Barrister Professor Rudi Klein takes an in-depth look at the Public Contracts Regulations 2015.
The Specifier was the first publication to herald the introduction of 30 day payment periods on public sector contracts. Under the new Public Contracts Regulations 2015, contracting authorities (i.e. all public bodies except maintained schools and academies1) must have in their contracts an obligation to pay their contractors within 30 days. The 30 days commence from the date on which an invoice is “regarded as valid and undisputed”. The 30 day payment obligation must be included in subcontracts and sub-subcontracts. If the 30 day obligation is not expressed in contracts/subcontracts, the Regulations state that it will be an implied obligation.
Verification of invoices must be done in a “timely fashion”2, undue delay is no excuse for failing to regard an invoice as valid and undisputed.
Regulation 113 does not affect any statutory/contractual obligation to pay within a shorter period.
How do the Regulations affect construction contracts and subcontracts?
The Regulations apply to all construction contracts, subcontracts and sub-subcontracts involving the carrying out of any works, supplying any products or providing any services. Unfortunately (despite a considerable amount of advice given to the Cabinet Office by myself) the Regulations do not easily relate to the payment procedures in Part II of the Housing Grants, Construction and Regeneration Act 1996 (as amended) – the Construction Act.
In construction contracts (within scope of the Construction Act) payment timing and entitlement is dependent upon the operation of the statutory payment notice procedure – not on a process of determining that an invoice is “valid and undisputed”. Furthermore, the payment process in construction is usually commenced by a payment application rather than an invoice.
The Construction Act requires that construction contracts have:
- A PAYMENT DUE DATE
- A FINAL DATE FOR PAYMENT
Within five days of the due date, a payment notice must be issued (either by the payer or payee). The notice defines the amount to be paid by the final date for payment. This amount must be paid unless prior to the final date a ‘pay less notice’ has been issued, in which case the amount in that notice must be paid. All notices must be valid in that they have been issued by the correct party, contain the basis of the calculation and are issued on time.
There is also a statutory default procedure which “kicks in” when the paying party fails to issue a payment notice (although required to do so under the contract or Scheme for Construction Contracts). If the party carrying out the work has generally issued a payment application, the application becomes the payment notice.
Under construction contracts, when does the 30 days start?
The key issue, therefore, is when does the 30 day period commence? Let’s consider the scenario below which follows the traditional payment process:
A payment application is submitted a week prior to the payment due date. Not later than five days after the payment due date the paying party is required to issue a payment notice. Given that a week plus five days should qualify as a reasonable time for assessing the application as “valid and undisputed” the 30 days is likely to commence from the expiry of the five days. Any ‘pay less notice’ will have to be issued before the expiry of the 30 days.
The 30 days, therefore, should start from the expiry of five days following the due payment date (where the paying party is required to issue a payment notice).
How does the 30 day payment obligation apply to release of retentions?
It would have been helpful if this had been addressed in the guidance published by the Cabinet Office (see footnote 2). Retentions are, of course, deducted from payments subject to the 30 day obligation. As soon as the first or second half of the retention is due for release, an invoice/application or payment notice (if the contract states that the party carrying out the work has to issue payment notices) in respect of the outstanding retention should be sent to the paying party. The paying party has 30 days to release the retention from the expiry of five days from the due payment date3.
If payment is made late (i.e. after 30 days) statutory interest becomes payable. Also late payment can be reported to the Mystery Shopper service run by the Cabinet Office.
The Regulations require public bodies to report annually – via the internet – on their payment performance to tier 1 suppliers4.
Project bank accounts (PBAs)
The statutory guidance advises that project bank accounts “are a practical example of how payments can be made quickly to suppliers…” It further advises that “PBAs should be used where appropriate”5.
What to do now?
You should now check the payment terms in all your contracts and subcontracts when beginning to work on public sector projects. Make sure that they all provide for 30 day payments.
1 Public bodies include local authorities, police and fire services, health authorities and government departments and agencies.
2 Contracting authorities must have regard to the statutory guidance published by the Cabinet Office. The link is: https://www.gov.uk/government/publications/public-contracts-regulations-2015-paying-invoices-in-30-days-down-the-supply-chain
3 Your contracts should define the due and final dates for the release of retention monies.
4 The first annual reports should appear from end of February 2016 on the websites of public bodies.
5For central government departments and agencies PBAs must be used unless there are compelling reasons not to do so [refer to www.gov.uk/government/publications/project-bank-accounts].