Government has a longstanding commitment to improve payment practices across the public and private sector. To support this commitment, a new Prompt Payment policy has been introduced which will use prompt payment performance as part of the supplier selection process, with effect from 1 September 2019.
Every year, thousands of businesses experience severe administrative and financial burdens as they are not paid on time. Late payment is a key issue for business, especially smaller businesses, as it can adversely affect their cash flow and jeopardise their ability to trade.
The Prompt Payment policy means that bidders for government contracts (including defence) will be required to provide evidence about their payment performance, including the percentage of invoices paid within 60 days across both their private and public sector business. Suppliers who are unable to demonstrate that they have effective systems in place that ensure a fair and responsible approach to payment of their supply chain may be excluded from bidding.
The Cabinet Office has now published detailed guidance PPN 04/19 on how payment performance will be taken into account in the procurement of major government contracts and you may need to take action to mitigate the risk of being excluded from bidding for government work.
Key points to note are as follows:
- This policy will be implemented in government contracts with expected revenues above £5m per annum.
- Although guidance PPN 04/19 applies to the Public Contracts Regulations (PCR) 2015, the MOD has adopted a similar approach to procurements conducted under the Defence and Security Public Contracts Regulations (DSPCR) 2011.
- A phased approach to implementation will be adopted. Suppliers will not be excluded from bidding provided they meet 75% (of invoices paid within 60 days) in one of their previous two reports and submit an acceptable action plan for improvement to the contracting authority with their bid.
The action plan will need to follow the Chartered Institute of Credit Management (CICM) format and meet five key criteria:
- Identification of the primary causes of failure to pay
- Actions to address each of these causes
- Commitment to regular reporting on progress to your Audit Committee Plan signed off by a director
- Plan published on company website (this can be a shorter summary plan)
- The 75% threshold will be raised over time, and any changes will be fully communicated in advance.
- Bidders can remove inter-company payments from their calculations, which can skew the headline figure on the published data.
- Large companies should already be reporting payment performance every six months in accordance with the Reporting on Payment Practices and Performance Regulations 2017, and all relevant legal entities should be reporting this data via BEIS – https://check-payment-practices.service.gov.uk.
Suppliers are advised to:
- review their published data via BEIS – https://check-payment-practices.service.gov.uk
- ensure they are meeting the required standards (95% of payments within 60 days)
- take any steps to improve performance if required
This does not preclude the MOD’s standard contract condition (DEFCON 534) requiring suppliers to pay undisputed invoices within 30 days, which will take precedence. This condition also seeks to ensure prompt payment throughout the supply chain by requiring an equivalent condition to ensure that subcontractors also pay within 30 days.