Value Wales, November 2012

Wales Fair PaymentGuidance

Background

In 2007 the Office of Government Commerce’s(OGC) Fair Payment guide and Charter were introduced, which stipulated that public sector clients should pay their suppliers the correct full sum within a specified time. This requirement applied equally to suppliers paying their sub-contractors. The aim of this process was to prevent late or delayed payment, provide greater certainty on payment in the supply chain and optimise payment periods to minimise financing charges.

In January 2011, the UK Government announced that the application of fair payment contract terms would be mandatory for all central governmentcontracts. Uptake has also been recommended by the National Improvement and Efficiency Partnership for the Built Environment.

In October 2010 Constructing Excellence in Wales published No Turning Back,a report on construction in Wales, the challenges facing Welsh construction businesses, and the need for collaboration, standardisation and best practice in construction procurement.

One of the key findings of the report was that a standardised, best practice approach to payment of contractors be adopted across the public sector in Wales.

In December 2010 the then Minister for Business and Budget established the Construction Procurement Strategy Steering Group, to take forward the recommendations of the report.

The purpose of this note is to outline how fair payment clauses should be incorporated into public sector construction projectsin Wales, and remind clients and contractors that the Construction Procurement Strategy Steering Group, with the support of the Minister for Finance, strongly recommends the use of these terms.

It provides guidance for the development of clauses to implement fair payment which are to be issued with the NEC form of contract. Similar guidance where using JCT and PPC2000 forms will follow. It also advises of a route that can be used by all suppliers to raise concerns about non-compliance.

The following is an example of a Fair Payment (Z) clause published by NEC and endorsed by the Cabinet Office Efficiency Reform Group for use within NEC3 contracts[1]

Z5 / Fair payment
Z5.1 The Contractor assesses the amount due to a Subcontractor without taking into account the amount certified by the Project Manager.
  • Z5.2 The Contractor includes in the contract with each Subcontractor
  • a period for payment of the amount due to the Subcontractor not greater than 19 days after the due date* in this contract. The amount due includes but is not limited to, work which the subcontractor has completed from the previous assessment date up to the current assessment date in this contract.
  • a provision requiring the Subcontractor to include in each sub-subcontract the same requirement, except that the period for payment is to be not greater than 23 days after the due date in this contract.
  • a provision requiring the Subcontractor to assess the amount due to a sub-subcontractor without taking into account the amount paid by the Contractor.

Z5.2 The due date in this contract is the date on which the Project Manager certifies payment.
Z5.3 The Contractor includes this provision in each subcontract, and requires Subcontractors to include the same provision in each subsubcontract.

Implementation

Construction procurers in Welsh Government departments, local authorities and any otherrelevant public bodies in Wales, need to ensure that their contracts with suppliers include the payment provisionsoutlined in Figure 1.They should ensure that contracts and sub-contracts define the payment periods for the different tiers in the supply chain.

  • It is vital that firms are made aware of the main contract due dates for payment.

Contractors and their sub-contractors whose services are procured for the above bodies, should also ensure that fair payment practices as described in the guidance for the development of contract clauses provided, are implemented throughout the supply chain.

  • It is vital that all Tiers have assessment dates that are aligned with the main contractor, or Tier 1 supplier.

The fair payment cycle outlined in Figure 1 defines payment periods for different Tiers in the supply chain:

  • Tier 1 – payment is required within 14 calendar days from the Due Date.
  • Tier 2 – payment is required within 19 calendar days from the Due Date.
  • Tier 3 – payment is required within 23 calendar days from the Due Date.

This contractual requirement is not intended to be applied retrospectively to existing construction contracts. However, wherever feasible, suppliers’ voluntary agreement to this new payment requirement should be sought.

Monitoring take-up of the terms

Public sector clients will be responsible for monitoring application of the standard contract clauses by requesting regular reports as appropriate from the relevant main contractor.

Value Wales will seek to work with public bodies tocollate data on the payment performance of contractors, in order to create a picture of how the policy is adopted by the public sector and how contractors’ payment processes are developing.Contractors and clients will be asked to apply the standard clauses and provide data on fair payment within contractsover £2m.

Figure 1[2] - The Fair Payment Cycle

Frequently Asked Questions (FAQs)

What do I get out of it?

Cashflow is absolutely vital to the growth and even survival of companies large and small – especially during an economic downturn.

People prefer to work with clients and contractors who pay fairly. A performance table will ensure that both clients and sub-contractors know who pays fairly – and who doesn’t.

What if I want to pay sooner than these terms?

There is absolutely nothing to stop you as a client from paying your suppliers sooner than these terms, which represent a minimum standard.

What is a ‘Valuationdate’?

This is the same thing as the assessment date, which is specified in the Head Contract.

How do I ensure my contractor is paying their sub-contractors fairly? Privity of contract means that you can’t take legal action over a contract to which you are not party. However, you can ensure that contractors embed fair payment terms into their contracts and strongly encourage them to pass this provision down through the tiers. You can also put clauses in to the main contract to say that in the event of repeated failure to pay on time you reserve the right to reduce the fees owed accordingly and pay subcontractors directly.

Ho do I embed fair payment terms into different types of contract?

A standard clause is available for use with the NEC form of contract. Efficiency Reform Group is developing similar clauses for JCT and PPC 2000 forms of contract.

How will the performance table work? What will be done with the information?

Value Wales will be monitoring the take-up of fair payment terms and seeking feedback from various clients and contractors.

This doesn’t answer the question though as to what happens to the info. Im keen on league tables but not just for fair payments, if we are going to introduce it then lets say its about construction performance – as well as CB, and make a bigger thing of it? If we aren’t ready to say that they say we will be considering publication as part of a wider wish to recognise and be transparent about good and bad performance across Wales? The issue of performance tables needs to feature in the MB and doesn’t at the moment?

This will inform wider Value Wales work on performance in construction and will also link with our work in monitoring implementation of the Construction Procurement Strategy and Construction Commitment Charter. We will work with clients to ensure that future delivery partners adhere to the principles of these initiatives, which includes fair payment.

How do I highlight instances of non-compliance?

Queries about the policy or examples of both good and poor practice can be directed to the Construction Procurement Strategy Steering Group via construction fora or the Value Wales Policy Mailbox.

How does this policy fit in with the changes to the Construction Act?

This policy complies with the changes introduced in October 2011, because the changes relate chiefly to the way in which payment notices and ‘pay-less’ notices are issued. Regardless of whether the contract follows a payer-led or payee-led process, these must be issued within 5 days of the due date, therefore falling within the maximum payment period after the due date. Clients and contractors should note that payment periods do not start after the issuance of these notices.

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[1] Cabinet Office Efficiency Reform Group Procurement Information Note 1/2011:

[2] Taken from OGC Information Note 2/2010, Making fair payment in construction a requirement in central government contracts