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Funding Construction Retentions: Options for Small Contractors in the UK

By Jodhbir Mehmi | Mehmi Financial Group

Last reviewed: 25 October 2026 | United Kingdom

Small construction contractors in the UK can potentially obtain working capital finance while waiting for retention payments to be released. Available options may include specialist construction invoice finance, unsecured business loans, revolving credit facilities, equipment refinancing and negotiated alternatives to cash retentions.

However, an important distinction applies: not every retention balance can be financed directly.

Money withheld under a construction contract may not become payable until practical completion, expiry of the defects liability period or another contractual condition is satisfied. Many conventional invoice finance providers therefore exclude amounts that are not yet due.

For example, a groundworks subcontractor may complete a £200,000 project with £10,000 withheld under a 5% retention clause. Although the contractor has incurred the labour, materials and equipment costs necessary to complete the work, it may have to wait months for the full £10,000 to be released.

Meanwhile, wages, suppliers, VAT liabilities and equipment finance repayments continue.

A financing arrangement can potentially help bridge that gap, but the contractor must be able to repay the facility even if the retention is released later than expected.

There is also an important legislative development.

As of 25 October 2026, the UK government's proposed ban on construction retentions has not become law. The Commercial Payments Bill completed its third reading in the House of Lords on 20 October 2026 and has moved to the House of Commons for further consideration.

Existing contractual retention arrangements therefore remain an immediate cash flow concern for smaller contractors.

This guide explains how construction retentions work, when payments become due, which financing options may be available, what lenders assess and how contractors can reduce the amount of money tied up in withheld payments.

What Are Construction Retentions?

Construction retentions are amounts withheld from payments under a construction contract, typically to provide financial protection against incomplete work or defects.

The paying party may be a property developer, project owner, main contractor or another business within the construction supply chain.

For example, a main contractor might deduct a percentage from a subcontractor's interim payments.

The amount withheld accumulates during the project and is released according to the relevant contractual conditions.

Retentions are commonly encountered in:

Groundworks and excavation.
Civil engineering.
Commercial building construction.
Mechanical and electrical contracting.
Plumbing and HVAC installation.
Roofing and cladding.
Concrete and structural works.
Commercial fit-outs.
Fire protection installation.
Industrial construction and maintenance.
Infrastructure and utilities projects.

The specific percentage, release conditions and payment dates depend on the contract.

What is the usual retention percentage in UK construction?

Retention percentages vary.

During the Commercial Payments Bill debate in the House of Lords on 9 June 2026, construction retentions were described as commonly around 3% on larger projects and up to 5% on smaller contracts.

These are industry observations, not universal legal requirements.

A particular contract may use a lower percentage, a different arrangement or no retention at all.

The amount must be checked against the executed contract rather than assumed.

Source: UK Parliament — Commercial Payments Bill Debate, June 2026.

Why Are Retentions a Problem for Small Construction Contractors?

Retentions can place substantial pressure on contractors with limited working capital reserves.

The company may have completed the work and paid its direct costs but still be waiting for part of the agreed contract price.

This is particularly important for smaller subcontractors operating on relatively narrow margins.

Example: A £200,000 construction contract

Suppose a contractor completes a commercial project worth £200,000 before VAT.

The contract provides for a 5% retention.

The total amount withheld would be:

£200,000 × 5% = £10,000.

Assume the contractor originally expected a 10% gross profit margin.

The forecast gross profit would therefore be £20,000 before allocated overheads, finance costs and tax.

The £10,000 retention represents half of that forecast gross profit.

This does not mean the contractor has lost half its profit. Retention is a timing and collectability issue, and the accounting treatment is separate.

However, it demonstrates the financial pressure created when a substantial portion of the contract value cannot be collected immediately.

If the business already paid its employees, suppliers and subcontractors, it may need additional liquidity to start the next project.

What if several customers withhold retentions?

The problem can become more significant when a contractor manages several projects.

Suppose a small company has eight projects, each with £10,000 currently withheld.

Its total retention balance would be £80,000.

That £80,000 is not necessarily available cash.

Some amounts may become due shortly, some may remain within the defects period and others may be subject to unresolved contractual conditions.

The company therefore needs to distinguish between the total value withheld and the amount realistically collectible in the near term.

A retention balance recorded in the accounts should not automatically be treated as available working capital.

When Are Construction Retentions Released in the UK?

Release dates depend on the specific contract.

A common structure provides for retention to be released in two stages.

First retention release: Practical completion

Under certain contracts, part of the retention becomes releasable when practical completion is achieved and the relevant contractual certification or notice requirements are satisfied.

Practical completion generally indicates that the works have reached the required state for practical use, subject to the contract and any outstanding minor matters.

For example, a contract holding £10,000 might provide for £5,000 to be released following practical completion.

However, the subcontractor must check the exact mechanism.

The release of the first portion is not automatically triggered under every agreement merely because the subcontractor believes its work is complete.

Second retention release: End of the defects period

The remaining amount may be held until the contractual defects period ends and applicable release requirements are satisfied.

A defects period might last six or twelve months, or another period specified in the contract.

Some projects have longer arrangements.

If the contractor is required to rectify identified defects, the release process may involve further inspections or certification.

Can retention remain unpaid after the defects period ends?

Yes, payment disputes and delays can arise.

However, the expiry of a defects period may be an important contractual milestone.

The contractor should determine whether the relevant conditions for release have been satisfied and whether a payment has become due.

Where payment is overdue, the contractor may have contractual or statutory remedies.

The precise position depends on the agreement, applicable notices and jurisdiction.

Can You Finance Construction Retention Money Directly?

Sometimes, but direct financing against an unreleased retention is generally more difficult than financing an eligible invoice that is already due for payment.

This is because the lender must assess whether the withheld amount is legally payable, when it will become due and whether the customer may make deductions.

A retention held until the end of a defects period can present additional uncertainty.

What if the retention is not yet due?

A conventional factor may exclude the amount because the customer does not yet have an obligation to pay it.

A specialist lender might consider the retention as part of the wider company's financial position.

However, the facility may need to be supported by other receivables, assets or operating cash flow.

What if the retention is due but unpaid?

The financing options may be different.

Where all release conditions have been satisfied and the amount is legally due, a specialist provider may be willing to consider the receivable.

However, approval still depends on customer creditworthiness, contract terms, notices and collectability.

If the paying party disputes the debt, the retention may be unsuitable for conventional invoice financing.

What if the retention is disputed?

A lender may be unwilling to advance against a sum where the customer disputes whether payment is owed.

A commercial loan supported by the borrower's wider financial position may still be considered, but borrowing does not resolve the underlying dispute.

In some circumstances, pursuing the payment through the contract's dispute resolution procedure may be more appropriate.

The first step is to establish whether the retention is not yet due, due but unpaid, or genuinely disputed.

Those situations require different responses.

Funding Options for Small Contractors Waiting for Retentions

A contractor does not necessarily need a product specifically marketed as a retention loan.

Several existing types of commercial finance may help address the resulting cash shortage.

1. Specialist Construction Invoice Finance

Construction invoice finance allows eligible contractors to access funding against qualifying unpaid construction invoices or other accepted payment rights.

The lender or finance provider assesses the relevant customer, amount due, contractual terms and risk of non-payment.

Traditional invoice finance products may be restrictive where construction payments involve retentions, valuations, set-offs or disputes.

Specialist construction providers can sometimes offer more flexible arrangements.

How does it work?

A contractor submits eligible construction invoices or payment applications.

The provider agrees on the amount that qualifies for funding.

It then advances a percentage of that amount under the facility.

When the customer pays, the provider accounts for the outstanding advance, financing charges and any remaining amount due to the contractor.

Can a lender finance the retention portion?

It depends on the provider and the status of the retention.

Some specialist funders can assess construction contracts containing retention clauses, but that does not mean they advance against every retained amount.

The contractor should ask the provider to distinguish between:

Certified amounts currently payable.
Submitted applications awaiting certification.
Retentions not yet due for release.
Retentions due and undisputed.
Disputed or otherwise ineligible amounts.

Example: Funding a construction payment with retention deducted

Suppose a contractor has £80,000 of eligible work certified for payment before retention, VAT and any other deductions.

The contract provides for a 5% retention.

The withheld amount would be £4,000.

That leaves £76,000 before any other relevant adjustments.

Assume a hypothetical specialist finance provider agrees to advance 80% of that £76,000.

The gross initial advance would be:

£76,000 × 80% = £60,800.

The contractor would receive £60,800 before applicable financing charges and other deductions.

The remaining £15,200 of the currently payable amount would be dealt with under the finance agreement when the customer pays.

The £4,000 retention would remain separate and may not become eligible until its contractual release conditions are satisfied.

The important distinction is that the provider is not automatically advancing 80% of the original £80,000 valuation.

This example is illustrative and assumes there are no other contractual deductions or eligibility restrictions.

What costs should you compare?

Invoice finance may include a service fee, discount charge, minimum monthly fee, setup cost or other contractual charges.

The contractor should also ask whether the provider has recourse if the customer does not pay and whether construction disputes affect the funded amount.

Source: British Business Bank — Invoice Finance.

2. Construction Finance Against Applications for Payment

Some specialist UK construction finance providers consider applications for payment rather than restricting funding entirely to conventional issued invoices.

This can be useful where a contractor completes work and submits an application before the payment is certified.

For example, Bibby Financial Services advertises construction finance for both certified and uncertified applications for payment.

Its published materials also explain that its specialist product takes account of staged billing, retentions and final accounts.

However, the provider's ability to finance an application is not a guarantee that all claimed or retained amounts qualify.

The customer, contract and application must still satisfy the provider's requirements.

Source: Bibby Financial Services — Construction Funding.

When might this be appropriate?

Consider a groundworks contractor that regularly submits monthly applications for payment.

The company needs working capital for payroll and materials before the main contractor settles those applications.

Specialist application finance may align the funding with the construction payment cycle.

However, the provider may require contractual documentation, work records, application details and evidence supporting the amounts claimed.

Important limitation

A submitted application is not automatically an undisputed debt.

The payer may assess a different amount, and contractual notices may affect the payment obligation.

The contractor should avoid borrowing on the assumption that every submitted claim will be paid in full.

3. Unsecured Business Loans for Contractors

An unsecured business loan may help a contractor finance a temporary cash shortage while awaiting retention releases.

Unlike direct retention financing, an unsecured loan is generally assessed primarily against the business's financial position rather than relying solely on the withheld retention as collateral.

A lender may examine:

Trading history.
Annual turnover.
Operating profitability.
Recent business bank statements.
Existing borrowing.
Credit history.
Available repayment cash flow.
Intended use of the funds.

Example: A contractor awaiting £25,000 in retentions

Suppose a roofing company has £25,000 withheld across several completed projects.

It needs £15,000 to fund wages and materials for a new contract.

A suitable commercial lender may consider a £15,000 working capital loan.

However, the borrower must demonstrate that repayments remain affordable even if the retention money arrives later than anticipated.

The existence of £25,000 in retentions does not guarantee approval.

Do unsecured loans require personal guarantees?

Some do.

A lender may request a guarantee from one or more directors.

An unsecured business loan does not automatically remove personal financial liability under a separately signed guarantee.

4. Revolving Business Credit Facilities

A revolving credit facility may suit contractors with recurring retention-related cash flow gaps.

The business receives access to an approved borrowing limit, subject to the agreement.

It can draw money when needed and repay borrowing when customer receipts arrive.

Depending on the terms, repaid amounts may become available to draw again.

Why this can suit construction businesses

Retentions can accumulate across multiple projects.

A contractor might receive one release payment while another project creates a new retained balance.

A revolving facility can potentially accommodate recurring cash needs better than repeatedly arranging separate fixed-term loans.

However, credit limits, renewal requirements, fees and lender review rights must be considered.

When can a revolving facility become risky?

If the company continually uses the full credit limit without reducing the balance, the issue may no longer be a temporary timing gap.

It may indicate that the business requires more permanent working capital or has underlying profitability problems.

The contractor should monitor whether the facility balance falls as customer payments arrive.

5. Business Overdrafts

An authorised business overdraft can provide temporary funding within an agreed bank account borrowing limit.

It may help a contractor manage short periods between paying suppliers and collecting certified payments.

An existing approved overdraft may also be more readily accessible than arranging a completely new loan.

However, availability and pricing depend on the bank.

The agreement may include interest, fees, security requirements and review provisions.

A contractor should not assume an overdraft is a permanent substitute for recovering overdue retention payments.

6. Equipment Refinancing and Asset-Backed Finance

Some construction businesses own machinery, vehicles or equipment with remaining market value.

A specialist lender may consider eligible owned assets as collateral for commercial financing.

Potential assets include:

Excavators.
Loaders.
Dumpers.
Telehandlers.
Commercial trucks.
Trailers.
Generators.
Compressors.
Other qualifying construction machinery.

For example, a groundworks company may own several excavators outright while waiting for retention releases.

A provider could potentially assess those assets for refinancing.

The available amount depends on ownership, age, condition, valuation, existing security and repayment capacity.

What are the risks?

Asset-backed financing creates obligations beyond the existing retention arrangement.

If the contractor cannot repay, the lender may have enforcement rights over the pledged equipment.

Losing machinery could affect the company's ability to complete future contracts.

Financing a delayed retention should not place essential equipment at disproportionate risk without careful consideration.

7. Supplier Credit and Negotiated Payment Terms

Not every construction cash shortage requires a new lender.

Some contractors may be able to reduce the amount of external finance required by negotiating supplier payment terms.

For example, a materials supplier might agree to payment after an expected certified customer receipt.

A contractor may also negotiate staged payments with suppliers or seek extended terms through an established trade account.

These arrangements depend on commercial relationships and supplier approval.

They should be documented clearly.

The contractor should compare any increased material prices, credit charges or late-payment consequences against the cost of obtaining external finance.

Supplier credit can reduce immediate cash requirements, but it does not eliminate the obligation to pay suppliers.

8. Negotiate a Lower Retention or an Alternative Security Arrangement

One of the most effective long-term approaches may be to reduce the amount withheld before signing the next contract.

Some paying parties may be willing to consider lower retention percentages, earlier partial releases or alternative forms of performance security.

These options depend on the negotiation, contract and project.

Retention bonds

A retention bond is a form of surety intended to provide the paying party with agreed protection against specified contractor obligations.

Where accepted, it may allow the contractor to receive cash that would otherwise have been withheld.

However, the bond provider may require underwriting, a premium, indemnities or other support.

A retention bond does not automatically give the contractor immediate access to existing retentions.

The paying party must agree to the relevant contractual arrangement.

Performance bonds

A performance bond provides a different form of security for specified obligations under a construction contract.

It is not the same as a conventional working capital loan.

A performance bond does not automatically replace a retention unless the customer accepts the arrangement.

Project bank accounts and escrow arrangements

Project bank accounts and certain properly structured escrow arrangements can potentially improve payment administration or protect money for agreed beneficiaries.

However, they do not necessarily provide new funds to a contractor.

A protected retention may still remain unavailable until contractual release conditions are satisfied.

The legal structure, access rights and insolvency protection must be checked.

RICS identifies retention bonds, performance bonds, project bank accounts and other mechanisms among alternatives to conventional cash retentions.

Source: RICS — What Are the Alternatives to Retention?.

How Much Does Construction Retention Financing Cost?

There is no standard UK interest rate specifically for financing construction retentions.

Pricing depends on the financing structure, amount, term, borrower, security and perceived credit risk.

A contractor should compare the total cost of every proposed arrangement.

Example: A £20,000 working capital facility

Suppose a small contractor needs £20,000 while waiting for retention payments expected in approximately six months.

For illustration, assume it considers a hypothetical facility with:

Principal borrowed: £20,000.
Annual nominal interest rate: 18%.
Interest-only payments during the term.
Six-month repayment period.
Principal repaid at maturity.
Arrangement fee: 2% of the principal.

Under a simple monthly interest calculation, six months of interest would total £1,800.

The arrangement fee would be £400.

The total stated financing cost would therefore be £2,200.

The contractor would still need to repay the £20,000 principal at the end of the six-month term.

This calculation assumes the full principal remains outstanding, interest is not compounded and no other fees apply.

It is not an actual lender quote, an average UK rate or an annual percentage rate calculation.

What happens if the retention is delayed?

This is the key risk.

Suppose the contractor expects £25,000 of retentions to be released before the six-month loan matures.

If the paying party delays certification or disputes the retention, the contractor may still owe the full £20,000 principal on the scheduled maturity date.

The lender is not automatically required to extend the loan simply because the customer has not paid.

Before borrowing, the contractor should identify another credible repayment source or sufficient available liquidity if the retention arrives late.

What charges should you check?

Potential costs include arrangement fees, interest, discount charges, administration fees, broker fees, legal expenses, asset valuations, early repayment charges and default interest.

For invoice finance, additional considerations include customer concentration limits, reserves, recourse and the treatment of disputed amounts.

For asset finance, confirm the security and consequences of default.

The relevant comparison is the complete financing cost and cash flow impact, not simply the advertised interest rate.

What Do Lenders Assess When Financing Contractors With Retentions?

A specialist construction lender may consider both the contractor's financial position and the quality of its outstanding payment rights.

1. Trading history

An established contractor may have several years of completed contracts and financial information.

Newer companies may require additional supporting evidence.

2. Revenue and cash flow

Lenders may examine annual turnover and business bank statements.

However, large contract revenue does not automatically mean the company can afford another loan.

3. Existing borrowing

Business loans, overdrafts, equipment finance and other obligations affect repayment capacity.

4. Customer creditworthiness

A retention owed by a financially stable paying party may present different risks from one owed by a business experiencing serious financial difficulties.

5. Contractual release conditions

The lender may need to determine when the retention is due and what must happen before payment is required.

6. Practical completion and defects records

Documents confirming completion and rectification of relevant defects may help establish payment entitlement.

7. Payment disputes

A disputed retention may be less suitable for receivables-based finance.

8. Contract concentration

A company waiting for most of its retentions from one main contractor may face greater collection risk.

9. Profitability

The lender may assess whether completed and current projects generate sufficient profit.

10. Repayment capacity

Ultimately, the provider must be satisfied that the company can meet the proposed financing obligations.

A large retention balance may explain a working capital shortage, but it is not a substitute for demonstrating affordability.

What Documents Do You Need to Apply for Retention-Related Finance?

Requirements vary by provider and product.

A small construction contractor should prepare a clear record of its retentions and supporting financial information.

Company documents

These may include the registered company name, Companies House number, business address, trading history and relevant ownership information.

Financial documents

A lender may request:

Recent business bank statements.
Latest annual accounts.
Current management accounts.
Aged debtors and creditors.
Existing borrowing schedule.
Cash flow forecasts.

Construction contracts

Provide signed contracts or subcontracts showing the retention percentage, payment terms, release conditions and relevant amendments.

Retention records

Maintain a separate retention register identifying:

Project name.
Paying party.
Contract value.
Retention percentage.
Total retention withheld.
Amount already released.
Outstanding balance.
Practical completion date.
Defects period end date.
Expected release date.
Actual contractual payment due date.
Current dispute or certification status.

Supporting completion information

Depending on the contract, documents might include completion certificates, payment notices, defects records, correspondence confirming remedial works and retention release applications.

Project cash flow information

The lender may also want to understand upcoming payroll, materials, subcontractor payments and expected customer receipts.

Why a retention register matters

A business might report £70,000 in outstanding retentions.

However, a lender may find that only £20,000 is currently due, £35,000 is not yet due and £15,000 remains subject to unresolved disputes.

Separating those balances gives a clearer picture of potential near-term collections.

It also helps management identify which amounts should be pursued for release rather than financed.

How to Recover Construction Retentions That Are Already Due

Before taking out another loan, a contractor should establish whether some retention payments can be recovered directly.

Financing has a cost.

Collecting a legally due and undisputed amount may reduce the need to borrow.

Step 1: Review the contract

Identify the retention percentage, release milestones and payment procedures.

Check whether practical completion, the defects period or other conditions have been satisfied.

Step 2: Identify who owes the money

Confirm the actual contractual payer.

A subcontractor's customer may be the main contractor rather than the project owner.

This distinction matters when pursuing payment.

Step 3: Confirm completion and defects obligations

Obtain relevant certificates and keep records showing when required work was completed.

Where the payer alleges defects, request a clear description of the issues.

Step 4: Establish the actual payment due date

The date the defects period expires may not always be identical to the contractual final date for payment.

Check whether a further payment application, certificate or notice is required.

Step 5: Submit the appropriate payment request

Use the mechanism specified in the contract.

Include the relevant retention amount, release milestone and supporting documents.

Step 6: Request clarification of deductions

If the payer proposes withholding money, determine the legal and contractual basis.

The form and timing of payment and pay-less notices can be significant.

Step 7: Seek specialist advice if payment remains outstanding

Where the sum is overdue or disputed, a construction solicitor or experienced contract specialist can advise on the appropriate recovery route.

A contractor should not assume that cancelling work or suspending performance is lawful without following the relevant statutory and contractual procedures.

What Does UK Construction Law Say About Retention Payments?

Construction payment rights in England, Wales and Scotland are principally governed by Part II of the Housing Grants, Construction and Regeneration Act 1996, as amended, where the contract falls within its scope.

The legislation establishes important rules concerning construction payments, notices and dispute resolution.

Northern Ireland has separate but related legislation.

Payment notices and pay-less notices

Section 111 of the Construction Act requires payment of the relevant notified sum by the final date for payment, subject to the statutory provisions.

A payer seeking to pay less than the notified amount must satisfy the applicable pay-less notice requirements.

However, whether a retention is due, what sum has been notified and whether a notice is effective can require detailed contractual analysis.

The fact that a contractor has completed the work does not resolve every payment dispute automatically.

Source: Housing Grants, Construction and Regeneration Act 1996 — Section 111.

Are pay-when-paid clauses legal?

Section 113 of the Construction Act generally makes provisions conditional on the payer first receiving payment from a third party ineffective, subject to a specified insolvency exception.

However, payment provisions connected to performance under another contract and retention release arrangements can raise additional statutory issues.

For example, a subcontractor should not automatically accept the statement that its retention cannot be paid because the main contractor has not received its own retention from the project owner.

The actual clause and statutory rules should be reviewed.

Source: Housing Grants, Construction and Regeneration Act 1996 — Section 113.

Can you use adjudication to recover retention money?

Potentially.

Section 108 of the Construction Act provides qualifying parties with a statutory right to refer disputes arising under construction contracts to adjudication.

The statutory framework generally provides for an adjudicator's decision within 28 days after referral, subject to permitted extensions.

However, an adjudication is not necessarily completed within 28 days of the first complaint, and enforcing an award can require further steps.

Fees, legal costs and the financial position of the other party should be considered.

Source: Housing Grants, Construction and Regeneration Act 1996 — Section 108.

What if the project is in Northern Ireland?

Northern Ireland has separate construction payment legislation, including the Construction Contracts (Northern Ireland) Order 1997, as amended.

It also provides statutory adjudication and payment mechanisms for qualifying contracts.

However, contractors should not assume that every provision or proposed reform applying in Great Britain has identical effect in Northern Ireland.

Source: Construction Contracts (Northern Ireland) Order 1997.

Are Construction Retentions Being Banned in the UK?

The UK government is pursuing legislation to prohibit certain construction retention clauses, but the ban is not yet in force as of 25 October 2026.

The Commercial Payments Bill proposes changes intended to improve payment practices between businesses.

The proposals include:

Restricting or prohibiting qualifying construction retention clauses.
Strengthening protections against late commercial payments.
Expanding the powers of the Small Business Commissioner.
Improving payment reporting and enforcement.

The Bill completed its third reading in the House of Lords on 20 October 2026.

It then proceeded to the House of Commons for further scrutiny.

When will the retention ban start?

No operative commencement date has been established as of this article's review date.

The government has described a two-year transitional period associated with implementation.

However, the relevant commencement regulations and final timetable remain future matters.

The transition period should not be treated as having already started.

The Bill may also be amended before becoming law.

Will the ban release retentions already withheld?

Contractors should not assume that the proposed legislation will immediately release all existing retention balances.

Its ultimate effect will depend on the final legislative text, commencement provisions, transitional arrangements and the circumstances of individual contracts.

For now, existing contractual payment rights and applicable construction law remain essential.

Does the proposal apply throughout the UK?

The retention provisions proposed within the Bill principally concern the construction contract framework applying in England, Wales and Scotland.

Northern Ireland has separate construction legislation and should be assessed separately.

Source: UK Parliament — Commercial Payments Bill, October 2026.

Can You Check a Main Contractor's Retention and Payment Practices?

Yes. Publicly available payment reporting information may provide useful insight before accepting a new subcontract.

Certain large UK companies and LLPs are required to publish information about their payment practices and performance.

For financial years beginning on or after 1 April 2025, additional reporting requirements apply to qualifying construction retention policies.

These include information about whether retention clauses are used and how withheld sums are released.

Some reports also describe the standard retention percentage and other relevant policies.

Why is this useful for small contractors?

Before accepting a substantial subcontract, a smaller contractor can investigate whether the proposed customer reports using retention clauses and what its payment practices indicate.

This does not guarantee how the customer will perform under a new contract.

However, it provides additional information for commercial due diligence.

Businesses can review the official GOV.UK payment practices reporting guidance.

The government reporting service can also be used to search published company reports.

Does the 30-Day Public-Sector Payment Rule Apply to Retentions?

The Procurement Act 2023 includes 30-day payment provisions for qualifying public contracts and public subcontracts.

These measures are intended to improve payment practices across relevant public procurement supply chains.

However, a requirement to pay amounts that are due within the applicable timeframe does not automatically make a retention payable before its contractual release conditions have been satisfied.

A subcontractor should distinguish between:

An ordinary certified amount currently due.
An amount withheld as retention under the contract.
A retention that has become due for release.
A disputed amount.

Public procurement rules and construction payment laws may both be relevant.

Source: GOV.UK — Payment Spot Checks in Public Subcontracts.

Does the Small Business Commissioner Help Recover Construction Retentions?

As of October 2026, the Small Business Commissioner's published guidance states that disputes concerning work covered by the Construction Act are outside its ordinary complaint-handling remit.

This is because qualifying construction contracts have a separate statutory dispute resolution framework.

The Commissioner directs affected construction businesses towards the relevant contractual and adjudication procedures.

The Commercial Payments Bill proposes expanding the Commissioner's powers, but those proposals should not be treated as existing law.

Source: Small Business Commissioner — FAQs.

For a disputed construction retention, obtaining advice from a construction contract specialist may therefore be more appropriate than relying on the ordinary Small Business Commissioner complaints process.

What Happens if the Main Contractor Becomes Insolvent?

This is a particularly important risk.

A retention may remain unpaid for months after the subcontractor has completed its work.

If the main contractor or other contractual payer becomes insolvent before releasing the amount, recovery can become difficult.

The treatment depends on the agreement, how the money was held and the relevant insolvency circumstances.

Are retention payments held in a protected account?

Not automatically.

Some construction contracts provide for protected or separately administered retention arrangements.

Others do not.

A contractual statement that money has been retained does not, by itself, establish that the funds are held in a legally protected trust for the subcontractor.

The contractor should establish whether any security, trust, escrow or other protection exists.

Can a business loan protect against the customer's insolvency?

No.

Borrowing may provide cash before the retention becomes payable, but it does not guarantee that the original customer will eventually pay.

If the payer becomes insolvent, the contractor may still owe the commercial lender.

This is one reason why repayment affordability should not depend exclusively on one uncertain retention release.

Does invoice finance include bad debt protection?

Some providers offer credit protection as an additional service.

However, protection is subject to its terms, exclusions and approved limits.

A contractor should not assume that standard invoice finance automatically protects against customer insolvency or contractual payment disputes.

How Does CIS Affect Construction Retention Payments?

The Construction Industry Scheme (CIS) can affect the net amount a subcontractor receives when retention money is released.

HMRC states that retention payments are generally treated like other payments under CIS.

The appropriate deduction depends on the subcontractor's tax status at the date of payment, rather than necessarily the status when the work was originally carried out.

Example: A £10,000 retention release

Suppose a subcontractor becomes entitled to a £10,000 retention payment.

Assume, purely for illustration, that the entire amount is subject to a standard 20% CIS deduction and no qualifying materials adjustment applies.

The CIS deduction would be £2,000.

The amount paid to the subcontractor would be £8,000 before considering any separate VAT treatment or other lawful adjustments.

However, some retention payments include different components, such as amounts attributable to qualifying materials.

The actual CIS calculation must reflect the correct classification and the subcontractor's status.

A business with valid gross payment status may receive the relevant payment without CIS deductions.

The amount retained under the contract should not automatically be assumed to equal the amount that will arrive in the bank account.

Source: HMRC — CIS Retention Payments.

Do You Pay VAT on Construction Retentions Before Receiving the Money?

VAT treatment depends on the type of construction contract and applicable tax-point rules.

For certain retention arrangements, special provisions delay the VAT tax point until the retention payment is received or a relevant VAT invoice is issued.

However, construction contracts providing for periodic payments can be subject to different rules.

Some construction arrangements are also affected by the domestic reverse charge.

A contractor should therefore not assume that VAT on every withheld retention is automatically deferred.

HMRC's construction VAT guidance distinguishes between single-payment contracts, periodic-payment contracts and other specific circumstances.

Source: HMRC — Buildings and Construction, VAT Notice 708.

Accurate VAT and CIS calculations are important when forecasting how much cash will actually become available after a retention is released.

How to Reduce Retention-Related Cash Flow Problems

Small contractors can reduce future financing requirements by improving contract negotiations, payment administration and cash forecasting.

Negotiate retention terms before signing

Review the percentage withheld and the release milestones.

Where commercially possible, seek lower retentions or alternative security arrangements.

Request earlier partial release

Some paying parties may agree to release part of the retention when defined contractual milestones are achieved.

Any variation should be documented.

Maintain a retention register

Track every withholding and anticipated release date.

Do not allow retention balances to remain buried within general accounts receivable.

Apply promptly when release conditions are satisfied

If the contract requires an application or other document, submit it within the relevant timeframe.

Document completion and defects work

Keep certificates, photographs, correspondence and records of completed remedial work.

Forecast the collection date conservatively

Do not base payroll or supplier commitments entirely on optimistic release dates.

Review customer creditworthiness

A financially weak payer may create a greater risk of non-payment.

Monitor existing project margins

A contractor with very narrow profit margins may be especially vulnerable to withheld payments.

Consider financing before a cash emergency

Where a business regularly needs working capital, investigating an appropriate facility before the next shortage may provide more flexibility.

For related practical guidance, see Mehmi Financial Group's Working Capital to Start a New Construction Project and Construction Material Financing articles. These broader guides use examples from other markets; UK contractual and regulatory rules should be assessed separately.

How to Apply for Construction Retention-Related Finance

Step 1: Calculate the actual cash shortfall

Determine how much working capital the business needs.

Do not simply request financing equal to the total retention balance.

Step 2: Identify which retentions are due

Separate due and undisputed balances from amounts that remain conditional or disputed.

Step 3: Review the cash flow forecast

Prepare a realistic forecast of receipts, payroll, suppliers, tax liabilities and existing loan repayments.

Step 4: Select the appropriate financing structure

Consider whether a working capital loan, revolving facility, specialist construction invoice finance or asset-backed product matches the requirement.

Step 5: Prepare the supporting documents

Gather bank statements, financial accounts, contracts, retention schedules and relevant payment certificates.

Step 6: Explain the repayment source

Identify how the business will repay the facility if expected retention payments arrive late.

Step 7: Complete lender underwriting

The provider may review company credit, financial performance, customer quality and the proposed security.

Step 8: Compare the written terms

Confirm:

The amount actually available.
Interest and financing fees.
Total repayments.
Repayment dates.
Security requirements.
Personal guarantees.
Early repayment provisions.
Default conditions.
Customer notification requirements, where applicable.

Step 9: Complete final verification

Approval, documentation and funding timing depend on the provider.

Step 10: Continue pursuing the retention payments

Financing does not replace proper payment administration.

The business should maintain its retention records and pursue contractual releases when they become due.

When Should a Small Contractor Avoid Borrowing Against Expected Retentions?

Borrowing can be unsuitable if the underlying business is already experiencing serious financial difficulties.

Potential warning signs include:

Persistent operating losses.
Retentions subject to substantial disputes.
Customers facing insolvency.
Repeated overdue supplier payments.
Existing business loan arrears.
Projects completed below expected margins.
No realistic source of repayment other than uncertain retention releases.
New borrowing required mainly to service existing debt.

Example: Financing a disputed retention

Suppose a contractor expects to receive £30,000 in retentions.

However, the payer alleges significant outstanding defects and disputes whether the amount is payable.

The contractor seeks a £25,000 short-term loan, intending to settle it entirely from that retention.

If the dispute continues beyond the loan maturity date, the contractor may be unable to repay the lender.

A financing facility does not establish the validity of the retention claim.

In such circumstances, resolving the contractual dispute or obtaining appropriate professional advice may be more important than arranging additional debt.

The expected release of retention money is a potential source of cash, not a guaranteed repayment event.

Frequently Asked Questions About Construction Retention Finance UK

Can you get finance against construction retentions in the UK?

Potentially. Some specialist providers may assess retention-related receivables, particularly where the amount is due and undisputed. Retentions that are not yet payable can be more difficult to finance directly.

What is construction retention finance?

Construction retention finance generally refers to commercial funding used to address cash flow shortages caused by money withheld under construction contracts. It is not one standard loan product with universal eligibility requirements.

Can small contractors finance unpaid retentions?

Potentially. Available options may include specialist construction invoice finance, working capital loans, revolving credit or other suitable facilities. Eligibility depends on the contractor and payment circumstances.

Can you factor construction retention money?

Sometimes, but many conventional factoring providers exclude amounts that are not yet due for payment. Specialist lenders may consider different arrangements, subject to underwriting.

Can I finance a retention before practical completion?

Direct financing can be difficult where contractual release conditions have not been satisfied. A working capital facility supported by the contractor's broader financial position may be considered instead.

Can I get funding after practical completion?

Potentially. The lender will need to determine whether the relevant amount is due, whether it remains subject to other conditions and whether the payer is likely to settle it.

Can you finance a construction retention during the defects period?

It may be difficult to finance the withheld amount directly while it remains conditional. Other working capital products may be available to eligible contractors.

What is the usual construction retention percentage?

Contracts commonly use percentages around 3%–5%, according to observations made during the 2026 parliamentary debate. However, the actual rate depends on the agreement, and there is no universal retention percentage.

When is the first half of retention released?

Some contracts provide for release at practical completion, subject to the applicable certification and payment procedures. The contractor must review its own agreement.

When is the second half released?

Some contracts release the remaining amount after the defects period and satisfaction of relevant conditions. The actual date depends on the contract.

Are construction retentions illegal in 2026?

No. As of 25 October 2026, the proposed legislative ban has not come into force. Existing retention arrangements must be considered under current contractual and statutory rules.

Will the new Commercial Payments Bill release existing retentions?

The final effect will depend on the legislation as enacted, commencement regulations and transitional provisions. Contractors should not assume immediate release of all existing balances.

Can I get an unsecured loan while waiting for retention payments?

Potentially. A lender may assess the contractor's wider cash flow, credit history and repayment capacity rather than relying solely on the retention balance.

Can I use an overdraft to cover construction retentions?

An authorised business overdraft may help cover temporary operating expenses while awaiting payment, subject to the bank's terms.

Can a startup contractor obtain retention-related finance?

Some providers may consider newer businesses, but limited trading history and uncertain receivables can restrict eligibility. Additional documentation, security or guarantees may be required.

Can contractors with bad credit get retention finance?

Potentially, depending on the provider and circumstances. Serious arrears, defaults or inadequate repayment capacity can limit financing options.

Can I borrow against retention money owed by one main contractor?

Possibly. However, dependence on one payer can create customer concentration risk. A specialist provider may impose limits or require other support.

Can I finance a disputed construction retention?

Disputed receivables are often difficult to finance directly. A lender may require resolution of the dispute or assess a different form of commercial borrowing.

Is a retention bond the same as a retention loan?

No. A retention bond is a form of surety that may replace cash withholding where accepted. A loan provides financing that the borrower must repay.

Can a retention bond help release existing retentions?

Potentially, but only if the paying party agrees and the contractual arrangements permit it. A bond does not automatically release money already withheld.

Can an unpaid retention be recovered through adjudication?

Potentially. Qualifying construction contracts provide statutory adjudication rights. The appropriate process depends on the agreement, payment status and applicable legislation.

Does the main contractor need to pay my retention before its client pays it?

Not necessarily dependent on the client's payment. Pay-when-paid clauses are generally ineffective in qualifying construction contracts, subject to specified insolvency exceptions. Contract-specific legal advice may be required.

Does the Construction Industry Scheme apply to retention payments?

Yes, where the relevant payment falls within CIS. HMRC generally treats retention payments like other contract payments, with deductions determined according to the applicable status and rules at payment.

Do you pay VAT on retention money before receiving it?

It depends on the contract and VAT tax-point rules. Certain retention arrangements have special rules, while periodic-payment construction contracts can be treated differently.

Does the Growth Guarantee Scheme cover contractors with retention cash flow problems?

Potentially. Eligible contractors may apply for supported commercial finance through participating lenders. The scheme does not automatically finance retention balances or guarantee loan approval.

How much does construction retention financing cost?

Costs vary according to the product, lender, term, security and company risk. Compare total financing charges, repayment obligations and the consequences if the retention arrives late.

How long does retention finance take?

There is no universal timeframe. Specialist receivables finance may require contract and customer verification, while other loans require standard credit and affordability checks.

What documents are needed?

Lenders may request contracts, retention schedules, payment certificates, bank statements, financial accounts, existing debt information and cash flow forecasts.

What if the main contractor becomes insolvent?

Recovery may become difficult, particularly where retentions are not protected under an effective trust or other security arrangement. The contractor should seek specialist legal advice promptly.

Can I charge interest on an overdue retention?

Potentially, where the retention is legally due and the relevant contractual or statutory late-payment provisions apply. The contractor should establish the correct due date and legal basis before calculating interest.

Should I borrow against retention money or pursue payment first?

If the retention is already due and undisputed, pursuing release may avoid unnecessary borrowing costs. Where the money is not yet due, a suitable working capital facility may be considered if the company can afford it.

Final Verdict: What Is the Best Way to Fund Construction Retentions?

Construction retentions can create serious cash flow pressure for small UK contractors, particularly when several projects have money withheld simultaneously.

However, the most suitable response depends on the status of the retained amount.

If the retention is due and undisputed: Confirm the payment process and pursue release before assuming that additional borrowing is necessary.

If the retention is not yet due: Consider whether a suitable working capital loan, revolving facility or another finance product can address the temporary cash requirement.

If other construction invoices are already payable: Specialist construction invoice finance may provide funding against qualifying receivables.

If the contractor owns valuable equipment: Asset-backed financing may be available, subject to ownership, valuation and affordability.

If the business regularly experiences retention shortages: Negotiating better contract terms and considering alternative security structures may reduce future dependence on borrowing.

If the retention is disputed: Resolving the contractual issue may be more important than obtaining another loan.

Ultimately, financing should help a contractor bridge a realistic cash flow gap without creating an unsustainable repayment obligation.

A good application identifies how much money is actually needed, which retentions are expected to be released, the relevant contractual dates and how the company will repay the facility if collection is delayed.

Explore Construction Working Capital Options With Mehmi Financial Group

Does your UK construction company have money tied up in retentions, certified payments or outstanding customer invoices?

Mehmi Financial Group is an independent commercial financing brokerage, not a bank or direct lender.

We consider enquiries from eligible businesses in the United Kingdom and can assess whether an appropriate commercial financing introduction or referral route is available through independent third-party providers, subject to local requirements and provider participation.

Depending on the company and available arrangements, the discussion may involve working capital loans, business credit facilities, equipment finance or other relevant commercial funding structures.

Availability of finance directly against retained construction sums is not guaranteed.

For an initial discussion, prepare:

Registered company name and UK location.
Construction trade or specialisation.
Number of years trading.
Approximate monthly or annual turnover.
Total construction retentions outstanding.
Amount currently due for release.
Expected payment dates.
Details of significant disputes, if applicable.
Financing amount required.
Intended use of funds.
Existing business borrowing commitments.
Preferred funding timeframe.

Discuss Your Construction Financing Requirements

Begin with general business information and request the appropriate secure submission route before providing bank statements, identity documents or confidential construction contracts.

Mehmi Financial Group cannot compel payment of existing retentions, determine contractual payment rights or guarantee financing availability. Any commercial financing is subject to independent provider participation, eligibility, underwriting, verification and final terms. Rates, borrowing amounts and funding timelines vary. Mehmi Financial Group may receive commissions or referral fees.

Sources and Editorial Methodology

This guide uses official UK construction legislation, HMRC guidance, parliamentary developments, British Business Bank resources and published construction finance information.

Primary sources:

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