Procurement Act 2023: prompt payment terms

Obtaining timely payment for services rendered and work carried out is critical for the supply chain. For construction businesses, a failure to ensure net positive cashflow across projects can prove fatal.

Parliament and the UK Government have long acknowledged that delays in making payments on public sector projects, and failure to see that those payments cascade through the supply chain need urgent attention.

A principal method adopted to address the problem is the prompt payment requirement in the Procurement Act 2023 (the “PA 2023”). This note explores how the PA 2023 tackles payment terms in public sector contracts and the implications for the construction industry, including risks for those who do not closely monitor them.

Payment under the PA 2023

The PA 2023 strengthens prompt payment requirements in public sector contracts by introducing a 30-day statutory payment period for every relevant contract. Under s68, this applies to every public contract with a contracting authority, unless the contract is:

• a concession contract;
• a utilities contract awarded by a private utility; or
• a contract awarded by a school (“excluded contracts”).

For each relevant contract, s68(2) requires that sums due under that contract are paid before the end of the period of 30 days beginning with:

• the day on which an invoice is received by the contracting authority in respect of the sum; or
• if later, the day on which the payment falls due in accordance with the invoice.

Importantly, s68(6) provides that any contractual term that seeks to override or restrict this statutory payment deadline is rendered invalid.

Impact on payment in the construction sector

Standard practice throughout the construction sector has always been for interim payments to be applied for, assessed and made in stages governed by three principal dates:

• the assessment date (typically the date on which the payee is to submit its invoice);
• the due date for payment (the date to which the interim payment is to be assessed); and
• the final date for payment (the date by which the payer must make the interim payment).

Each of these dates is to be set out in the contract, and is to be aligned with the payment regime prescribed in the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”), and in the statutory Scheme for Construction Contracts (the “Scheme”). The Construction Act governs every contract for construction operations in the UK, and imposes mandatory requirements relating to payment regimes in such contracts. The Scheme sets out a payment regime that is deemed to apply if such a contract fails to comply with those mandatory requirements.

Following the introduction of the PA 2023, the question is whether s68 will create a divergence from standard practice or a conflict between the Construction Act’s longstanding requirements and the new PA 2023 provisions. There are three potential issues:

1. Under s68(2) of the PA 2023, the date by which a payer must make payment under a relevant contract is calculated on the basis of the due date specified on the invoice, rather than on the basis of the final date for payment specified in the underlying contract (or, in its absence, in the Scheme). Plainly, this could operate to contradict the provisions of the Construction Act and the Scheme.
2. s73 flows down the PA 2023’s 30-day payment period to all relevant sub-contracts, and s68(6) provides that any contractual term purporting to restrict or override the terms implied by s68(2) will have no effect. In principle, therefore, there is nothing to stop a sub-contractor payee from stating a due date on its invoice that is earlier than the date which would give effect to the agreed payment terms in the contract – which earlier date would then be enforceable under the PA 2023. This may oblige payers up the supply chain to make payments substantially earlier than agreed and create uncertainty over payment timing.
3. It is common practice to provide a buffer between payment periods under a head contract and a sub-contract, to ensure that contractors and consultants up the supply chain are not ‘caught in the middle’ and do not end up having to make payments to sub-contractors before receiving payments from their clients. The PA 2023 makes no reference or concession to this practice. In principle, there is nothing to stop a sub-contractor payee from stating a due date on its invoice that is earlier than the date on which the contractor or consultant payer itself received payment from its client – which earlier date would, again, be enforceable under the PA 2023. This could leave contractors and consultants up the supply chain cash-flow negative – effectively financing a project through their own balance sheets.

Conclusions

Clearly, the potential issues set out above can only be problematic if the final date for payment specified in a construction contract is greater than 30 days from the date of the payee’s invoice – and the entire purpose of the prompt payment regime in the PA 2023 is to avoid this being the case.

However, given the complexity of construction contracts and the industry’s heavy reliance on precedents and flowdowns, there is a real risk that the point is missed in practice. If this happens, unexpected invoice due dates may lead to unexpected late payment claims and smash-and-grab adjudications, and accordingly to cashflow difficulties.

The courts have yet to rule upon the interpretation of s68 PA 2023, and in the interim it remains uncertain as to how this will operate and whether it will be interpreted to accord with the Construction Act and the way in which the construction sector currently operate. The hope is that such an approach would help promote certainty as to payment periods, and to support manageable cash-flow.

Anyone who is a payer under a construction contract on a public sector project must watch out for due dates in invoices which are different to those calculated in accordance with the relevant contracts – both at the front-end, when negotiating contracts, and during project delivery, when administering payment.

It is worth noting that the prompt payment provisions in ss68 – 73 PA 2023 do not have retrospective application. The terms will not be interpreted into procurement processes commenced, and contracts awarded, pre-24 February 2025 Procurements commenced before 24 February 2025 and their contracts will be covered by the Public Contract Regulations 2015 (as amended), which do not contain these implied terms.

If you require any assistance on reviewing your payment terms, or any other contractual queries, please contact the authors or your Beale & Co lawyer.