Suppliers to government that don’t pay 95% of their invoices to their own supply chain within 60 days run the risk of losing out on major government contracts - thanks to “tough” new prompt payment rules that have now come into force.
The new code of practice was announced back in November by the Cabinet Office, with the aim of making it easier for SMEs to do business with government.
It has been a long running ambition of government to boost the amount of business that SMEs do with Whitehall. However, a significant chunk of this business is done via larger suppliers’ supply chains and poor payment practices can be inhibiting for smaller companies.
A target of 33% of central government procurement spend going to SMEs, directly or via the supply chain, is currently in place. Total spend with SMEs for the year 2017/18 currently stands at 23.7%, up from 22.5% from the previous year. The increase is as a result of more spend via the supply chain.
The Minister for Implementation, Simon Hart, said:
Developing a prompt payment culture is critical for all companies helping to deliver vital public services.
And it’s particularly important for small businesses who may not have the reserves of larger organisations. That’s why we’re making it clear to big businesses that they must get their payment records in order or face the very real risk of missing out on large government contracts in the future.
The Cabinet Office has said that since announcing the rules there has been evidence of an “improvement” in payment rates by government suppliers, but added that it is “clear that many businesses still need to do more”.
Lots of work to do
A recent report found that only six out of the government’s 36 strategic suppliers - suppliers that are deemed so critical to the delivery of essential public services that the government’s relationship with them is managed centrally - would have been found to be compliant under new rules.
Tussell, a research firm that is planning to publish regular reports on supplier payment compliance, found that a total of £90 billion of in-scope contracts (ones that are worth more than £5m per annum each) have been awarded to suppliers with poor payment practices since 2015. Only 10% of contracts have been awarded to compliant suppliers.
The number of in-scope contracts awarded since 2015 in central government stands at 562; local government has awarded 354; and the NHS has awarded 81.
It also found that under the new standard, four-fifths of the government’s strategic suppliers would be excluded from bidding on government contracts.
Of the departments responsible for issuing the most contracts that fall under this remit, it’s unsurprising that the Ministry of Defence comes out on top with 59 contract awards. This is followed by Highways England (28), Department for Work and Pensions (25), Transport for London (23) and the Home office (20).
The new rules were welcomed by the Confederation of British Industry (CBI). CBI Deputy Director-General, Josh Hardie, said:
Businesses know that strong supply chain relationships are the bedrock of a successful UK. Paying on time is at the heart of this - which is why companies welcome the Government’s efforts to support a culture of prompt payment.
Companies are already raising their game. These new rules - applied fairly and consistently - will further enhance the UK’s responsible payment culture.
It hasn’t been made clear how the government plans to audit or enforce these new rules, but it does publish payment information for large suppliers here - where you can search to see how long a supplier typically takes to pay.