Following the 2026 Department of Business and Trade’s proposed ban on cash retentions in construction contracts, the industry is in need of a new avenue to strategically disburse project funds in a controlled and well-governed manner.

In theory, a cash retention is an effective way to guarantee completion of works, satisfaction on both sides and, historically, has been able to support compliance with contractual obligations and provide protection against insolvency. The proposed ban therefore leaves many with feelings of uncertainty, at stripping away the security of a retention pot as a resource to support timely project completion as well as mitigation of risks posed by supply-chain insolvency.

Nevertheless, for those within the industry who have been suffering with cash-flow problems, having anxiety over the financial risk of taking on new projects and losing out on payment of any kind as a result of upstream insolvencies, this government proposal is certainly a welcome change. Cash retention payments have come under significant criticism for their effects on SMEs, no longer acting as a lever of accountability.

With a ban on the horizon, businesses are now being encouraged to seriously review their payment practices to avoid suffering from penalties once the new rules take place. This is where we, at Riverside Escrow, could provide assistance in navigating payment options that work for you and your project. Using an FCA-authorised, independent escrow service can ensure compliant, timely, and fair payments so that all parties are satisfied. Our escrow service offers the potential for interest to accrue, to be paid out at funds flow. This offers the potential to add further value to key projects, subject to the terms of the escrow agreement and applicable banking arrangements.

Many companies are seeking other options that meet their needs, understand the industry requirements and have the same commercial intent – to safeguard funds for fair flow. Often, retention and performance bonds are frequently brought up as an alternative avenue to a cash retention with the appeal of introducing a third independent party i.e. a bank or insurance company. Whilst there are similarities between the offerings of retention bonds and the use of escrow accounts, there are fundamental differences in their structure.

Escrow vs Retention Bonds in Construction: Key Differences

Whilst retention bonds represent a financial promise whereby money is only secured in the event of a contractor default, escrow requires actual funds on account to be held and ring-fenced in accordance with FCA safeguarding requirements upon project commencement or at another appropriate time in the project timeline. The risk factor of retention bonds, though reduced in comparison to a cash retention, still leaves the payment vulnerable to disputes. As funds are not immediately available and disputes can delay or in some cases prevent recovery, the stress repeatedly felt by using a cash retention is translated in the case of retention bonds.

An escrow account is set up with strict release conditions and terms upon which payment can be made. With the release conditions independently administered, the risk of dispute is reduced. Both options come with their share of administration procedure; both necessitating set up administration, however, retention bonds demand a claim to be made in order to access the funds which potentially leaves uncertainty around the payment itself.

How to tackle the risk of insolvency is at the forefront of the proposed cash retention ban, leaving too many companies and their employees vulnerable to financial despair with the cascading effect leaving contractors unpaid and projects incomplete.

Tackling Insolvency Risk in Construction Through Financial Resilience

For companies looking to steer away from the restrictive and risky nature of traditional cash retention payments and retention bonds, escrow presents a transparent, protected payment structure and forward-thinking alternative. Placing funds upfront into an FCA-safeguarded escrow account ensures clear segregation of project finances, reducing financing pressure. This, in turn, is not only a smart safeguarding option but is also beneficial in improving confidence and trust between parties to work towards healthier project relationships and upholding a positive reputation.

Escrow sustains clearly defined and independently administered payment terms and release conditions, with funds held in a safeguarded, segregated account and released only when the agreed milestones have been achieved. By working to remove uncertainty around possible disputes, unfair withholding, or insolvencies, using an escrow account can bring peace of mind to an industry constantly under pressure.

How Escrow Works as an Alternative to Cash Retention in Construction

Typically, a Contractor will receive an agreed percentage of the project valuation, with the remaining funds withheld in the Employer’s control. The remaining percentage can only be collected once the construction is finished and ready for use and then also after the defects liability period. The structure of cash retention lends itself to risk – insolvency, defects liability disputes, contractor no-shows to name but a few.

The escrow alternative would be as follows:

• An agreed value of up to 100% of the valuation is paid upfront by the employer, mitigating certain risks in relation to insolvency and non-payment.
• The agreed portion is moved into an FCA authorised, safeguarded escrow account.
• Funds are held by an independent escrow provider, such as Riverside Escrow Limited, separate from the control of either party.
• Payment is to be released by the escrow provider in line with the pre-agreed payment release conditions, for example on the instruction of an independent third party such as a project manager or surveyor.

This approach is able to both preserve the intent behind retention, of certifying accountability and quality, while managing to eradicate certain risks associated with withholding funds. 

Why Use Escrow for Construction Payments?

At Riverside Escrow, we have developed a streamlined onboarding process, designed to tackle the worries of administrative hold-ups during time-sensitive construction ventures. Our approach prioritises progression with minimum disruption whilst also maintaining our reputable customer-centric approach. We work closely with our clients, using clear communication and tailored support throughout the escrow process and as a result instil our clients with confidence from the get-go.

A cash retention is no longer viable as a default option. Let escrow become your go-to retention payment solution.

This article is for general information only and is not legal or financial advice. Riverside Escrow Limited is authorised by the FCA as a payment institution. Escrow can help manage payment risks but does not remove all risks or prevent disputes.