New requirements for large companies to report on construction retentions

Large companies operating in the construction industry will soon have to report on retention sums withheld from suppliers.

The Reporting on Payment Practices and Performance (Amendment) (No. 2) Regulations 2024 are set to come into force on 1 March 2025, and will apply to financial years beginning on or after 1 April 2025. These regulations (which amend existing reporting regulations) introduce new requirements for qualifying companies and LLPs to disclose specific information regarding their practices, policies and performance related to retention clauses in qualifying construction contracts with suppliers. The Secretary of State for Business and Trade, Jonathan Reynolds, has stated that this is intended to increase transparency and improve payment practices, which will predominantly benefit SMEs in the construction sector.

Who has to report?

Companies that meet the criteria of a "qualifying company" under the 2017 regulations need to report. These are companies which exceed two or more of the stated thresholds on its balance sheet dates (turnover of more than £36 million, a balance sheet total of more than £18 million, or more than 250 employees). Where a company is a parent company (as defined in the Companies Act 2006) adjusted thresholds apply under the regulations. If both a subsidiary and a parent meet the relevant thresholds, they would both have to report. A company is not considered a qualifying company in its first financial year.

Which contracts are caught?

The retention reporting requirements apply to "qualifying construction contracts". These are contracts for the carrying out of construction operations within the meaning of the Housing Grants, Construction, and Regeneration Act 1996 (i.e. those which are subject to the statutory requirements as to payment and where the statutory right to adjudicate applies). This includes contracts for the performance of construction work such as building, alteration, repairing, maintaining and demolishing structures, arranging for the carrying out of construction operations or supply of labour (but does not include construction contracts with residential occupiers, or those that fall within excluded sectors, such as oil and gas). Developers, contractors and other entities that procure construction works and meet the definition of a qualifying company can therefore be caught by these reporting requirements. Where group companies are involved in procuring projects, whether they will have to report needs to be considered on a case by case basis (e.g. an intragroup development agreement between a PropCo and DevCo might constitute a construction contract and fall under the rules).

What information needs to be provided?

A retention clause is defined under the regulations as a provision in a qualifying construction contract that allows a party to withhold monies equating to a percentage of the payments for goods, services, or works supplied under the contract, any interim payment, or the contract sum, until any condition for release is met. Withholding a specific retention percentage from interim payments during the construction period is common practice in building contracts (the reporting requirements would also apply to consultant appointments, as those are covered by the 1996 Act, if a qualifying retention arrangement is agreed).

If a company states that retention clauses are included in their construction contracts with suppliers, it must provide the following additional information:

• A statement on whether retention clauses are standard practice for all qualifying construction contracts, some contracts, or only in specific circumstances, with a description of those circumstances.
• A statement on whether there is a maximum contract value under which no retention clause is included, specifying that sum.
• A statement on the standard percentage rate in retention clauses in qualifying construction contracts between the qualifying company and its suppliers, specifying that rate.
• A description of the practice of using retention clauses that are no more onerous than any retention clause in a qualifying construction contract between the qualifying company or LLP and its client in that supply chain.
• A description of the mechanism or process for the release of the retention monies.
• A statement of the percentage ratio of the amount of retention withheld from the business compared to the amount the business holds on suppliers.
• A statement of the percentage ratio of the amount of retention the business withheld from gross payments made to suppliers compared to the gross amount paid to suppliers during the reporting period.

Additionally, the name of the director of the qualifying company or LLP who has approved the information must be provided. Each qualifying company must publish a report for each reporting period within 30 days after the last day of each reporting period.

Companies that fail to report this information will face sanctions in line with reporting requirement sanctions more generally, although the Department for Business and Trade has indicated it would encourage businesses to comply before seeking prosecution.

For further information about reporting requirements see: Payment practices reporting – updated guidance and further measures to tackle late payments and Corporate Governance Fundamentals: Periodic reporting outside the annual report and accounts.