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HS2 – Payment of subcontractors

According to a recent report by the National Audit Office (NAO), central government spends £40 billion a year on goods and services, of which about…

According to a recent report by the National Audit Office (NAO), central government spends £40 billion a year on goods and services, of which about £4.5 billion (11%) is attributed to small and medium-sized enterprises (SMEs). At least another £4 billion is spent indirectly with SMEs – where SMEs are subcontractors on government contracts. Given that the use of SME’s and subcontractors will be significant in the ongoing HS2 project, the terms of payment for their services will be no doubt be under close scrutiny.

When businesses sell goods and services to other businesses, sales are usually made on credit, under the assumption that payment is received after an appropriate time and following the issuing of an invoice. It will be up to the parties involved to agree the "appropriate" timescale for payment. The reality though is that with no monitoring procedures in place, payments are often late, lower than expected or not made at all – something to which SMEs are particularly susceptible.

To combat the culture of late payment, the Department for Business, Innovation and Skills introduced the Prompt Payment Code (PPC) in 2008. The PPC is a voluntary code of practice that enables organisations to publicly assure their suppliers that payment will be made on time. At the time of writing, the PPC has attracted 1,778 signatories between the public and private sectors and, as of February 2014, every governmental department has signed up to it. HS2 Limited, the non-departmental public body overseeing the HS2 project, has said it will observe the principles of the Code.

In addition to the PPC, the Cabinet Office established a "Mystery Shopper Service" in 2011 to help gauge the severity of the issue. Contractors and subcontractors may report directly to the government to raise concerns about instances of late payment. The downside to these initiatives however is they are both voluntary.

From a legal perspective, the government has proclaimed that since 2010, all of their contracts will include a clause that stipulates payment for services must be within 30 calendar days. Payments can be made after 30 days, so long as there is a specific agreement in place between both parties. This was in direct response to the announcement of the European Directive 2011/7/EU, targeting late payment in commercial transactions. The Late Payment of Commercial Debts Regulations 2013 incorporated the Directive into UK law and since that time, the government has pledged to pay 80% of undisputed invoices within 5 working days, well within the now 30 day statutory limit.

In theory then, there should be no late payment problems between a governmental department and their main contractors as the statutory safeguards are now in place and all departments are signatories to the PPC.

What about subcontractors?

Whilst large main contractors work directly for the government those main contractors are then often supplied by several tiers of smaller subcontractors, including SMEs, below them. If the government’s intention has been to protect and promote the growth of SMEs, then surely the subcontractors should expect the safeguards to extend to them also?

Speaking at the HS2 Supply Chain Conference, Commercial Director Beth West made a point of reassuring subcontractors that every effort will be made to pay them within a designated timeframe. West went as far to say that, should any payment problems arise, that HS2 Limited would consider paying subcontractors directly should main contractors fail to do so in the timescales they require. This should be of some relief to subcontractors after the NAO’s report found that "90% of specialist contractors have to wait over 30 days" for the full settlement of their invoices.

Further relief for subcontractors may be sought via the Late Payment of Commercial Debts (Interest) Act 1998. This provides an avenue to claim interest and penalties should payment exceed the 30 day, or otherwise contractually agreed, time period. The unfortunate reality for SMEs and subcontractors though is that they can’t usually afford to incur further costs by challenging late/non-payment through litigation. In fact, a recent survey by the National Specialist Contractors Council (NSCC) has revealed that over £200m of late payments were written off by subcontractors as bad debts over the past year. The government is further looking to address such issues through its recent consultation on what constitutes ‘grossly unfair’ payment terms in commercial contracts and in looking to introduce the Small Business, Enterprise and Employment Bill.

As HS2 Limited has said it is exploring ways to ensure "prompt payment requirements filter through the supply chain". It seems fair to assume then that the given the negative publicity the HS2 project has already had to endure, the project’s executives will be looking to clamp down on late payments, particularly with HS2 forming a significant contentious issue in the 2015 election battle.