Putting a stop to unfair payment terms

Putting a stop to unfair payment terms

Putting a stop to unfair payment terms

A recent Procurement Policy Note (PPN) published by the Cabinet Office at the end of November is likely to have an impact on future procurements for contingent labour managed service (MSP) contracts in the public sector – but the implementation date of 1st September 2019 means it will likely be too late to affect the re-letting of the major MSP frameworks. I initially viewed the delay in implementation with cynicism on this basis but then I reminded myself that the world of public procurement is of course much bigger than just recruitment and HR services!

Propping up the prime contractor’s cashflow

Unfair payment terms dictated by some MSPs (a small number I should stress) can be a major issue for small employment businesses looking to grow their share of more mature markets. Payment terms of up to 60 days can create significant cash-flow problems for the temporary payroll while the more common ‘pay-when-paid’ provisions can prevent SMEs from getting access to critical invoice financing services (at least at a sensible rate). 

My desire to provide the free advice below is driven in no small part by the actions of one MSP in particular, who last year started introducing pay-when-paid clauses back into their contracts (having previously removed them) at exactly the same time that they also just happened to be launching their own invoice financing product for suppliers on their contracts – offering an opportunity for agencies

to pay a premium to receive terms that in some cases they should have been entitled to anyway. An amusing co-incidence I’m sure you will agree.

But surely the MSP is free to include whatever terms it wants in a B2B contract?

In late February 2015, the last version of the Public Contracts Regulations came into force in the UK. Although based largely on the updated European Directive, the UK regulations contained a number of additional and enhanced provisions based on the Lord Young report into promoting opportunities for SMEs in the UK economy. One relevant provision was the inclusion of strict payment rules under Regulation 113(2). Not only do the regulations impose conditions under contract that all invoices must be paid by a contracting authority within 30 days, these same terms must be flowed down to all levels of the supply chain where the master contract has been let under the regulations.

Although the original contract notices came out before February 2015, the current generation of major MSP frameworks within the public sector (such as MSTAR2 and the YPO framework) did already contain terms intended to be compliant with the regulations and, in one case, put an absolute limit of 21 days rather than 30.

Despite this, a small number of MSPs continued through the last generation of contracts (under the frameworks) to dictate payment terms to agency suppliers that are compliant neither with the regulations nor with the framework contracts that they signed up to. This includes suppliers operating standard 60-day terms and also MSPs insisting on pay-when-paid provisions that ignore the required ‘backstop’. Some of these MSPs are responsible for the disbursement of hundreds of millions of contingent labour spend on behalf of local authorities – creating a significant headache for SMEs (some of whom simply have to disregard supplying into the public sector altogether).

Although this issue has been flagged to, and is partially acknowledged by, the framework operators, when it comes to payment terms the actual responsibility lies with the contracting authorities (the public sector bodies using the MSP services). More on that later.

Self-reporting

It’s interesting to note that some of the worst offenders also appear to have failed to meet their legal obligations under the Reporting on Payment Practices and Performance Regulations that came into force in 2017. I’m sure that’s just another happy coincidence though.

Even where reports are published through the service, they can be misleading/easily manipulated. Another ‘dirty trick’ operated by some MSPs to protect their cashflow is to try and define under the supply chain contract (keeping in mind that self-billing is commonly used) when an invoice becomes an invoice.

For example…

I read an article last year at the height of the Carillion collapse in which the chairman of a very high-profile recruitment business was commenting on the impact the collapse had on Carillion’s supply chain and he, rather boldly, equated poor payment terms in the supply chain with drink driving – at a moral level – whilst also suggesting that public bodies should stop giving contracts to businesses operating unfair payment terms (bravo!).

I quickly dug up the last three or four contracts that I had seen issued by his agency’s MSP arm for supply into local authorities – expecting them to be extremely favourable to SMEs on the basis of the comments that were made. Instead, what I found was a very suspicious re-wording of the standard framework conditions essentially saying that the invoice from the supplier (or self-billed from the MSP) was not even a valid invoice until the MSP had already received payment from the end customer – thereby also confirming that invoices would not be paid/be payable at all if no money was received. No reference to timesheets, dispute mechanisms, validation or appeal, just a clear statement that the MSP receiving the money was the ONLY condition upon which the supplier could have an invoice raised and be paid. I raised the issue with the MSP’s agency management team and flagged the comments of their chairman in the relevant article but all I received was the usual comment that payment terms were non-negotiable and were still, technically, within the terms of the law/the relevant framework (they’re not either of those things).

Whether lawful or not, the terms would have allowed them to essentially dictate the benchmark against which their payment performance was measured and reported; regardless of the impact on the supply chain.

On a positive note, I was encouraged to see the public clarification log for the new MSTAR3 framework (still to be awarded) giving a clear statement to one MSP wanting to continue this practice that it was not acceptable to delay payment to suppliers on the basis of payment terms from the contracting authority. I’ll be keeping a copy of that.

No need to wait

The good news is that – for supply into the public sector at least – if you are an SME (or even if you’re not) and you find yourselves in this situation then you don’t need to wait for the next round of authority call-offs for, which could be another four years in some cases, for the matter to come to a head. There are already a number of fairly simple and pain-free steps that you can take to resolve it. Not just for your own business but potentially for all businesses affected by the same unfair terms.

Step 1

Identify all MSPs/end-client contracts where you are receiving payment on terms longer than 30 days. Where certain MSPs operate different terms for different end clients, it’s important to isolate the specific end-clients for whom the payments are being ‘delayed’ beyond the limits laid down by the regulations. This will probably be easier for the MSPs that apply blanket 45/60-day terms than it will for the MSPs that operate ‘pay when paid’ provisions.

If the relevant MSP has sought to redefine the reasonable grounds under which an invoice becomes valid (as per the example above) then base your figures on the date upon which you would normally issue an invoice (the Friday following the authorisation of a valid timesheet for example).

Step 2

Contact the Public Procurement Review Service (PPRS, formerly the Mystery Shopper Service) operated by the Cabinet Office – whose responsibility it is to monitor practice and compliance with the Public Contracts Regulations, including payment performance by public bodies and their supply chains. Please note that this service is still completely anonymous for suppliers wishing to raise a complaint – thereby circumventing the main argument that the more unscrupulous MSPs rely upon to suppress payment terms; i.e. that no supplier wants to be the one to be seen to complain about the public authority for fear of being excluded from the supply chain or future tender opportunities.

Step 3

Provide the PPRS with details of all of the public authorities for whom you are receiving extended payment terms through the supply chain. Remember, it is the end client that is important here – although you should also reference the MSP and (where relevant) the framework in each case. If you have the data broken down by end client, then provide it. Better still, if you have explicit terms and conditions from the MSP relating to unfair payment terms (60 days, pay when paid etc.) then provide the specific clauses as well and state which public authorities they apply to.

Please also see the general note below about frameworks. It is worth noting every end client where you receive payment outside of the relevant framework terms (not just outside of 30 days) as these public authorities will also be in breach of the Public Contracts Regulations. Although the MSPs and even the framework operators themselves will argue this isn’t the case – you might find that the Cabinet Office takes a different view on that one.

Step 4

Not really a step for you but, at this point, the PPRS is obliged to make contact and raise the concerns with each of the public authorities that you have named in your report. If they receive multiple complaints from multiple agencies in the supply chain – even better. The public authorities themselves are subject to potential penalties or sanctions if they fail to enforce lawful payment terms through the supply chain. They are also subject to their own reporting regime under public policy guidance and KPI targets to ensure payment on a much timelier basis.

Optional step (belt and braces)

If you really want a particular public authority to take notice, it may also be a good idea at this point to raise a Freedom of Information Request (which can be done online via What Do They Know) to the relevant authority/authorities asking the following questions.

  1. How much does [The Authority] spend each year through its contract for contingent labour with [MSP]?
  2. Please can [The Authority] advise what steps it has taken to ensure that its contract with [MSP] is compliant with Regulation 113(2) of the Public Contracts Regulations 2015?
  3. Please can [The Authority] confirm whether it holds information regarding any audits it has conducted on [MSP]’s payment performance and/or whether [MSP] has submitted any reports to the [The Authority] regarding its payment practices?
  4. Please can the Authority provide copies of any reports identified in point (3) above.

However, please note, unlike the PPRS service, freedom of information requests cannot be made anonymously.

What impact will it have?

Obviously, the more agencies that take this advice the more successful the approach can potentially be in eliminating these practices. However, just one complaint can make all the difference and if you combine an enquiry from the Cabinet Office with a published FOI response referencing £5m – £25m of public money being spent and no action being taken to audit or address payment terms in the supply chain then you might find that the end clients will turn their attention pretty quickly towards their MSP(s).

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