Pay promptly or pay the price!

Alison Walton, Head of Public Procurement, explores the regime in place to encourage prompt payment within supply chains and the implications that late payment could have on your ability to participate in public tender processes.

If you don’t pay your invoices on time this could stop you winning new work from Central Government through public procurement processes. The latest PPN from the Cabinet Office confirms the Government’s no-nonsense approach to poor payment practices and its intention to ease cash flow and encourage growth throughout the supply chain.

Government clamp down

Clamping down on poor payment practices is not a new initiative of the Government; the Reporting on Payment Practices and Performance Regulations 2017 already require the UK’s largest companies and LLPs to report on a six monthly basis their data on:

• the average number of days taken to make payments in the reporting period, measured from the date of receipt of invoice to the date the cash is received by the supplier
• the percentage of payments made within 30 days or fewer, between 31 and 60 days, and in 61 days or longer
• the percentage of payments due within the reporting period which were not paid within the agreed payment period

together with narratives on the business’s standard payment terms, practices, invoicing, and payment disputes. Guidance issued by BEIS in September 2019 is helpful for businesses in explaining how they should comply with these requirements, non-compliance with which is a criminal offence.

New guidance

In July 2019 new guidance was published by the Cabinet Office in PPN 04/19 requiring Central Government to include stringent pass/fail requirements relating to prompt payment practices in its selection processes for public tenders valued at over £5 million.

That policy was stringent, in that it required automatic exclusion of any bidders who had a record of paying less than 75% of their suppliers within 60 days.  For bidders who had a record of paying between 75% and 95% within 60 days but were able to provide an explanation and rectification plan could continue in the tender process.

The Cabinet Office warned that the threshold of 75% would be ratcheted up to 95% over time, and the latest PPN from the Cabinet Office published last week sees the threshold increase to 85%.  From 1 April 2021, any suppliers bidding for public contracts with Central Government valued at over £5 million will be automatically excluded at the selection stage if they have a record of paying less than 85% of their suppliers within 60 days of invoice.

SME's included

Even SME bidders will be subject to these requirements where they are bidding for Central Government contracts alongside larger bidding organisations.  Whilst some explanation can assist where the payment record shows less than 95% of suppliers have been paid within 60 days (which could of course take into account financial difficulties as a result of the impact of lockdown), there is a “zero tolerance” approach to poor payment practices which lead to less than 85% of suppliers being paid within 60 days of invoice.

It is worth noting that evidence will be sought of the bidder’s payment practices to back up the declarations made at selection stage, and we can expect the next ratchet up to the 95% target (a high bar indeed) to occur within the next 12 months if this current pattern continues.

For bidders who do not have stringent payment processes in place, the net is closing in; this is all part of the tide turning as a result of the Lord Young reforms which resulted in provisions being added to the Public Contracts Regulations 2015 to impose mandatory 30 day payment terms not only in public contracts but also in private contracts throughout the supply chain with sub-contractors and suppliers, amongst other measures to protect SMEs and micro businesses.

With Brexit looming ever closer, the formalities around public procurement look unlikely to disappear as the Government continues to use its toolkit of public spending powers to encourage cash flow and economic growth through the business it awards directly, and indirectly through supply chains, to small and medium sized businesses.

For more information or to discuss any aspect of procurement, please contact Alison Walton on 0191 211 7850 or email [email protected]