With reports suggesting around £11 billion is lost in the UK economy each year as a result of poor payment practices, the government’s recent announcement of new late payment fines and the banning of retention payments is welcome news.
Introduced towards the end of March 2026, the government’s new late payment measures will see heightened powers for the Small Business Commissioner (SBC), enabling them to adjudicate payment disputes, issue multi-million-pound fines to big businesses – especially repeat offenders – and, crucially, ban the withholding of retention payments in construction contracts.
This is vital, given around 38 businesses – typically small and medium enterprises (SMEs) – are forced to shut down each day because they have not received payments on time. This impact is particularly being seen across the construction industry, with Turpin Baker Armstrong releasing stats in September 2025 that illustrated 17% of all insolvencies in England and Wales between September 2024 and August 2025 were construction companies.
Much-needed late payment fines for offending contractors
The SBC being given the autonomy to fine those worst offending businesses will go some way to holding larger contractors and businesses to account. This development cannot be understated given businesses across the UK are reportedly owed an estimated £26 billion in later payments at any given time – equating to £17,000 per affected business on average.
Emma Jones, the current SBC, will also now have the ability to settle late payment disputes out of court via a new adjudication function. This is hoped to streamline the dispute and adjudication system in the construction industry, ultimately reducing costs for all involved and ensuring a fair and impartial decision-making process.
Additionally, she will have significant authority to investigate any big businesses or contractors suspected of poor payment practices or inaccurately reporting payment performance. In fact, the government has stated boards or audit committees of those firms will be required to publish explanations for poor payment performance and the actions they are taking to address it.
The new powers will help to increase transparency across the construction industry – which is very much called for.
60-day payment terms
One of the other significant reforms is the capping of payment terms for large firms when paying smaller suppliers. The government’s initiative will mean large firms and contractors will now have just 60 days to pay invoices after they have been issued.
With longer payment terms often the cause of cashflow issues throughout supply chains and substantially disrupting the financial stability of suppliers and subcontractors, the 60-day cap is a huge step forward and indicates a more encouraging future for subcontractors and smaller firms.
Furthermore, all commercial contracts will require included statutory interest to be set at 8% above the Bank of England base rate. For instance, if a small business is owed £10,000 and is paid 60 days later than the agreed payment date, they will therefore be owed £10,293.15, including mandatory interest.
The proposed retention ban comes at a critical time
Perhaps the biggest change coming to the construction industry will be the banning of retentions.
For many years, retention payments have been used by contractors and large firms to hold back a portion of a contracted sum – typically between 1.5% and 5% – to cover costs for rework and to ensure project completion.
Retention isn’t just relevant to the primary contractor. In fact, retention payments trickle down the chain of payment through to every individual working on a project. Subcontractors can therefore finish their portion of a project long before the general contractor completes the entire job – meaning subcontractors may not receive retention even when they finish their allocated task.
However, the March announcement by the Department for Business and Trade (DBT) will call for the banning of these retention payments, aiming to prevent smaller firms from losing money held back against defects. This will especially apply in cases where larger contractors and firms become insolvent or fail to release the funds.
The proposal is currently under consultation, but with smaller businesses forming a major percentage of the number of UK insolvencies happening each year, the government’s move to ban retention payments must go through for the sake of the construction industry.
The government’s changes and recommendations offer the built environment an ideal opportunity to transform transparency and financial stability across contractors, subcontractors and supply chains. However, these significant reforms must just be the start – those working across the industry must also identify the root causes of late or inaccurate payments and prioritise moves to eradicate these.
In fact, many across the built environment still use manual administrative processes, such as spreadsheets and emails, to submit, review and approve applications for payment. While this has been the primary method for many years, inputting data in this way risks information going missing, multiple formats or formulas being used, heightened payment disputes, a lack of visibility and trust across the supply chain and, ultimately, payments being delayed.
The leveraging of technology therefore plays a vital role here. However, before advanced software can even be adopted, perceptions and behaviour must be changed across the industry. Reports suggest the construction sector only has a 47% technology adoption rate – much lower than many other sectors across the UK.
While the latest advancements in software offer contractors, subcontractors and finance professionals a superb opportunity to streamline payment processes and make it faster, easier and more accurate to monitor cashflow, encouraging greater industry-wide adoption is just as important as the technology itself.
As a cloud-based system, Payapps is trusted by contractors and large construction firms across the UK. Automating the application for payment process, it expedites submission, assessment and approval, enhances communication and collaboration between contractors and supply chains, improves data accuracy and optimises payment visibility.
As Peter Vevers, Commercial Director of Utility Services at OCU Group, and user of Payapps software, explains, “One of the things that’s important to our clients is that we’re paying our subcontractors quickly, fairly, and in line with our payment terms. We generally pay all of our subcontractors ahead of our clients paying us, so they can be confident the money is flowing through the supply chain. And if we were audited for fair payments, there would be complete visibility in Payapps, which is particularly important on some of the government-backed schemes.”
Late payments and retentions have long been considerable challenges for the construction industry to overcome. Having seen the financial instability caused by delayed payments up close, we are thrilled to see the government is taking the opportunity to drive real change and help the built environment become a more transparent and conscientious sector.
