Prompt Payments and the Procurement Act – A Christmas Carol

Out upon Merry Christmas! What’s Christmas Time to you but a time for paying bills without money; a time for finding yourself a year older and not an hour richer; a time for balancing your books and having every item in ’em through a round dozen of months, presented dead against you?

I had the pleasure of reading a Christmas Carol again recently and Scrooge may have been on to something here.

With the festive glow now sadly fading away along with the turkey leftovers, it is now a time where many businesses take stock and prepare for the challenges of the coming year. For many people, especially those outside of seasonal trade, the post-Christmas period is one of managing cash flows, attending to the flurry of invoices issued oddly late in December and dealing with extended bank holidays. Bah Humbug!

To add to this excitement, many businesses operating for or within the public sector, as well as their contracting authorities, should also now be thinking about the impact on their payment obligations and cashflows of the new Procurement Act (the Act) and the newly issued Fair Payment Code. Together, they have the potential to accelerate the tempo of payments, and the kinds of conversations they need to have, with their supply chains.

Indeed, putting these changes together and considering their wider impacts is going to be a critical adaptation for business managers, accounts teams and purely as a matter of good contract management. We should not end up like Scrooge’s heedless nephew, paying bills without money and with the books stacked up against you.

Payments Under The Procurement Act

The Act is due to substantially come into force on the 24^th February. As a recap, the following terms have to be implied into nearly all public sector contracts:

• contracting authorities should consider and verify invoices in a timely manner;
• valid invoices must be paid within 30 days;
• the contracting authority must permit electronic invoicing (although the authority has some limited discretion to determine the kind of ‘system’ it uses for this, it must be BSI compliant); and
• these payment terms should ‘flow down’ to sub-contractors of the supplier (i.e. they must be paid within 30 days of receipt as well) but electronic invoicing is not necessary.

The most important change in the Act is that invoices will need to be paid within 30 days of receipt or the due date, not within 30 days of their validation as per the current procurement regulations. This greatly limits the ability of payers (including the supplier themselves under the ‘flow down’) to routinely challenge the payment of invoices, i.e. ‘tactically’ or where there are limited grounds for success. The clock is running regardless and would only be reset if the invoice is proven to be invalid.

Failure to meet payment timescales will also have real teeth under the Act due in part to the greater transparency standards it creates (some of which already indirectly apply to the private sector, see below).

Contracting authorities must publish a Payments Compliance Notice every six months setting out their compliance with the 30 day payment requirement. They must also publish specified information on individual payments to suppliers in excess of £30,000 at least quarterly.

As a supplier, you do need to mindful that certain information on payments to you will be public. If nothing else, you may lose face if your subcontractors can point to public notices and tell you “your authority is paying you on time… why aren’t you paying us as well”?

Even More Teeth

Indeed, suppliers (or their sub-contractors and throughout the supply chain) may find themselves under more direct sanction if they fail to pay on time. There is potential for your non-compliance to be presented dead against you in a public forum. But worse, you can be closed out from public sector contracts entirely.

If you fail to pay your sub-contractors promptly, this will be a breach of the relevant public sector contract. If so:

• contracting authorities will have a discretionary ground to terminate public contracts for non-compliance, including following issue of a remedy notice for breach;
• the contracting authority will need to publish performance notices and information regarding any periods of contractual breach (although the latter is not coming into force until after February); and/or
• you may end up being ‘excludable’ and so removed from existing frameworks or even in extreme circumstances disbarred from bidding on public sector contracts.

Note also that the contracting authority, in some circumstances, can look though the supply chain, although this is likely to be targeted at key suppliers and focused on other elements of compliance (e.g. on corruption and money laundering).

To The Participators, A Carrot

Moreover, the Government has been working through revised procurement policy statements over the past couple of years, making prompt payment a condition of being able to participate in large tenders or frameworks (those with a contract value of over £5m) issued by or via the central government. The Chancellor believes this to be an important carrot (whether or not nibbled by Rudolf) in ensuring sectoral compliance.

The latest such statements (PPN 15 and PPN 18) issued in early December 2024 are intended to run with the Act. They require suppliers to demonstrate prompt, fair and effective payment practices in their supply chains, including to those outside of public contracts (i.e. including your entirely private sector suppliers). In particular, suppliers must be able to demonstrate that they:

• pay 95% of invoices within 60 days (or 90% with an action plan); and
• pay all invoices within 55 days on average.

The 55 day average will be reduced to 45 days from 1 October 2025.

Note also that the period begins from receipt and includes disputed invoices, so the time spent investigating an invoice is not factored in, and so you should be looking to investigate, resolve and pay within the 60 day window.

The relevant contracting authority can also ask for precise information and auditing on the supplier’s prompt payment compliance as part of tender submissions.

You Don’t Need More If You Are Large Enough

Commentary on the Act has noted that the transparency obligations on contracting authorities are intended to mirror the publication obligations already imposed on large private sector businesses. Many will also be aware that new regulations in this area (The Reporting on Payment Practices and Performance (Amendment) Regulations 2024) will take effect on the 1^st of January.

Under the existing regulations, all large businesses must report twice a year on the average time taken to pay supplier invoices. They must also state the fractions of invoices paid within 30 days, at between 30 days and 60 days and those over that time limit.

‘Large businesses’ are the usual test, i.e. two of:

1. turnover more than £36m;
2. balance sheet total more than £18m; and
3. average number of employees more than 25.

However, note that these thresholds are going up by 50% in April 2025. So, notwithstanding any New year’s resolutions, some of us are going to shrink anyway…

The new Regulations now further detailed reporting from large businesses, including details of:

• the total amount of payments which are not made within a payment period;
• and the percentage of invoices that are not paid within a period due to a dispute.

The changes are therefore not radical, but need to be understood in context with the Act and the Fair Payment Code.

The Fair Payment Code

In mid-December 2024, the Government has launched a new voluntary payment code, The Fair Payment Code (the Code) replacing the previous Prompt Payment Code. Setting aside Government buzzwords about the Code being “aspirational, robust and ambitious”, it does represent a qualitative shift in how standards are measured. Payment standards are now ‘tiered’ into two year awards, and it is possible to win the following (and to level up over time):

• Gold Award – for those firms paying at least 95% of all invoices within 30 days
• Silver Award – for those paying at least 95% of all invoices within 60 days, including at least 95% of invoices to small businesses within 30 days
• Bronze Award – for those paying at least 95% of all invoices within 60 days

The key changes are that:

1. The highest standards are intended for payment to all suppliers, whereas previously the 30 day standard only applied to payments to SMEs.
2. You do not get credit merely for paying invoices within your payment terms.
3. You must adhere to a ‘clear, fair and collaborative’ code of practice and ensure that your payment terms generally are fair to suppliers.

It is apparent that the Gold Award aligns with prompt payments under the Act.

Unwrapping It All

Clearly the overall intention is to move both the public and the private sector towards a 30 day payment period as soon as possible and to drive down payment periods generally.

The policy objectives for this can be found in innumerable publications, papers and via think tanks, but this should be a major benefit for many payees, particularly smaller businesses, and significantly improve their cash flow position.

For payers, whether contracting authorities, or elsewhere within the supply chain, the following points should be clear:

• Private sector and public sector payment terms will need to converge. Although the 30 day window only directly applies under public sector supply chains, tenders can take into account your payment performance, and general practices (including Awards) in bidding for public sector contracts.
• More information about your payment practices will be publicly available and you could be publicly shamed if you are an outlier. This may come about via notices issued under the Act or, if you are large business, through the existing public portal or even through the loss of a Fair Payment Code Award. Ultimately you could be excluded from or disadvantaged in any future tenders and you may expect a reputational hit.
• Processes for the auditing and checking of invoices will need to improve. The time taken to do so is seldom taken into account now in assessing prompt payment compliance.
• The average time of payment for private sector suppliers will need to come down, not only to win a shiny new Fair Payment Code Award, but also to ensure the ability to bid for large public sector contracts.

Generally, you might expect sub-contractors to have harder dealings with you if you have a reputation of being a bad payer (determined by very clearly defined metrics), or if you are not Code compliant. Contracting authorities may also weigh this reputation when setting up market engagement and shaping tenders (as they are entitled to do under the Act).

Time to React?

The time is now to react to the recent and impending changes to prompt payment terms.

For many businesses and other operators, it makes sense to simplify and harmonise their payment terms under public sector and private contracts: i.e. to get rid of split payment terms and try to adhere to a 30 day payment period throughout. Many operators would benefit from reviewing their standard payment terms to ensure compliance with the Act, the Code and generally to ensure that they are fair and balanced.

For suppliers intending to continue to operate public sector contracts, applying for accreditation under the Fair Payment Code and seeking a Gold Award would be an excellent start to the New Year. In many ways this is short hand for prompt payment compliance and would put them in good stead for competitive bidding.

For more complex supply situations involving multiple contractors, a good step would be to open dialogue with your suppliers and joint venture partners about updating payment terms throughout the supply chain, and where necessary imposing ‘flow down’ terms in your contracts with them.

In terms of the practicalities (Scrooge’s balanced books), for businesses concerned about maintaining cash flows, they should be working with their banks and lines of credit and also ensuring working capital is maintained at sufficient buffer levels. They should be refreshing their own invoicing and accounts systems to ensure a quick pass through, including any new IT or services software or other infrastructure needed. Now is a perfect time to do so at the beginning of the new financial year.

Finally, businesses should be ensuring engagement with their payers on all of these changes, making sure that they are set up to deliver payments promptly, and are themselves compliant. As a boss at my old firm once told me, ‘bill early, bill often’.

From all at Winckworth Sherwood LLP, wishing you a happy and payment compliant New Year!

If you have any questions about this article, please do contact the author.