The Retention Ban – what social housing providers need to know

This article focuses specifically on the proposed ban on retentions and what it could mean for providers of affordable housing. A broader overview of the Commercial Payments Bill and its implications for developers and contractors across the wider construction industry can be found here.

This is not the only change developers and providers need to prepare for, there are forthcoming changes to zero-rating and their impact on the “Golden Brick” structure from April 2027.

Turning to retentions, the Commercial Payments Bill has completed its passage through the House of Lords and received its first reading in the House of Commons on 21 October 2026. If its passage continues as anticipated, it could receive Royal Assent in early to mid-2027, with the changes potentially coming into effect later in the year.

The Bill is a significant reform of construction payment practices and includes caps on payment periods, mandatory late payment interest, enhanced enforcement powers, and a ban on retention provisions in construction contracts. While the political focus and primary intention of the Bill is to tackle late payments to smaller contractors – the ban on retentions is going to affect social housing providers, your Development Agreements and how you manage contractual performance risk, defects liability and contractor insolvency risks.

What are construction retentions?

For the uninitiated, it is currently common practice for construction contracts to retain part of the build payments otherwise due to a contractor / developer as security for performance and the rectification of defects. These can be fixed sums (i.e. £500 or £1000 per dwelling) or a percentage of the build payments (in the case of the latter, often half of that is released at Practical Completion with the remainder held until after the end of the defect liability period).

Retentions are standard in Development Agreements and JCT documents and have been a relatively straightforward and cheap way to ensure that the contractor / developer remedies any defects in the works (or there is an accessible sum to carry out those works were that is not done).

Risks and challenges for registered providers

While the Bill’s objectives are understandable, the implications for housing associations should not be underestimated.

Retentions currently provide a straightforward mechanism to encourage performance of defect liability obligations. Once a contractor / developer has achieved practical completion and received full payment, the commercial incentive for them to return promptly to rectify minor defects could be diminished significantly. Not only is this an issue in terms of cost (if social housing providers end up having to remedy the defects themselves); delays in resolving defects often create resident dissatisfaction / complaints and a reputational risk.

As a result, it is very likely that we will see a greater reliance on alternative securities. Retentions are one of the few forms of security available to an employer which is inexpensive, easily administered and immediately accessible – making it the “go to” security to ensure contactors / developers are complying with the defect liability provisions in the Development Agreement. If retentions disappear, RPs and RSLs are likely to seek enhanced protection through:

• performance bonds;
• parent company guarantees;
• latent defects insurance;
• enhanced warranty obligations; and
• (assuming they can be structured in a way that is not caught by the Bill) project bank account structures and / or escrow arrangements.

Each alternative has limitations – performance bonds are costly, parent company guarantees may be unavailable, insurance companies may challenge whether the payment should be released. As such it is very likely that recovery will be slower and the security more expensive than simply withholding retention monies – which is not desirable for contractors / developers or social housing providers. Housing associations will also need to be mindful that the cost of some of these alternatives mean smaller developers struggle to provide them.

This also has an impact on building safety risks – the sector is operating against a backdrop of heightened obligations and housing associations have been requiring contractors to remain engaged after completion to address defects, building information requirements and regulatory obligations in relation to higher-risk residential developments. Retentions have been a helpful mechanism to ensure that continuing contractor engagement and their removal may necessitate more robust contractual compliance provisions.

Potential benefits for social housing providers:

While the thrust of this article is focusing on the risk to housing associations and the need to review how those risks are managed; there are some potential benefits for RPS/RSLs which will come out of the ban on retentions:

1. Improved contractor liquidity and supply chain resilienceMany of you will have experienced the need to deal with contractor distress in recent years and removing retentions may improve their cashflow – a healthier supply chain should help to reduce disruption to a scheme and insolvency risk during delivery.
2. Some lower pricingContractors will have been building the cost of financing retained monies into tender prices. With no retentions, it may enable some contractors to reduce their tender quotes as they no longer need to factor in funding costs and payment delays / risks in the same way.
3. Reduction in payment disputesEliminating retention arrangements will simplify payment administration and likely reduce arguments concerning the completion of defects, certification, releases dates and entitlement to payment.
4. Alignment with partnership-based procurementWe have seen registered providers increasingly favour longer term ongoing contractor relationships rather than “adversarial” contract management. Removing retentions may support more collaborative behaviours throughout the supply chain.

What should social housing providers be doing now?

While the Bill is not settled yet, it does appear that the ban on retentions is going to be part of it. As such social housing providers may want to consider taking the following actions now:

1. Consider what would be an acceptable alternative security package?
2. The proposed legislation is likely to affect existing Agreements retrospectively, making the retentions in them unenforceable following the ban. RPs and RSLs will want to review any ongoing developments you have that are likely to be active after mid-2027 and;

   a) monitor the proposed transitional provisions carefully to see if the ban is immediate or has a lead in period for existing Agreements; and

   b) consider whether variations or side agreements are needed to introduce alternative security.

3.  RPs and RSLs will want to review their pipelines and identify future schemes where retentions were going to be used as the security. Consider whether alternative security should be introduced now to future proof the scheme when the Bill comes into effect. This may include more robust defect liability procedures.
4. Does the disappearance of contractor retentions further increase your need to rely on developer warranties, latent defects insurance, collateral warranties, and covenant strength assessments?
5. Where your organisation has agreed a framework of documents or to follow standardised documents with a specific contractor / developer, you may want to audit these to identify where retention provisions are currently relied upon and agree the replacement security.
6. Housing providers may want to engage early with funders, employers’ agents, and development consultants regarding any alternative security arrangements.

Conclusion

The proposed ban on retentions is a significant shift in the allocation of performance risk. While the reform should improve cashflow for contractors and specialist subcontractors; for housing associations it removes one of the most effective and inexpensive tools for managing post-completion performance.

In practice, the likely outcome is not going to be a reduction in security requirements, but a transition from retention-based security to a combination of performance bonds, guarantees, insurance products and more sophisticated contractual remedies.

Social housing providers should therefore view the proposed reforms as both an opportunity and a risk: an opportunity to support a more resilient supply chain, but also a prompt to reassess how contractual and insolvency risks and post-completion performance are managed.

Clarke Willmott’s social housing sector can support your organisation with navigating new legislation whilst maintaining smooth progress on your transactions. Contact our experts today by submitting an online form or call 0345 209 1000 to discuss how we can support your team.