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John Tizard: Prompt payments matter

Thursday November 1st, 2018

Successive governments have implored the public sector to ensure that they pay suppliers – especially smaller companies, charities and social enterprises – promptly.

John Tizard

However, almost daily there are reports of such suppliers not being paid in accordance with government guidance or contract conditions. Delays can be many weeks and sometimes months. These delays have serious consequences for suppliers. Their cash flow is severely affected. Staff payments may be in jeopardy. The supplier’s supply chain may not be tolerant and will expect payments to be made promptly. Businesses, social enterprises and charities can even be forced into administration and out of business. This is simply wrong.

There are many other reasons for the public sector to ensure that it makes prompt payments to its suppliers, especially those with small balance sheets and tight cash flow. This means most of those suppliers which are SMEs, even smaller companies, sole traders, charities and social enterprises. Such suppliers are likely in the current economic environment to be financially stressed and have very little wriggle room. It should not be the public sector that pushes them over the edge.

Most local authorities wish to ensure that they sustain their suppliers, in particular those which operate in their locality. These businesses and charities contribute to the local economy. They will employ local people and are likely to use local suppliers themselves. If they are treated badly by their public sector customers, this can lead to reputational damage for those customers.

Such reputational and political damage will be even more severe for those local authorities that claim to be advancing the interests of their local economy, local start-up businesses, SMEs, charities and social enterprises. Those local authorities and their partners which are committed to local community wealth-building recognise more than most that they can use procurement to support and advance the interests of the local economy and local suppliers from all sectors. Local authorities must practise joined-up policy and approaches – and this means treating their suppliers with respect and making sure they are paid properly and on a timely basis.

In addition, if payments are not being made in accordance with contractual conditions there will be additional transactional costs and interest payments for the suppliers which in turn will lead to higher contract prices over time. There are also likely to be additional costs for public bodies as they have to handle repeated requests and demands for payment.

Few such suppliers, of course, will have the resources to resort to legal action. Public bodies should not take advantage of this. And sometimes supplier trade and membership bodies may have to intervene with such threats on suppliers’ behalf. Is this what anyone wants in 2018?

Theory suggests and experience shows that customers, especially the public sector, gain the most benefits when they have a sustained and positive relationship with their suppliers, notably smaller local suppliers. If there are continual disputes over failure to pay promptly such relationships are seriously undermined.

Firms and charities under financial stress are more likely to default on supply, on quality and on their ability to be excellent employers. Adding to such stress is not in anyone’s interest and certainly not in the interest of public sector customers.

If the public sector is unable to behave in accordance with current guidance and best practice, central government should consider statutory regulation. This should not be necessary, but we know that all is not well.

Good practice must be the order of the day. This could include public bodies acknowledging their responsibilities to pay promptly and avoiding mischievous and clever wheezes to delay payments – these can include changing purchase orders without due notice; querying invoices in ways that are designed not so much to ensure probity and effective stewardship of public money but more to avoid making payments; and, in my experience, even changing email addresses so that invoices are not received.

Payment By Results contracts place many challenges before both suppliers and public sector clients. They can sadly also be used to ensure delayed payments and to offer the opportunity to identify reasons for not paying as well as further delay.

Sharp practice should have no place in ethical public organisations. Ethical supply chain support and management should be part of a broader public sector ethos.

When agreeing contracts public bodies should discuss payment terms and be willing to consider fortnightly payments over monthly ones in some circumstances, or some element of the due payment being made in advance with appropriate safeguards and other measures that are mutually beneficial to suppliers and purchasers.

In 2018 it is unfortunate that austerity combined with poor public stewardship by some public bodies is leading to suppliers from all sectors and their trade and membership bodies having once again to campaign for fairness and good payment practice. Pay the right amount for the right delivery and do so promptly. This is in the public interest.

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