The UK Government has just closed a major consultation on late payment reforms, setting out proposals that could significantly reshape business payment practices across the economy. The construction sector, where late payments and retention issues have long posed challenges for smaller firms, is expected to be among those most affected.

Late payments have been recognised for years as a major barrier to business growth, particularly for small and medium-sized enterprises (SMEs). The issue costs the UK economy almost £11 billion each year, with an estimated 38 businesses closing every day as a result of not being paid on time. More than 1.5 million businesses are affected by late payments - a figure that represents a serious drag on UK productivity and competitiveness.

The Government has long acknowledged the need to address this issue and fix what it describes as a “negotiating imbalance” between large companies and smaller contractors. This latest consultation forms part of a wider set of reforms designed to improve payment practices, transparency, and accountability across the business landscape.

Existing measures 

As part of its wider efforts to tackle late payments, the Government has already announced a number of complementary measures, including:

• Legislation requiring large companies to include payment performance in their annual reports, increasing transparency and ensuring greater board-level oversight of payment practices.
• A new Fair Payment Code, delivered by the Small Business Commissioner, to highlight and celebrate those companies that pay their suppliers promptly and fairly.
• The appointment of Emma Jones CBE as the new Small Business Commissioner, bringing entrepreneurial expertise and a renewed focus on tackling poor payment practices.

Most significantly for the construction sector, the consultation addresses one of the industry’s most long-standing issues – retention payments. It proposes two possible approaches for reform: a complete ban on retentions or the introduction of protection schemes to safeguard retention sums withheld under construction contracts.

Retention payments have been a source of contention within the construction industry for decades, with many smaller firms facing cash flow pressures due to late or non-payment, or even losing retentions entirely in cases of insolvency further up the supply chain. The consultation marks a major opportunity for the sector to shape future policy and ensure a fairer, more sustainable approach to managing quality assurance and payment risk.

Other proposed measures

The consultation sets out several measures designed to strengthen the UK’s payment culture, increase transparency, and improve enforcement. Key proposals include:

• A hard cap of 60 days for business-to-business payment terms, removing the current ability to agree terms longer than this (even if both parties agree). After 5 years, subject to consultation, this would be reduced further to 45 days. CIOB has cautioned that while this could be a positive step, it also risks establishing a 60-day payment term as a default rather than a limit, potentially leading some firms to extend their current, shorter terms.
• Making statutory interest on late payments mandatory, removing the option for businesses to negotiate a lower rate or opt out entirely, while the rate would be set at 8% above the Bank of England base rate for all contracts. While CIOB supports this in principle, concerns remain about how mandatory interest would be implemented and enforced in practice, as well as the potential administrative burden it could create.
• A 30-day deadline for disputing invoices. There are questions about compatibility with the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) and whether introducing this measure under the Late Payment of Commercial Debts (Interest) Act would therefore create a parallel mechanism for disputing invoices that risks being inconsistent with, or duplicating, the Construction Act framework.
• Financial penalties for persistent late payers. Further clarity is needed on how these penalties would work in practice; however, the current proposal lays out a potential trigger threshold set at 25% of invoices paid late which would trigger an investigation and a penalty equivalent to twice the amount of statutory interest owed in the last reporting period. CIOB supports financial penalties for repeat offenders in principle but has suggested that a higher threshold should be set initially, while the mechanism for setting the penalty amount must be considered against potential loopholes that could be exploited.
• Requiring large businesses to report how much statutory interest they owe and pay, to increase accountability.

• Expanding powers of the Small Business Commissioner (SBC) to investigate unfair payment practices, compel disclosure of payment data arbitrate disputes and award compensation, and impose fines on repeat offenders. CIOB welcomes these proposed changes as a positive step toward improving enforcement and giving smaller businesses greater confidence that poor payment practices will be addressed. However, there are concerns about the Office of the Small Business Commission’s (OSBC) capacity to manage this expanded remit effectively. Furthermore, as the OSBC cannot intervene in contractual disputes relating to construction, the new powers are unlikely to directly impact the construction industry.

A step toward fairer business practices

The late payments consultation represents a long-overdue opportunity to reform the UK’s payment culture and level the playing field for smaller firms. For construction in particular, it is a chance to address two of the industry’s most enduring challenges - late payments and retention abuse, in a way that promotes fairness, collaboration, and business sustainability.

CIOB has responded to the consultation, and you can read our full response here. We will continue to engage with members, industry partners, and government throughout this process to ensure that the construction sector’s voice is heard. We are committed to advocating for fair, transparent, and efficient payment practices that support a thriving, high-quality built environment. As more updates are published about this process, we will keep our members informed.

For further information, please contact [email protected].