The Government is planning to ban retentions in construction as part of a major crack down on late payments.

It said: “We propose to ban the withholding of retention payments under the terms of construction contracts, consulting on its implementation.

“This will prevent small firms losing retentions to insolvency or non-payment.”

Initial consultations showed the majority of the industry is in favour of a total ban rather than an alternative system like project bank accounts.

Concerns raised about a ban included ensuring the scope of the legislation is broad enough to prevent circumvention, and the cost and availability of alternative forms of surety.

A suggested time scale for the change was a “12 to 24-month transitional period for contractual adjustments, financial planning, stakeholder engagement, and the development of alternative assurance mechanisms.”

Wider reforms include giving the Small Business Commissioner sweeping new powers to investigate poor payment practices, adjudicate payment disputes, and fine the worst offenders – with fines worth tens of millions for firms that persistently pay late or fail to comply with the new laws.

Changes will also include a new 60-day cap on payment terms on all large firms when paying smaller suppliers.

New mandatory interest on late payments will also be introduced, with a requirement for all commercial contracts to include statutory interest set at 8% above the Bank of England base rate.

Rico Wojtulewicz, Director of Policy and Market Insight at the NFB, said: “ For construction, the main challenge will be the ban on retentions. Retentions are used to ensure performance, compliance and completion but we understand why the Government’s hand has been forced by unscrupulous businesses abusing them to pay less and/or balance shaky accounting.

“We therefore thank the Government for hearing our recommendation to further consult on the ban’s implementation. This period creates breathing room for adjustment and offers time to progress alternatives, such as accessible surety bonds or insurance.”