Prompt payment rules are being tightened by the UK government, in a bid to ensure quick payment of invoices so as not to damage companies’ cash flow. From April 1st 2023, clients, contractors and subcontractors will need to pay 90% of invoices within 60 days, which is an increase from the previous target of 85%.
Those who fail to meet this 90% target could be at risk of being excluded from public contracts. Companies bidding for work worth more than £5 million will be checked to ensure they adhere to the new prompt payments standard. If it is found that a company has fallen short of this target, it will be barred from winning work.
The government outlined the new target in a Policy Procurement Notice (PPN). It has also highlighted that in time, the target will be changed so that clients, contractors and subcontractors will have an absolute requirement to pay 95% of invoices within 60 days, although a date for this change has not yet been provided.
Bringing the industry in line with the Prompt Payment Code
These changes follow on from action taken to strengthen the UK’s Prompt Payment Code. Updates to the code came into effect on July 1st 2021, which saw Code signatories become required to pay 95% of invoices from businesses with fewer than 50 employees within 30 days.
The changes also mean that signatories need to pay 95% of all invoices within 60 days – which will ultimately be the industry standard – meaning clients and developers, as well as contractors, will need to ensure they have the adequate cash flow available to fulfil this.
Those who have signed the Prompt Payment Code must also recognise the right of suppliers to charge late payment interest and charges if an invoice is paid late without justification. Suppliers also need to be provided with a contact point for payment queries.
In mid-July, there were just over 3,320 signatories to the code, which was originally established back in December 2008. The code is voluntary although large businesses that have signed can be suspended if they pay less than 90% of invoices within 60 days. They can also be permanently removed if they fail to achieve compliance or to engage with the Code’s commissioners.
Back in 2019, a large number of construction firms – including Kier, Balfour Beatty and Galliford Try – were suspended from the code for failing to meet its requirements, although they have all since been reinstated.
Are the new targets enough?
There are concerns that even this new target will not be enough to ensure that invoices are settled on time. As industry expert Rudi Klein points out, companies that don’t meet the target are still able to bid for work if they can provide a plan that details how they are aiming to improve performance. Mr Klein has suggested that the government make prompt payment a strict mandate for winning jobs.
To ensure prompt payment, Mr Klein suggests the use of project bank accounts (PBAs). With these accounts, the money for contractors, subcontractors and suppliers is ring-fenced and protected from insolvency and abuse.
Project bank accounts mean that payments are made directly and simultaneously to suppliers, no matter where they are in the supply chain. Not only does this improve efficiency and reduce late payments, but it also ensures more transparency.
An example of PBAs in use is Highways England, which commonly uses them to pay contractors and consultants throughout the supply chain within 18 days of their work being assessed. However, the use of PBAs in the construction industry across the UK is still limited, which is why the rules around prompt payment may need to be stricter.
Protecting small businesses
The goal of changing industry standards and strengthening the Prompt Payment Code is to protect small businesses across the UK. According to the Federation of Small Businesses, around 50,000 businesses close every year due to late payments.
With two-thirds of the UK private sector employment being down to small business, along with more than half of business turnover, late payments can have a huge impact. Late payments can drastically affect businesses’ bottom lines, restricting investment and the creation of jobs, if not causing closures.
It is hoped that the changes to the rules around construction invoices will help with businesses’ cash flow and help the industry recover from the uncertainty brought on by the Covid-19 pandemic, while also helping to strengthen it in the coming years.