Start the clock…

The government has tightened up the 30 day payment rule on public sector contracts. Regulation 113 of the Public Contracts Regulations 2015 applies to contracts entered into on or after 26 February 2015. The contracts must have been issued by UK government departments, agencies and non-departmental public bodies, or English public bodies such as NHS trusts and local authorities. These are collectively referred to in the regulations as “contracting authorities”. A contracting authority that is a maintained school (funded by a local authority) or an academy (funded by the government) is exempt.

Regulation 113 imposes a duty on contracting authorities to ensure that contracts contain a requirement to pay within 30 days. They must also ensure that clauses to the same effect are contained in subcontracts and sub-subcontracts.

Contractors can establish whether a contracting authority complies with this by visiting its website; public bodies are legally obliged to confirm their compliance on their websites. A recent survey carried out by the Electrical Contractors’ Association revealed that 5 in 10 councils have still to comply with Regulation 113.

Where this requirement is not included in a contract or subcontract, there is, in any event, a term implied by Regulation 113(6) that payment must be made within 30 days.

Even if the payment periods in your contract are more than 30 days, you still have a statutory right to be paid within 30 days

This means that, even if the payment periods stated in your contract are more than 30 days, you still have a statutory right to be paid within 30 days. Where payments are made later than the 30 days, you have a right to levy statutory interest under the Late Payments of Commercial Debts (Interest) Act 1998 and the Late Payment of Commercial Debts Regulations 2002 and 2013.

Where you have concerns about the solvency of the paying party, such as a main contractor, you may wish to suspend performance of any or all of your contractual obligations on the expiry of the 30 days (rather than waiting for payment on the expiry of the contractual payment period).

When Regulation 113 was implemented, it was unclear as to when, in construction contracts, the 30 days started from. The answer under Regulation 113 is the point at which invoices are verified as being valid and undisputed. However, this does not align easily with the statutory payment notice procedure in construction contracts. In response to concerns over this, raised by SEC Group with the Cabinet Office, revised statutory guidance has been issued.

This advises that the start dates for the 30 days under construction contracts are as follows:

• Where the paying party is required to issue the statutory payment notice under the Construction Act (within five days of the payment due date), the 30 days starts the day after the notice is issued. Therefore, the maximum period between the due date and the final date for payment must be 35 days on public sector contracts and subcontracts.
• Where the paying party is required to issue the payment notice but has failed to do so, the 30 days starts the day after the date when the notice should have been issued or the date when you issued a default notice, whichever is later. If your contract requires or permits you to issue a payment application, the application takes effect as the default notice immediately on the expiry of the five days after the due payment date.
• Where you have issued the payment notice, the 30 days starts the day after the date on which the notice was issued. In this case, it is in the interests of the party receiving payment to issue the notice as early as possible.

Use of a project bank account enables all parties to be paid within the 30 days and within as little as 10-12 days

The statutory guidance advises that compliance with Regulation 113 can be achieved through using a project bank account (PBA). Government departments and agencies are required to use PBAs “unless there are compelling reasons not to do so”. The use of a PBA enables all parties – including sub-subcontractors – to be paid well within the 30 days and within as little as 10-12 days.

If a public body or a contractor above you is applying a term longer than 30 days, a complaint can be made to the government’s Mystery Shopper Scheme complaint service. To preserve your anonymity, you can complain through a trade association but you will need to produce the terms in your contract/subcontract that provide for payments to be made later than 30 days. The scheme has already received complaints on this.

This regulation is potentially far reaching. It attempts to standardise 30 day payment terms up and down the supply chain on all public works contracts. But you may have to police the process to ensure that 30 day terms are being applied.

Professor Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors’ Group