Major reform on late payments will change construction payment and disputes

The government's response on the late payments consultation it carried out last year has finally been published – and it confirms sweeping change that will particularly impact construction, with a ban on retentions but also much more.

In its response, the government clearly stated why change is needed, saying late payment: 

• Costs the UK economy £11bn annually, leading to 38 UK businesses closing daily
• Sees business owners spend 86 hours chasing payments annually (133m hours across UK businesses)
• Hits smaller businesses harder, which struggle to pay employees and rent, and to invest in their future.

None of this will be surprising to those working in the construction sector, but what may surprise them is how much change is coming.

Ambitious legislative change

In what the government calls “the most ambitious legislation to tackle late payments in over 25 years”, it has confirmed that it intends to introduce the following measures across the UK (working with the governments of Scotland, Wales and Northern Ireland):

• Board-level scrutiny of payment practices, with boards (or audit committees) of large UK businesses, which make a significant proportion of their payments late, being legally required to explain how they will improve payment performance on GOV.UK
• Maximum payment terms of 60 days between businesses. There'll be limited exemptions e.g. where both parties are large companies, the purchaser is the smaller party, or the goods or services are being exported or imported. "Respondents from the construction sector highlighted the importance of alignment of the existing and well-established legislation for parties to a construction contract with this policy for stricter maximum payment terms. This will be taken forward as part of the next steps"
• Deadline to dispute invoices, so if businesses don't raise disputes within a set time they must pay compensation to their supplier. However "we want to ensure that any new dispute policy does not cut across existing ones and make it clear how a dispute window will work in detail. A separate measure, aligned with the existing payment notice mechanisms will be taken forward for construction contracts"
• Mandatory interest on late payments, with all commercial contracts containing a right to statutory interest at 8% above the Bank of England's base rate. Parties won't be allowed to agree an alternative remedy to this statutory interest. And if interest is not paid, small businesses can refer the matter to Small Business Commissioner (SBC) adjudication (more on this below). Guidance will be provided to support businesses.
• Additional reporting on statutory interest, where large companies will have to report on interest payments. This includes how much interest they've been liable to pay and actually paid. The SBC can use this information to spot persistently poor payment practices, potentially leading to investigations and fines. Again, guidance will be provided.
• Prohibiting retention payments, banning retentions under construction contracts to prevent loss of money through insolvency and late or non-payment. However the government "will consult further with interested parties on the impact of this measure before taking a final decision on implementation. To address concerns about build quality and surety alternatives, we will work with the Construction Leadership Council and construction clients to develop practical approaches to minimising defects, as well as working with the financial services sector to identify ways of developing the surety market for the construction sector."

Greater SBC powers

The SBC will also gain new powers to:

• Investigate businesses suspected of poor payment practices, and breaching late payments legislation. This includes launching investigations and compelling companies to provide information
• Adjudicate to settle disputes between businesses, including allowing small businesses to refer payment disputes with larger businesses to SBC adjudication, and making adjudication awards
• Fine or impose penalties, including for those who persistently pay late or breach payment legislation. 

When to expect change

The government says "these measures will require a combination of primary legislation (an act of Parliament) and secondary legislation to enact. We will legislate as soon as Parliamentary time allows". 

Amy Hodge, Managing Associate in Womble Bond Dickinson's Construction & Engineering team, commented:

“These reforms mark a significant shift for the industry, with long anticipated payment protections, particularly in relation to retentions and late payments. However, there is clearly still a lot of detail for government to work through, not least around how a ban on retentions would operate in practice, how employers will manage the risk of defects without retentions, and how the new payment timescales will align with the Construction Act.

The proposed introduction of SBC adjudication also raises important questions about how this will interact with existing construction adjudication processes.

Over the coming months, expect to see more industry debate and keep watch for further detail from the government. In the meantime, businesses would be well advised to review their contracts and payment processes in anticipation of these reforms.”