Security of payment: UK and Ireland

What legislation or regulations govern security of payment in construction contracts?

England and Wales

The primary piece of legislation is the Housing Grants, Construction and Regeneration Act 1996, as amended by Part 8 of the Local, Democracy, Economic Development and Construction Act 2009 (the UK Construction Act).

The UK Construction Act is supplemented by the Scheme for Construction Contracts (England and Wales) Regulations 1998 (known as the Scheme) which provides default rules for payment if a construction contract does not include the necessary payment provisions or if their provisions are not compliant with the requirements of the UK Construction Act.

The UK Construction Act was introduced in the 1990s against a backdrop of economic recession, with widespread insolvencies across the construction industry. It aimed to ensure timely cash flow to contractors and subcontractors and thereby to reduce the occurrence of disputes and insolvencies. Under the Act (as amended) contractors and subcontractors have the right to make regular payment claims for work completed and to suspend work for non-payment. In addition, conditional payment clauses (for example, “pay-when-paid” clauses) are prohibited. The Act also introduced a system of statutory adjudication which aimed to deal with disputes (over payment and any other issue) quickly and cost-effectively.

The Late Payment for Commercial Debts (Interest) Act is also relevant. It implies a term into qualifying contracts allowing interest to be claimed on late payment. For business transactions it provides for a maximum 60-day payment date, after which interest starts to run. However, parties can agree a longer payment date, provided it is not grossly unfair to the supplier.

In relation to public procurement, the Procurement Act 2023 is a key piece of legislation. It implies a prompt payment obligation into all public contracts, requiring a contracting authority to pay sums due within a minimum of 30 days of issue of a valid undisputed invoice or, if later, the due date. This requirement flows down to subcontracts related to public contracts.

Scotland

In Scotland the applicable legislation is that same as for England and Wales (the UK Construction Act, as amended) but the “Scheme” is set out in the Scheme for Construction Contracts (Scotland) Regulations 1998, as amended by the Scheme for Construction Contracts (Scotland) Amendment Regulations 2011.

Ireland

The Construction Contracts Act 2013 (the Irish Construction Act) governs security of payment under “construction contracts”, ie agreements which relate to the carrying out of “construction operations”.

The Irish Construction Act became effective in July 2016 and applies to both the private and public sector. Taking some inspiration from the UK Construction Act, it provides that construction contracts must include terms which provide for the amount of each interim payment and amount of final payment (or an adequate mechanism to calculate such amounts), the payment claim date (or an adequate mechanism to calculate such date), and the period between the payment claim date and payment due date.

The Irish Construction Act sets out a defined payment schedule (the Schedule) which applies to main contracts if and to the extent they do not comply with such requirements. For subcontracts, the Schedule applies except to the extent that the subcontract contains payment provisions which are more favourable to the subcontractor.

Pay-when-paid clauses and pay-if-paid clauses in a construction contract are rendered ineffective under the Irish Construction Act, except in limited circumstances: eg winding up/receivership-type scenarios.

The Irish Construction Act creates a limited statutory right to suspend performance for non-payment.

It is not possible for parties to a construction contract to contract out of the application of the Irish Construction Act.

 

What framework is put in place to protect monies intended for progress payments?

Are project bank accounts required?

England and Wales

No, but the use of Project Bank Accounts (PBAs) is widespread in relation to major public infrastructure projects. The Government confirmed in its Construction Playbook (which sets out government guidance on sourcing and contracting public works projects) that PBAs should be used unless there are “compelling reasons” not to.

Interestingly, on 1 July 2025 the government withdrew its guidance note on Project Bank accounts stating that “a replacement is being prepared”. This suggest that a review and possible overhaul of the PBA system is being contemplated. At the time of writing, the government has not confirmed when it will publish updated guidance.

Despite the fact that several of the standard form contracts (including NEC and JCT) have documentation for PBAs, the adoption of PBAs in the private sector is much more limited, due to concerns that they are complicated and expensive to set up and operate.

Scotland

No, in Scotland PBAs are not mandated. However, the Scottish Government requires public bodies to follow the provisions in Chapter 10 (PBAs) of its “Construction Procurement: project initiation and business cases handbook.” This provides that a PBA should be included in tender documents for public works contracts commencing procurement procedures from 19 March 2019 whose estimated value is at least GBP2 million for building projects and GBP5 million for civil engineering projects.

Ireland

No, in Ireland, PBAs are not mandated.

The use of PBAs is not common practice. However, contracts published by the Royal Institute of the Architects of Ireland (the RIAI) (commonly used in the private sector), use a similar concept known as a Guarantee Account. This anticipates a joint account being set up in the name of the employer and the contractor into which monies are paid by the employer, to be released to the contractor upon delivery of contract works. These provisions are generally deleted in the schedule of amendments the parties negotiate to the RIAI conditions, for similar reasons as in the UK.

Are retention monies quarantined?

England and Wales

Retention monies are not normally required to be held in trust or in a separate escrow account and will often simply be held by the employer to be released once certain conditions are met (for example, when practical completion is achieved or after the defects rectification period). However, parties are free to agree these types of arrangements. Many of the JCT standard form contracts, for example, contain retention provisions which provide that the employee's interest in the retention is fiduciary and that, if the contractor so requests, the employer must place the retention in a separate trustee bank account.

In practice trust accounts are not widely used due to perceived complexities of implementation, the additional costs they would add to construction projects and the loss of cash flow benefits.

Scotland

No, in Scotland retention monies are not required to be quarantined. However, the Scottish Government requires public bodies to follow the guidance in “Retention in construction contracts: CPN 3/2022.” This provides guidance for contracting authorities on the use of retentions and aims to help the Scottish Government move towards reducing or removing the need for retentions.

Ireland

While the standard forms of contract published by the RIAI contain drafting requiring the employer to hold retention money on trust, parties generally agree to delete such wording. For similar reasons to the UK, retention accounts are not widely used.

Are retention monies regimes prohibited?

England and Wales

No, neither the UK Construction Act nor the Scheme refer expressly to retentions (either encouraging or prohibiting them) but they are widely used. As discussed below, the government is currently in consultation on proposed legislation to prohibit or restrict retentions albeit this has been an issue under consideration for many years.

Scotland

No, they are not prohibited.

Ireland

No, retentions are widely used. Retention bonds are also sometimes used, where the employer releases the full amount of the retention at practical completion in exchange for a bond (either conditional, or (less commonly) on-demand) in an amount equal to the retention the employer would otherwise withhold during the defect rectification period.

 

Can a contractor or subcontractor impose a lien or other form of security over the works or other assets of the developer?

England and Wales

There is not a specific concept of a “contractor's lien” as in other jurisdictions. Under the UK Construction Act, a contractor's primary remedy for non-payment is to suspend work. The Act does not grant a contractor a right over the property of the employer. However, there is a potential common law remedy where a party owed a debt can hold onto the assets of the debtor that are in his or her possession, pending payment of the debt. 

The usual position under English law is that parties are free to include in their contracts any terms that they can agree on. Therefore, in theory it would be possible for a contractor or subcontractor to require security over the assets of the developer at the time of agreeing the contract. However, in practice this is not something that a developer would commonly agree to. 

Scotland

In theory a subcontractor could pursue a contractor for payment via the courts and, if successful, execute summary diligence on the contractor and its assets. However, this is not common. Like the position in England and Wales, suspension is the usual remedy.

Ireland

There is no statutory provision under Irish law specifically allowing contractors to impose a lien over the works or assets of the employer/developer. Similar to the position in the UK, contractors have a right, pursuant to the Irish Construction Act, to suspend work for non-payment. Additionally (although, somewhat rarely), contractors may seek third-party payment security, eg a payment bond from a surety, or a parent company guarantee.

Although contractors cannot impose a lien, the Irish Construction Act does provide some protection by affording a party to a construction contract the right to refer a “payment dispute” to adjudication. The Irish Construction Act provides for an expedited adjudication process, which is intended to conclude with a formal decision within 28 days of the date of referral of the dispute.

 

What impact has the legislation or regulation had on the construction sector and insolvencies?

England and Wales

The intention of the UK Construction Act was to drive good behaviour with regard to regular payment throughout the industry. It does seem to have been successful at increasing the regularity of payment; however, the legislation hasn’t prevented a number of very high-profile main contractor insolvencies (and many SME insolvencies too). According to the UK Government's Insolvency Service figures, construction remains the worst hit sector for insolvencies in the year to June 2025. Cash flow remains a major issue in the UK construction industry. This most obviously affects the small and medium sized contractors, but with low margins and a very competitive market, cash flow remains a key issue for all players.

Scotland

The impact of the legislation remains a matter of debate. While it has likely curbed some of the more problematic practices within the industry and improved cash flow for subcontractors, the wave of insolvencies over the past 5 years appears to be driven by broader macroeconomic factors. These include the effects of COVID-19, Brexit-related challenges such as labour shortages, global supply chain disruptions, and steep inflation in energy and construction material costs. Many contractors have found themselves locked into fixed-price contracts that became commercially unviable, ultimately undermining their profitability and financial stability.

Ireland

The Irish Construction Act has generally had a positive impact on the Irish construction sector. By mandating the inclusion of minimum payment provisions in construction contracts and introducing a more efficient payment-dispute resolution forum (which is now well-entrenched in the sector and increasingly relied upon), the Act is generally considered to have helped alleviate cash flow pressures that plagued the sector. However, while the Act may have helped mitigate cash flow-related insolvency, it cannot fully shield the sector from wider economic pressures and, in recent years, COVID-19 and certain compounding issues which followed thereafter – eg supply chain issues, material price inflation – have led to solvency issues again becoming more prevalent. Notwithstanding the positive impact of the Irish Construction Act, contractually-negotiated security measures remain heavily relied-upon.

 

What, if any, reforms are being considered?

The UK Government is currently consulting on a range of measures aimed at tackling late payments which could have a significant effect on the construction industry. These would apply to the whole of the UK. Proposals include:

• Removing the option to allow parties to agree longer payment terms than 60 days. This maximum limit will reduce to 45 days after 5 years.
• Amending the Late Payment of Commercial Debts (Interest) Act 1998 (Late Payment Act) by introducing a 30-day limit to either dispute an invoice or, if undisputed, to pay it.
• Removing the parties ability to agree a different rate of interest than the statutory rate of interest in the Late Payment Act.
• Enhancing the powers of the Small Business Commissioner, including the power to fine large companies that repeatedly pay suppliers late.
• Amending the UK Construction Act to either:
  1. Prohibit the use of retentions entirely (the government's current preferred option); or
  2. Introduce requirements to protect retentions via a form of security. This would involve the payer segregating the retention in a separate bank account or protecting the sums through an instrument of guarantee.

Ireland

While certain aspects of the Irish Construction Act have been critiqued, no reforms are currently being considered in the near-term in this regard. Case law on the applicability (or otherwise) of the Irish Construction Act to construction contract disputes (often concerning the definition of payment disputes) continues to develop and is likely to shape the long-term impact of the Irish Construction Act on the sector.