Is it a happy birthday for 30-day payments?

A year after the Public Contract Regulations came into force, their long-term impact on payment terms in construction remains ambiguous, says Josh Gibbons.

25 February marked a year since the Public Contract Regulations 2015 (PCR 2015) came into force. Its purpose was to implement the changes to public procurement that were passed by the European Parliament under the Public Contracts Directive 2014.

The Directive’s main aim had been to simplify the procedural regime for public procurement in European member states, but the UK government went beyond the scope of the Directive by introducing a number of additional obligations to make it easier for SMEs and start-up businesses to access public procurement markets – implementing the recommendations of Lord Young, the government’s adviser on enterprise and small business.

Arguably, it is the implementation of these additional obligations, and particularly those regarding payment in public procurement contracts, that have presented the most difficulties to those in the construction industry.

Specifically, regulation 113 of the PCR 2015 requires a contracting authority to ensure that every public contract awarded provides that:

• invoices are paid “no later than the end of a period of 30 days from the date on which the relevant invoice is regarded as valid and undisputed”; and
• invoices are “considered and verified by the contracting authority in a timely fashion”.

However, there has been some confusion regarding how these requirements interact with the payment provisions implied by the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996). Briefly, if a contract does not have adequate payment provisions, a timeline will be implied by the Scheme for Construction Contracts 1998 (the Scheme) as follows:

• Invoice issued — the due date for payment;
• No more than five days following the due date for payment — the paying party issues a payment notice;
• 17 days (or such other period specified in the contract) following the due date for payment — final date for payment;
• At least seven days before the final date for payment — the paying party may issue a pay-less notice.

The Crown Commercial Service has issued statutory guidance on the PCR 2015 but this does not refer to the Construction Act 1996 or the Scheme. The issue that arises, therefore, is when does an invoice become “valid and undisputed”?

Some have suggested that it is when the “due date for payment” falls; while others suggest it is after the time by which a “pay-less notice” can be issued as this is deemed acceptance of the invoice. The lack of clarification creates uncertainty.

The matter is further complicated by the need to ensure this 30-day period for payment is incorporated in contracts down the entire contractual chain. Given that many public procurement projects involve multiple tiers of contractors, this could be problematic. While the government’s commitment “that the public sector should set a strong example by paying promptly” is admirable, lower tier contractors will also need to revise their contracts to ensure that they are compliant with the PCR 2015.

The Crown Commercial Service guidance suggests using a project bank account (PBA), whereby subcontractors down the chain can obtain payment direct from the PBA. However, the advantage this potentially brings should be weighed against the administrative costs of setting up and running a PBA for smaller projects.

The government is keen to ensure that these payment mechanisms are adhered to and, as such, contracting authorities are required to publish statistics of how many invoices they have paid within the 30-day time period. This again adds to the administrative burden on contracting authorities in gathering and maintaining such statistics at a time when resources in the public sector are already limited.

It remains to be seen how the 30-day time period is interpreted in practice and it is frustrating that practitioners may have to wait until case law drips down through the courts. It is likely to be only once one party incurs the time and expense of challenging the time period that a proper interpretation will be given. While this ambiguity remains, however, those in the industry should ensure that their contracts are as compliant as possible.

Josh Gibbons is a solicitor on the construction and engineering team at IBB Solicitors