Government targets late payments with sweeping reforms to support SMEs

The government has announced a major package of reforms aimed at tackling late payments across UK supply chains⁽¹⁾, including new enforcement powers, a cap on payment terms and proposals to change how retention practices operate in construction.

Under the measures, described as the toughest in the G7, the Small Business Commissioner will be given powers to investigate poor payment practices, adjudicate disputes and issue fines worth tens of millions of pounds for persistent offenders.

The reforms also include a 60-day cap on payment terms for large firms paying smaller suppliers, alongside mandatory interest on late payments set at 8% above the Bank of England base rate.

The Department for Business and Trade said the changes are intended to address a problem estimated to cost the UK economy £11bn each year, with around 38 businesses closing every day due to late payment. Construction is consistently among the sectors most affected by insolvencies, reflecting the underlying financial pressures across the industry.

Construction sector impact

BCIS chief economist Dr David Crosthwaite said the proposed measures could improve financial resilience across supply chains, but noted that payment practices are only one part of a wider risk landscape.

He said: ‘Late payment has long been a pressure point in construction supply chains, particularly for SMEs and specialist contractors, where delays can place significant strain on cashflow.

‘The government’s proposed reforms represent a positive step towards improving payment discipline. Stronger enforcement powers, a 60-day cap on payment terms and mandatory interest on late payments would help improve the flow of money through supply chains and provide greater certainty for smaller firms.

‘However, insolvency risk in construction is typically driven by a combination of factors. Alongside cashflow pressures, firms continue to operate with tight margins, cost volatility and exposure to project-specific risks, as well as higher employment and business costs.

‘In this context, late payment can act as a trigger in an already fragile financial position.’

Retention reform welcomed, but questions remain

Alongside the wider late payment measures, the government has confirmed plans to consult on banning the withholding of retention payments in construction contracts.

Retention has long been a source of concern across the industry, particularly where funds are lost due to upstream insolvency or delayed release.

Dr Crosthwaite said changes in this area could help reduce that risk, while highlighting the need to preserve appropriate safeguards.

‘Proposals to address retention practices are particularly relevant, given the risk to firms when upstream contractors become insolvent.

‘However, retentions have traditionally played a role in managing defects liability and quality assurance, so any changes will need to ensure that appropriate mechanisms remain in place to maintain delivery standards.’

Industry groups have broadly welcomed the proposed ban, describing it as a long-awaited intervention, although some have raised concerns about potential workarounds and the need for careful implementation to avoid unintended consequences.

Wider pressures remain

The reforms come at a time when construction firms continue to face a challenging operating environment, including ongoing cost pressures and economic uncertainty.

‘There may also be scope to strengthen payment security further through mechanisms such as project bank accounts, which can support more reliable and timely distribution of funds across supply chains,’ Dr Crosthwaite added.

‘Improving payment practices should support greater financial resilience across the sector, although the overall impact will depend on how these measures interact with wider market conditions.’

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^{(1) GOV.UK – Time to Pay Up: Government unveils toughest crackdown on late payments in over 25 years – here}