Payment Terms in Public Contracts: Is Further Statutory Intervention Required?

On the 25th October 2017 Lord Prior of Brampton announced that as part of its review into the 2011 changes to the Construction Act¹, the Department for Business, Energy and Industrial Strategy was publishing two consultations on payment practices in the construction sector. The purpose of the consultation was to assess whether and to what extent government intervention may be required in respect of payment practices². This article looks at the existing legislation governing payment processes in construction contracts and how, if at all, changes to the Regulations or the Construction Act could improve the payment process and reduce the financial exposure of SMEs.

The consultation to support the review coincided with the collapse of the UK’s second largest construction company³ and a resultant early day motion (“EDM”) tabled by James Firth MP. The timing of these events is significant, and will no doubt give rise to consideration regarding what (if any) action the government should take to regulate payment timescales on construction contracts, particularly where the employer is, for the purpose of the Regulations a “Contracting Authority”⁴.

The EDM tabled by James Firth raises concerns over what it calls payment abuse and a failure to comply with and enforce the payment conditions set out in the Public Contract Regulations 2015. It states:

The difficulties that such lengthy payment terms may cause to the cash flow of a SME are well documented. These difficulties are further exacerbated when the party that owes the money enters into liquidation. In such cases, companies subject to payment terms of 120 days are exposed to 4 months’ worth of revenue.

1. The Housing Grants, Construction and Regeneration Act 1996 as amended by the provisions of Part 8 of the Local Democracy, Economic Development and Construction Act 2009.
2. Publication of Construction Payment Consultations: Written Statement - HLWS194.
3. Top 100 Construction Companies 2017.
4. “Contracting Authorities” means the State, regional or local authorities, bodies governed by public law or associations formed by one or more such authorities or one or more such bodies governed by public law, and includes central government authorities.