It’s time to amend the public contracts regulations on payment terms

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Softly, softly approaches to changing bad practice do not work in the construction industry, says Rudi Klein

When regulation 113 was included in the Public Contracts Regulations 2015, it appeared to herald a long-awaited improvement in payment times for supply chain firms engaged on public sector contracts. The regulation states that “contracting authorities shall ensure that every public contract […] require[s] […] that any payment […] is made no later than the end of a period of 30 days from the date on which the relevant invoice is regarded as valid and undisputed”.

It goes on to require that this provision is inserted into subcontracts and sub-subcontracts. Where such provision is absent from the relevant contract, the regulation implies a term that payment must be made within 30 days.

The major problem with regulation 113 is the lack of effective enforcement. Moreover, firms in the supply chain are usually too afraid to file a complaint

Unfortunately, when regulation 113 became law on 26 February 2015 (in relation to contracts entered into after that date), it was not easily aligned with the statutory payment provisions applying to construction contracts. This was rectified on 30 September 2016, when revised statutory guidance was issued. The trigger for the 30 days begins after the issue of a payment notice (which should be issued within five days of the payment due date). The guidance advises that, for construction, project bank accounts are a way of ensuring 30-day payments.

The regulation applies to contracting authorities including UK government departments, agencies, non-departmental government bodies (quangos), NHS trusts and local authorities. Maintained schools (funded by local authorities) and academies (funded by government) are excluded.

But this long-awaited improvement in payment times – particularly for subcontractors – has substantially failed to materialise. For example, it transpired that the 30-day requirement was absent from most of Carillion’s public sector works subcontracts. Surveys carried out by the Specialist Engineering Contractors’ Group and its member organisations have revealed that, on average, almost half of local authorities do not comply with regulation 113.

Softly, softly approaches to changing bad practice do not work in the construction industry

Carillion used to maintain that its early payment facility gave its subcontractors the option of being paid within 30 days. There’s nothing in the regulation that requires payment of a fee in order to get paid within 30 days. Other contractors still operate similar arrangements, offering subcontractors the option to pay a fee to get paid earlier than their standard terms; again, there’s nothing about this in the regulations.

The major problem with regulation 113 is the lack of effective enforcement. Complaints about non-compliance can be referred to the Mystery Shopper Scheme operated by the Cabinet Office. Those operating the scheme do not have the power to force a contracting authority to comply with what is, after all, a statutory duty. Moreover, firms in the supply chain are usually too afraid to file a complaint (let alone insist on operating the statutorily implied term that payment must be made within 30 days).

Many contracting authorities outsource their construction and property activities. Some local authorities outsource these activities to trading companies that are council-owned. The contracts let by these companies are unlikely to come within regulation 113.

Contracting authorities are required – under regulation 113(7) – to publish on their websites the extent of their compliance with the 30-day requirement. The Mystery Shopper Scheme is responsible for carrying out spot checks to ensure that this is done. But, again, I wouldn’t describe this as effective enforcement of ensuring compliance either with regulation 113 or with the duty to publish the necessary data.

So, what needs to be done? I would redraft regulation 113 to include the following:

A statutory duty to pay within 30 days to automatically apply to all public sector contracts and subcontracts
Failure by suppliers to discharge payment within 30 days to result in them being debarred from public sector works
Failure by contracting authorities to pay within 30 days to attract a penalty (for this purpose a regulator may need to be appointed)
Extension of the remit of regulation 113 to cover maintained schools and academies and, more importantly, to contracts let by outsourcing organisations on behalf of contracting authorities.

These measures are now absolutely necessary and are urgent. Softly, softly approaches to changing bad practice do not work in the construction industry. Earlier in the year Greg Clark, the business secretary, promised to do whatever was necessary to deal with the lessons learnt from Carillion. Here is an opportunity to do exactly that.