What the Prompt Payment Code rules mean for you as a construction buyer

At the beginning of 2021, while we were still in the grips of the Covid-19 pandemic, UK policymakers were already trying to identify measures that would hasten an economic recovery.

The goal became not only to return to normal but also ‘build back better’ and a key area of focus has understandably been our nation’s small businesses. The Prompt Payment Code (PPC) has an important role to play in helping those businesses maintain cash flow, employ staff and invest in growth, and after reforms to the PPC were announced in January, new rules came into force on 1st July 2021.

Financial protection offered to small businesses

Smaller businesses are among those who have suffered most during the pandemic, and they’re also vital to our nation’s economy. More than 99% of UK businesses fall into the small to medium sized enterprises (SME) category. Those six million SMEs employ around 17 million people and account for almost half of total turnover in the private sector, according to 2020 government figures. Little wonder then that the government is seeking to ensure their survival, and encourage growth, by giving new powers to the Small Business Commissioner (SBC) through a complete overhaul of the PPC.

Why the PPC benefits everyone

While most buyers will already be familiar with the basics of the PPC, it’s important to remind ourselves why it was created and what the benefits of it are, for all parties. First introduced in 2008, the PPC is intended to propagate a culture of prompt payment between businesses, and from larger to smaller businesses in particular. While signing up to the Code is voluntary, the Commissioner’s office reminds us that adherence to the Code holds benefits for buyers as well as suppliers.

This isn’t a difficult concept to understand: for firms dependent on a stable supply chain, ensuring every business in that supply chain has the healthy cash flow they need to keep their teams employed and their operations running smoothly makes good commercial sense. Unfortunately, despite almost 3,000 organisations signing the Code, poor payment practices are still rife and in January 2021 there were £23.4 billion worth of late invoices still owed to firms across Britain, impacting their cash flow and ultimate survival.

What buyers need to know about the PPC reforms

The overhauled Prompt Payment Code introduces new responsibilities and stricter payment deadlines for which a buying firm’s owner, CEO or Finance Director becomes personally liable. It’s therefore crucial that procurement teams are aware of the changes and understand how to better manage their internal processes; to avoid investigation by the Commissioner’s office and the reputational damage that could come with being publicly struck off the Code.

Under the new reforms, organisations buying from SMEs must:
  • Pay 95% invoices from businesses with 50 – 250 employees within 60 days.
  • Pay 95% invoices from small businesses (with less than 50 employees) within 30 days.
  • Report annually on their payment performance, on a comply or explain basis (even if the signatory is an SME themselves).
  • Recognise the right of suppliers to charge late payment interest and charges if an invoice is paid late without justification.
  • Provide suppliers with a contact point for payment queries.
An ethical commitment that supports commercial goals

With the PPC forcing its signatories to evaluate their payment systems, and opening them up to the risk of reputational damage, it could be tempting for firms with outdated processes to bury their heads in the sand and put off making a commitment to prompt payment. But it’s important to recognise that becoming a signatory to the Code is a sound commercial choice. The PPC not only supports the long-term stability and liquidity of the construction supply chain, it also helps buying organisations build a reputation for being fair and ethical in their operations.

Being able to demonstrate an ethical approach is particularly important to any businesses bidding for public sector contracts, and the government has previously warned firms that poor payment practices could result in them being barred from bidding for contracts worth more than £5m. Upholding the same standards is also becoming increasingly important for those wanting to secure or nurture private sector partnerships, where pressure from both  consumers and investors is changing business culture and pushing ethical and social governance (ESG) to the top of the agenda.

Make PPC compliance easier

Compliance with the Prompt Payment Code is easier when you have full visibility of your supply chain and easy access to every supplier’s details – including how many people they employ, which supply chain segment they belong to and which of your projects they are contracted to. This means it’s simple and straightforward to identify those suppliers affected by the PPC, and makes it easy for you to ensure you comply. When you manage your supply chain through Constructionline, all of this information is available to view, manage and download through our intuitive platform, where you can also manage every aspect of supplier compliance – to keep your financial, operational and reputational risk to the absolute minimum.

The Constructionline platform provides a cost-efficient and straightforward way to centralise and manage critical information for your entire supply chain and also makes it easier to share ‘clear and easily accessible guidance on payment procedures and invoicing requirements, at on-boarding stage and on an ongoing basis’, as required by the PPC.

If you’d like to find out more about how Constructionline can help you stay in complete control of your payments and processes, get in touch with our teams via Live Chat or via our website and a member of the team will be happy to help you. 

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