Member Article

Whilst talk of Rail Refrom is excellent news for a Sector that has been crying out for it, how much will it really impact the supply chain and what processes and protections are already in place to help the flow of contractual payments?

As the Passenger Railway Services (Public Ownership) Bill awaits its second reading in the House of Lords on 7th October it is clear that there is a real focus on Rail from the Government. It is by no means seen to be the ‘silver bullet’ to solving all the problems that we face as an industry but instead we are called to see it as ‘…the first stop on our journey to a modern railway for a modern Britain.’ [The Rt Hon Louise Haigh MP, 3rd September 2024] 

It is not the only piece of legislation coming down the tracks this autumn which could impact the Rail sector however. With renationalisation of the TOCs and the creation of Shadow Great British Railways we cannot ignore the impact that, albeit delayed until February 2025, the Procurement Act 2023 (the “Act”) will have at the point at which many Customers will be deemed to be ‘Contracting Authorities’. This means that Customers which are Contracting Authorities will be subject to the Act when procuring certain works, services and/or supplies. 

There are various ways in which the Act will impact the sector but the focus of this article is very much on payment terms.

The Late Payment of Commercial Debts (Interest) Act 1998 has been around for some time now and clearly sets out the right to claim interest for late payment. It does also however set out the basis of what payment terms should be, namely that the standard expected is 30 days for public authorities or 60 days for business transactions. If no payment terms are agreed then payment should be made 30 days after delivery of the goods/services or date that the Customer receives the invoice. The parties can agree a longer payment terms but only where it is fair to both businesses. In the current climate where businesses are still struggling post Covid (and everything else that has been thrown at us since!) it would be difficult to contemplate a situation where any longer period could be seen as being ‘fair’ other than with good reason.

In addition to the Late Payment Act, the Prompt Payment Code introduced in 2015 states that if you are a supplier to a government department (which will inevitably cover OEMs and Tier 1s to Network Rail) you must pay 95% of your suppliers within 55 days (this came out in April this year). As to its application to private sector businesses who are not supplying into a public authority or Government Department, adoption of the Code is voluntary but seen as good practice. It also requires companies to agree to pay suppliers on time and within agreed terms; to give clear guidance to suppliers on terms, dispute resolution and prompt notification of late payment in addition to supporting good practices throughout their supply chain by encouraging the adoption of the Prompt Payment Code.

Where a company fails to comply with the Code and that failure is over one of the 2 previous 6 month reporting periods that company will be prohibited from being able to bid for Government contracts which will extend to cover Network Rail, DfT and any public bodies ie contracting authorities.

Large businesses have a further obligation by virtue of the fact that they should publish their payment performance under the requirements of the Reporting on Payment Practices and Performance Regulations 2017. These reports can be used as part of the bidding process to demonstrate compliance with the requirements of the Code.

Turning now to the Act, this will mandate that all public procurement contracts include a 30-day payment term. This term will also extend to any subcontracts that are “wholly or substantially meant to contribute to the performance of a public contract”. There are also new requirements for the contracting authority to publish a payments compliance notice which must include information about compliance with the 30-day payment term and to publish certain information about any payment of more than £30,000 made by the contracting authority. This indicates that there will be increased scrutiny of the extent to which the payment term requirement is complied with.

Our expectation is that this will apply to the entire supply chain whether relating to new rolling stock build contracts, refurbishment or maintenance contracts and we would find it hard to see how any such contracts could not be seen to be ‘contributing to the performance of a public contract’. This may well be a real change for colleagues in the rolling stock supply chain however those working within infrastructure should largely be in receipt of 30 day payment terms already and if they aren’t then the Act will give the ability to challenge that.

To be clear, invoices will have to be paid within 30 days of receipt, not when they are validated which will further avoid any attempt to delay payment for reasons other than valid disputes.

Key Take Aways

In light of the above it is clear that most areas of the Rail supply chain are already covered by the various payment codes and policies in force, the introduction of the Act in addition to the renationalisation of railway operations will however crystalise this point and, in our view, ensure that all suppliers who “wholly or substantially meant to contribute to the performance of a public contract” – which will include those within the rolling stock supply chain – will need to be paid within 30 days of their invoice. It is therefore suggested that Customers and Suppliers alike undertake the following actions; 

• review of existing payment terms within Contracts; 
• review of average payment terms made to Suppliers; 
• review of average payment terms received from Customers; 
• where eligible, ensuring that your reporting in accordance with the Reporting on Payment Practices and Performance Regulations 2017 is up to date and consider how your average payment terms compare with the requirements of the Act. 

 

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