Upcoming changes to payment term requirements for public procurements
The new year often comes with resolutions, and good financial hygiene should be one of them for companies wishing to participate in public procurements with an anticipated value of over GBP5 million per year.
The UK government has published two new Procurement Policy Notes (PPNs) that will impact payment terms when awarding public contracts. These changes, outlined in PPN 015 and PPN 018, aim to improve payment practices within government contracts making them prompter and fairer. Both PPNs were published on 3 December 2024, and changes will start to come into effect on 24 February 2025 in alignment with the Procurement Act 2023.
PPN 015: Effective from 24 February 2025
PPN 015 will replace PPN 10/23 and will be applicable to all new procurements advertised on or after 24 February 2025. The PPN sets out how payment approaches are to be considered in the procurement of major government contracts.
Essentially, the key points being assessed via the set questions are the reliability of a supplier's supply chain and having effective payment systems in place. In-scope organisations must use the standard procurement questions set out in Annex A of the PPN's guidance. These questions require suppliers to demonstrate that they are paying 95% of invoices within 60 days (90% with an action plan) and all invoices within an average of 55 days. The payment term requirements are the same as PPN 10/23, however the consequences of not meeting them differ. Under the new PPN 015, if a bidding supplier fails to meet the conditions of participation, it should be deselected. This includes considering the self-declarations, an assessment of its systems, and recent payment performance of the bidding supplier. A bidding supplier should also be deselected if it is unable to verify its self-declarations with the required evidence.
As per the FAQs, day one for counting is the day after the date on which the supplier receives an invoice or has notice by other means of the amount to pay, and the period ends when the supplier receives the payment. Also note that these requirements apply to undisputed, and disputed invoices.
PPN 018: Effective from 1 October 2025.
PPN 018 will replace PPN 015 and will be applicable to all new procurements advertised on or after 1 October 2025. The main update in PPN 018 is the reduction in the average payment days threshold that suppliers must demonstrate. This will reduce from an average of 55 days to an average of 45 days.
These PPNs apply to all central government departments, their executive agencies, and non-departmental public bodies.
Why should good financial hygiene be a New Years resolution?
For suppliers, the changes to be implemented by these PPNs mean that their payment processes and systems must be efficient and reliable in order to meet the requirements. Meeting the new payment performance standards is crucial for qualifying for major government contracts, as it applies to all contracts with an anticipated value of over GBP5 million. Note that this GBP5 million figure is a yearly threshold (and not over the whole contract term) and is inclusive of VAT. Suppliers who cannot comply with these measures will not qualify for such procurements launched by in-scope contracting authorities. To avoid deselection, it may therefore be helpful to ensure finance teams are aware of such requirements so that invoices are paid in a timely manner. These PPNs emphasise the importance of having robust financial systems, and their key focus is ensuring prompt, fair and effective payments. This hopes to support and maintain a healthy cash flow within the economy, in support of the new Government's budget, and improve supply chain reliability.
Ensuring financial hygiene is not just critical for suppliers, but also contracting authorities. For contracting authorities, improved payment terms means working with reliable suppliers who can maintain stable supply chains and deliver quality work, whilst also generally promoting fair payment practices, enhancing reputations and fostering strong relationships with suppliers.
Conclusion
The implementation of PPN 015 and PPN 018 aims to promote prompt and fair payment practices in public procurement, which in turn will hopefully benefit both suppliers and contracting authorities. This will only come to fruition if suppliers are aware of and prepared for the changes coming. Whilst not underestimating the difficulties of doing so, if suppliers wish to participate in major government contracts, it is crucial that the average payment days for all invoices meet the new requirements.
