Only 10% of high-value contracts awarded by government bodies in the last four years have gone to outsourcers that comply with new standards that will penalise companies that fail to pay their suppliers on time, an analysis has found.
The public contracts database Tussell has warned that 80% of strategic suppliers – companies that receive over £100m in revenue per year from government contracts – are at risk of being excluded from large government contracts, based on their track record.
From September, contractors that provide services to government that fail to pay 95% of their invoices to other companies in their supply chain within 60 days could be excluded from bidding on public contracts worth more than £5m a year. Public-sector bodies are already required to pay their suppliers within 30 days.
But in a report that called on the government to give suppliers more time to adjust to the regulations, Tussell found that of the 1,888 companies that had won government contracts since 2015, 1,336 – 70% – failed to pay their subcontractors on time.
And of the 1,139 contracts valued above the £5m threshold, worth a total of £172.2bn, just 10% were compliant with the new standard.
In 37% of the high-value contracts – worth 52% of the total monetary value – subcontractors were not paid within the 60-day limit. For 58% of contracts, outsourcers had not reported whether or not they had paid their suppliers on time – which would also violate the new rules.
Suppliers to the Ministry of Defence had the worst track record. The MoD has awarded 59 in-scope contracts to suppliers with poor payment practices since 2015, more than double that of the next-biggest buyer.
Highways England followed, with non-compliant suppliers responsible for 28 in-scope contracts; the Department for Work and Pensions, with 25; Transport for London, with 23; and the Home Office, with 20.
The report also found that 28 of the 36 strategic suppliers to government had reported poor payment practices. It highlighted the "outsourcing/construction" sector as a particular area of concern, as nine strategic suppliers in this area would be deemed non-compliant according to the new criteria.
Together, nine outsourcing and construction firms were responsible for 66 in-scope contracts, but paid just 72% of invoices on time on average. Only one company in this sector managed to pay its bills on time.
But among strategic suppliers, telecoms contractors had the lowest rate of compliance with the regulations. All three strategic suppliers in this sector fell short of the requirements, paying just 67% of subcontractors on time across six contracts.
Four IT and tech outsourcers were among the best-performing strategic suppliers, between them paying 97% of invoices on time, but seven companies in the same sector fell below the required threshold.
And while none of the five defence suppliers met the target, they were nevertheless among the better performers, paying 90% of invoices on time.
The report said the policy had the potential to be “transformative” for small and medium-sized businesses in the government’s supply chain, citing an estimate from the Federation of Small Businesses that late payments cause 50,000 small businesses to close every year.
“However, if implemented without due care, it could have a devastating impact on an already strained outsourcing sector,” it warned.
Freezing out strategic suppliers would be “counterproductive”, according to the report. “Therefore, we recommend the government proceed with care – taking decisive action but allowing tier 1 suppliers [that have direct contracts with government] sufficient time to reform. It should use the data at its disposal to focus attention on the areas where action on prompt payment would generate the highest return.”
It said as a starting point, concentrating on improving compliance in the MoD’s supply chain would have the biggest impact on suppliers.
Gus Tugendhat, founder of Tussell, said: “With this new policy, the government has made a welcome commitment to tackling the endemic problem of late payments to the small companies that can least afford it.
“While compliance is undeniably poor at present, we offer concrete recommendations as to where the government could best focus its efforts to ensure this policy achieves its goals. This initial audit of payment performance also provides a baseline against which future progress on compliance can be measured.”
Public sector should 'lead by example'
As the introduction of the new regulations approaches, Oliver Dowden, Cabinet Office minister for implementation, has reminded public-sector bodies of their obligation to pay suppliers within the required 30 day limit.
“We are being very clear with government suppliers that they must pay their supply chain on time or face losing future government contracts," he said in a statement.
“So it’s only right that we say to the public sector that they must lead by example and make sure their suppliers are paid on time."
The government’s Crown Representative for small businesses, Martin Traynor, said the difference between waiting 60 and 90 days for payment “can be make-or-break for many small companies, so it’s vital that both the private and public sector work better in this area”.