Procurement in a Nutshell – Supply chain payment terms

Requirements on payment compliance

Sections 67 and 68 PA 2023 set out the payment requirements for public contracts. Sections 72 and 73 mirror such requirements for sub-contracts.

Section 68 PA 2023 implies 30 day payment terms into every public contract and section 73(1) PA 2023 does the same but for public sub-contracts.

How are payment terms monitored?

PPN 021 suggests that in-scope organisations should conduct spot checks within the supply chain subcontracts at least every six months from the award date of the contract. The purpose of a spot check is to provide evidence of payment within 30 days of invoice.

An in-scope organisation is defined as all central government departments, their executive agencies and non-departmental public bodies, but all public bodies can use this guidance.

Whilst spot checks should be conducted every six months, they can also be applied at random to deter non-compliance with the terms set out in section 73 PA 2023. Targeted spot checks can happen any time where an authority has assessed there to be a risk of poor performance. This could ultimately result in the Public Procurement Review Service investigating where a specific complaint has been raised against a contracting authority, a primary supplier or any other supplier within the supply chain.

If a spot check reveals a supplier is not complying with the prompt payment rules, the contracting authority may:

1. Inform the supplier that 30-day payment terms are implied into all contracts for full or part performance ad any term purporting to override the 30 days is invalid. Sub-contracts have the right to claim late payment interest where these terms are no adhered to
2. Contact the sub-contractor to inform them that 30 day payment terms are implied even when not expressly included within the contract
3. Request the supplier explain what terms have not been adhered to and what action is being taken to remedy the issue
4. Inform the supplier they may be in breach of contract

What happens if you do not pay an invoice within 30 days?

A contracting authority can terminate a public contract for non-compliance by the supplier with its obligations to pay sub-contractors, or exclude the supplier from existing frameworks or future bidding opportunities.

Schedule 7 PA 2023 sets out the grounds for discretionary exclusion. In the context of late payment, paragraph 12(3) PA 2023 is the most relevant.

This outlines a discretionary exclusion ground that applies to a supplier if the supplier:

1. Has not performed a relevant contract to the authority’s satisfaction,
2. Was given proper opportunity to improve performance, and
3. Failed to do so

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Take Me There

Section 73 PA 2023

This nutshell’s focus is on sub-contracts, therefore, the relevant section is s73 PA 2023 rather than s68. It is important to note, sections 68(1)-(5) are implied into s73. This means, sub-contracts are still bound to pay a sum due before the end of the 30 day period beginning with:

1. The day on which the invoice is received by the contracting authority in respect of the sum, or
2. If later, the day on which the payment falls due in accordance with the invoice

However, these terms do not apply if the contracting authority considers the invoice invalid or if the invoice is disputed (s68(3)) and the contracting authority must notify the payee without undue delay if they consider the invoice to be invalid of disputed.

The term ‘undue’ delay is not defined within the PA 2023 or contract law. However, looking at the old procurement law under the Public Contract Regulations 2015, Regulation 113(2)(b) coupled undue delay with meaning within a timely fashion. Applying this logic to the new law, it seems undue delay can be presumed to mean within a timely fashion in the context of that particular contract. For example, if a contract was for 30 days, you could not have an undue delay of 40 days because it is longer than the length of the actual contract.

What counts as a valid invoice?

Section 68(8) and (9) set out criteria for a valid invoice and these criteria equally apply to sub-contracts, although, s73(2)(b) excludes section 68(8)(a) (electronic invoices).

An invoice is valid if:

(a)it is an electronic invoice issued in the required electronic form, or

(b)it sets out the minimum required information and meets any other requirement set out in the contract.

The minimum required information is:

(a)the name of the invoicing party,

(b)a description of the goods, services or works supplied,

(c)the sum requested, and

(d)a unique identification number.

As the PA 2023 sets out what is considered to be valid, it is assumed if the invoice does not meet any of these criteria, it can be categorised as invalid. There are however no criteria or guidance relating to what could be considered disputed, it depends on the particular facts in each case.

Can the 30-day period be extended?

S68(2)(b) says payment terms can be later than 30 days from the receipt of the invoice:

“if later, the day on which the payment falls due in accordance with the invoice”

So, this leaves open the possibility that suppliers could state in their sub-contracts that the date when payment falls due is soe time after receipt of the invoice, meaning that the 30 day period will only then commence.

Mitigating the 30-day implied payment terms

Even though the mandatory 30 day period is watertight once the invoice has been issued and received, the PA 2023 does not set a time limit for issuing an invoice. Therefore, there is nothing to stop a customer from imposing terms that delay its supplier’s ability to raise an invoice (e.g. until 30 days after delivery of the goods or services). This is contrary to the spirit of the PA 2023, but could still be lawful.

For further information please contact Melanie Pears or Tim Care in our Public Sector team.

Seminar: Procurement and Public Law Update

Join us for our in person Procurement and Public Law Update on Thursday 20th November between 9.30am – 12.30pm.

The challenge everyone in the public sector is facing is bedding in the new procurement rules with their increased transparency requirements.

This seminar will look at what those changes have meant in practice since both the new Act and the new NHS regime came into force and will give practical tips on how to manage procurements now.

In our Procurement and Public Law Update we will be covering a range of topics such as:

• Highlights from the transition to the Procurement Act 2023 and the NHS Procurement Selection Regime
• Latest case law
• The Transparency agenda
• Avoiding or defending a challenge
• Update on Subsidy Control
• Update on Local government reorganisation

Register for the seminar here.