Proposed government crackdown on late payments and stricter payment targets for SMEs and VCSEs
August 2025Major contractors may find themselves excluded from public tenders over £5m per annum if they fail to demonstrate supply chain payment within an average of 60 days. The Government has launched a consultation of public procurement, including into late payment, looking to improve economic growth and strengthen the requirements for contractors to achieve payment benchmarks (the ‘Consultation’).
The initiative is part of a wider push by the Government to combat late payment, which is estimated to cost the UK economy around £11 billion per year and close down 38 UK businesses every day. Construction is a sector where the problem is particularly acute. Previously, the UK Government intervened to encourage more prompt payment through the introduction of the Housing Grants and Reconstruction Act 1996, which bolstered contractors’ right to faster, more on-time payment and provided mechanisms to obtain payment more quickly.
Public procurement forms a cornerstone of the Government’s industrial strategy and is also a convenient lever for better corporate behaviour. Around £385b is spent annually on goods, works, and services. A sizeable amount of this is allocated to construction projects.
Prompt and efficient payment is crucial for supporting the supply chain, small and medium enterprises (SMEs), and voluntary, community and social enterprises (VCSEs). The Consultation seeks to build on changes brought about by the Procurement Act 2023 (PA23) and support implementation of the new National Procurement Policy Statement (NPPS).
This update focuses on two of the Consultation’s proposals:
- requiring large contracting authorities with spend over £100m per annum to publish their own three-year target for direct spending with SMEs and VCSEs and report against it annually, as well as extending spend reporting requirements; and
- requiring contracting authorities to exclude suppliers from bidding on major contracts (+£5m) if they cannot demonstrate prompt payment of invoices to their supply chains.
Requirement to publish, and report against, three-year target for spending with SMEs and VCSEs.
Public procurement accounts for around one third of total public sector spending. The Consultation forms a part of the wider goal of targeting economic growth by increasing spend with SMEs and VCSEs. The PA23 introduced a number of reforms intending to improve access to public sector supply-chains for SMEs and VCSEs. Following these reforms, the Government is seeking to go further in strengthening SMEs and VCSEs.
Under the reforms proposed by the Consultation, authorities will be required to determine their own three-year target for spending with SMEs and VCSEs. In line with the NPPS, the expectation is that authorities should make their targets more challenging year on year. In order to improve transparency across the construction industry, data against payment targets will need to be published in one place, for example the Central Digital Platform. There is currently no proposed financial penalty for not achieving the target.
This proposed requirement adds to the transparency provisions set out in the PA23. Section 70 of the PA23 (not yet in force) requires authorities to publish information about any payment over £30,000 made by the authority under a public contract. The Consultation proposes an extension of the section 70 requirements so that information on all payments made under public contracts are published, effectively removing the £30,000 threshold, and extending section 70 coverage to payments in notifiable below-threshold contracts[1].
Contractors bidding for large public contracts may increasingly find themselves assessed on how their own operations support SME and VCSE inclusion.
Requiring contracting authorities to exclude suppliers from bidding on major contracts (+£5m) if they cannot demonstrate prompt payment of invoices to their supply chains.
The Government aims to combat the issues of long payment terms and late payment terms, and the knock-on effect these have on businesses’ abilities to manage cash flow and plan for growth. Current policy (Prompt payment policy – GOV.UK) requires central government departments to ensure suppliers demonstrate that they pay their supply chain on time. The required standard is for 95% of invoices to be paid within 60 days, with an overall average of 45 days for payment.
The PA23 retains the obligation on public sector clients to pay suppliers within 30 days (s 68). S 73 of the PA23 also extended the obligation to imply a 30-day payment term into subcontracts between public sector suppliers and their subcontractors when part of the public sector supply chain (i.e. where the subcontractors had been engaged for the purpose of a public project).
The Government’s proposal is to extend the policy adopted by central government to other public sector organisations. That will commit a greater number of suppliers across the public sector to pay their supply chains on time. This measure will be implemented on a ‘comply or explain basis’: if or adequately demonstrate that complying would reduce compensation or jeopardise value for money.
From 1 October 2025, government departments will be required to carry out regular ‘spot checks’ on for in-scope contracts to ensure smaller companies at lower tiers of the supply chain are being paid within 30 days.
Unlike the PA23’s implied terms, the proposed reform will take account of every invoice a business pays, regardless of whether it is a part of a public supply chain. This is a much wider obligation, promoting adequate payment policies and increased transparency. The reform aims to stamp out late payment across the public sector and deliver better cash flow for SMEs and VCSEs.
While this rule will only apply to payment records exceeding 60 days (rather than the current 45 days for central government departments) and contracts worth +£5m, Ministers will have powers to subsequently lower these thresholds.
Contractors should note that poor payment performance, even outside public sector work, could result in exclusion from bidding on high-value public contracts. Suppliers must fulfil both criteria in at least one of the two previous six-month reporting periods. If they cannot do so, they will not meet the technical criteria at selection stage and be unable to bid for government contracts.
If suppliers fail to pay 95% of the invoices within 60 days, but still manage to pay 90% of invoices in this time, they must submit a detailed action plan outlining the steps to get back on track. If the supplier also pays invoices within an average of at least 55 days in one of the two previous six-month reporting periods at the same time, this will meet the criteria.
In order to facilitate these shifts, amendments will need to be made to the PA 23 itself. Notably, the Government is considering the introduction of statutory exceptions to the obligations set out in section 23(2)(a) that award criteria must be linked to the subject matter of the contract. The Government is concerned this rule prevents authorities the flexibility of targeting social value delivery to where it is most needed.
Impact
The proposed reforms have the potential to significantly change the public procurement sphere. The greater transparency on SME and VCSE payment, and the stronger payment targets, will provide wider opportunities for small businesses.
Following the launch of the Government’s 10 Year Infrastructure Strategy and the introduction of the National Infrastructure and Service Transformation Authority, there are likely to be numerous projects that fall within the ‘major contracts threshold’. These strengthened payment date requirements will increase compliance requirements for contractors and impact contractor cash flow and bidding eligibility. Contractors should look to negotiate their payment terms to allow for the necessary payment buffers considering the greater scrutiny on prompt payment.
The proposed changes to the payment regime are part of the Government’s broader efforts to support corporate solvency and alter payment practices in the construction sector. For more on related proposals, see our articles on the consultation to reform or end retentions and the new Small Business Plan for supporting SMEs. Stay tuned for upcoming piece on the implications of the 30-day payment period on standard payment terms.
For further advice on tendering, procurement design, or construction payment compliance, please contact the authors or a member of our Construction Disputes, Contracts and Projects Advisory, and Competition and Procurement Teams
[1] Notifiable below-threshold contracts: regulated below threshold contract with, if awarded by a central Government authority, a value of not less than £12,000 or, if awarded by any other contracting authority, a value of not less than £30,000. A below-threshold contract is not notifiable if the authority is a school, or if the contract is a concessions or utilities contract – Public Procurement: Growing British industry, jobs and skills (HTML) – GOV.UK
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