly defined exemptions where both parties are large companies, where the purchaser is the smaller party, or where goods or services are imported or exported. Such stricter terms will need to be aligned with the long‑standing construction payment legislation under the Housing Grants, Construction and Regeneration Act 1996.

In practice, expect 60 days to operate as a ceiling, not a default. Standard form construction contracts and bespoke schedules should be reviewed to ensure supply chain terms do not exceed the cap, save where an exemption clearly applies.

Dispute windows: Act early or pay up

A statutory time limit for raising invoice disputes will be introduced to deter tactical disputes; if a dispute is raised outside the window, compensation to the supplier will be payable. For construction, the Government will bring forward a separate, aligned measure to fit with existing payment notice mechanisms under the 1996 Act .

This will result in increased contract administration cost, as internal verification and approval workflows need to be tightened to ensure that defects, variations and valuation issues are identified and evidenced within the dispute window.

Mandatory statutory interest at 8% over base

All commercial contracts will be required to provide for statutory interest at 8% above the Bank of England base rate on late payments, removing the ability to agree alternative remedies or lower rates. Large companies will also have to report both the statutory interest they owe and the amount actually paid, increasing transparency and potential exposure.

For contractors, this strengthens leverage on overdue interim payments and final accounts. For developers and tier‑ones, expect automatic interest accrual, reporting scrutiny, and cost visibility at board level.

The Small Business Commissioner: New powers and penalties

The Small Business Commissioner SBC will gain powers to investigate suspected poor payment practices, compel information, conduct compliance checks on reported payment data, adjudicate payment disputes, and levy penalties. Board or audit committees of large businesses with significant late payment levels will be legally required to publish remedial commentary on GOV.UK.

Construction groups should anticipate governance obligations to evidence root‑cause fixes across procurement, valuation, and payment certification cycles.

Practical next steps for construction businesses

• Map exposure: identify contracts exceeding 60 days, those using retentions, and where interest clauses deviate from statutory terms.
• Update contract templates: amend standard forms and subcontracts to reflect the 60‑day cap, statutory interest, and the upcoming dispute window.
• Improve contract administration: enhance invoice approval, certification and dispute documentation to meet the dispute deadline and withstand SBC scrutiny.
• Replace retentions: design and pilot alternative assurance mechanisms and defect‑prevention controls ahead of the transition.
• Strengthen governance: implement board‑level KPIs on payment times and statutory interest accruals; prepare for public commentary obligations.
• Re‑engineer cash flow: adjust working capital forecasts for faster outflows and potential interest costs; consider supply chain finance that complies with the new framework.