Stricter payment rules for public contractors come into force

Suppliers that sell goods and services to government departments must now comply with stricter payment rules, which came into force on 1 April, or be prevented from winning government contracts worth more than £5m. Under the government’s latest Prompt Payment Guidance policy, all suppliers must now pay their invoices within an average of at least 55 days, in addition to the existing requirement of ensuring 95% of invoices in their supply chain are paid within 60 days.

Construction and procurement expert Lynne Davy of Pinsent Masons said that these latest developments reflect ongoing efforts by the government to influence better payment practices amongst major suppliers and construction industry participants, which have been introduced on an incremental basis to mitigate against poor take up.

The prompt payment policy was first introduced in 2015 by the government to tackle late and unfair payment practices in both public and private sectors, and in a bid to improve liquidity and cashflow among the small and medium-sized enterprises in the supply chains of government contracts.

The requirements have been tightened in various stages. Previously, suppliers bidding for a central government contract above £5 million per year had to demonstrate that they had effective payment systems and they could pay 95% of all supply chain invoices within 60 days. From 1 April 2025, those businesses must show that they pay all invoices within an average of 45 days, with the ultimate goal to shorten the average to 30 days in coming years.

“The risk to supply chain members participating in both public and private procurements is potential loss of future business as well as reputational damage to the extent they are not geared up to meet these requirements,” said Davy.

Simon Colvin of Pinsent Masons, who specialises in public sector technology contracts, added that the stricter rules were of relevance “to all suppliers of major public sector projects – whether technology, energy, commercial, construction or otherwise”.

Large businesses also have an obligation to publish their payment performance under the Reporting on Payment Practices and Performance Regulations 2017. They must report on their payment practices and policies, as well as their performance against those. From 6 April, changes to the regulations will become effective, meaning large businesses must provide additional information on payment performance, such as a break down on the number of payments made in 30 days or fewer, between 31 and 60 days, and in 61 days or longer.

For the private sector, companies can voluntarily adopt the UK’s Prompt Payment Code. Code signatories are required to pay 95% of invoices from businesses with less than 50 employees within 30 days, and to pay 95% of all invoices within 60 days.

Signatories to the code will also now have to recognise suppliers’ rights to charge late payment interest and charges if an invoice is paid late without justification, and suppliers should also be given a contact point for payment queries.  “We have identified a number of procuring entities that, despite the voluntary nature of this code, are including a requirement in their contracts for supply chain members to have signed up to this code,” said Davy. Signatories that cannot demonstrate compliance are not permitted to remain signatories.

According to Build UK, which tracks the largest companies in the construction sector on their payment performance, there has been substantial improvement over the last five years. Its statistics show that over two thirds of main contractors now pay in 30 days or less, compared to none in July 2018.