INSIGHT

New changes aim to improve cash flow for suppliers to government post COVID-19

By Penny Alexander, Luisa Uriarte, Spiro Kalavritinos
Government Infrastructure Manufacturing & Construction Property & Development

Ongoing focus on 'fair payment terms' 6 min read

Businesses supplying goods or services to the Federal Government need to be aware that they may need to modify their procurement processes to support shorter subcontractor payment time periods, under recent changes to federal procurement policies.

This continues the trend by governments around Australia to promote 'fair payment terms' for small businesses in response to COVID-19 challenges.

Key takeaways 

  • From 1 October 2021, the Commonwealth's Payment Times Procurement Connected Policy (PT PCP), which aims to improve payment time to suppliers in government contracts supply chains, applies.
  • Large businesses that enter into government contracts with non-corporate Commonwealth entities valued above $4 million must pay subcontracts of up to $1 million within 20 calendar days of satisfactory delivery of the goods or services and an invoice having been received. These payment time requirements will also flow down to relevant sub-subcontracts that contribute to the Commonwealth contract and meet the same monetary criteria.
  • The introduction of the PT PCP follows a trend in the wake of COVID-19, with various Australian jurisdictions having introduced policies aimed at improving small businesses' cash flow. These have largely focused on including fair payment terms (in particular, shorter payment time periods) in government contracts.
  • However, similarly to the PT PCP, from 1 July 2021, NSW will require large businesses with State Government contracts valued at $7.5 million or above to pay small business subcontractors within 20 business days.

What procurements are affected by the PT PCP?

The PT PCP applies to procurements for goods and services where:

  • the procuring entity is a non-corporate Commonwealth entity (eg government departments)1 ;
  • the goods and services are valued above $4 million (including GST);
  • the approach to market (eg tender) for the procurement is released on or after 1 October 20212; and
  • the supplier is a 'reporting entity' as defined under the Payment Times Reporting Act 2020 (Cth) (the reporting entity) (this is discussed below), at the time of its tender submission.

Certain procurements are expressly excluded from the application of the PT PCP, such as the procurement of:

  • goods and services overseas;
  • real property, including leases and licences; and
  • goods and services, the nature of which, or the structure of the procurement for which, would make it impractical for the policy to be applied 3 .

Who is a reporting entity under the PT PCP?

A reporting entity includes a business that:

  • is a constitutionally covered entity (CCE);
  • carries on an enterprise in Australia; and
  • has a total annual income that exceeds $100 million (or is a controlling corporation where the combined total annual income of all members of the group is greater than $100 million).

CCE is broadly defined, and includes private and public companies, Commonwealth corporate entities, foreign entities, trusts, partnerships, joint ventures and sole traders. It may also include state and territory incorporated government entities involved in trading or financial activities.

The definition may also capture an entity that is a member of a group:

  • with at least $10 million in total annual income; and
  • where the group’s combined total annual income is more than $100 million.

What is the impact for large businesses?

The PT PCP sets out the requirements that non-corporate Commonwealth entities must adhere to when procuring affected supply contracts. This has impacts for large businesses who are reporting entities wishing to secure those contracts.

  • Tendering: When responding to a tender for a procurement the subject of the PT PCP, tenderers will be required to declare whether they are a reporting entity4. Entities will need to carefully consider the definition of reporting entity in the legislation to ensure that they complete the declaration correctly.
  • Contracting with the Commonwealth: The PT PCP sets out clauses that must be included in the supply contract with the Commonwealth where the head contractor is a reporting entity. Those clauses (the PT PCP clauses) include requirements for similar clauses to be incorporated into a subcontract to the supply contract.

The PT PCP clauses are set out in Appendix A to the PT PCP and include:

  • Where the value of the subcontract is up to $1 million (GST inclusive)5, the subcontract must provide for payment to the subcontractor within 20 calendar days of acknowledgement of the satisfactory delivery of the goods or services and an invoice having been received, and interest charges on any late payments6 .
  • The subcontract must include a clause advising the subcontractor that it has a right to complain to the PT PCP Policy Team or relevant Commonwealth entity if the head contractor fails to comply with the subcontract (discussed below).
  • Where the subcontractor is also a reporting entity, the head contractor must use reasonable endeavours to include applicable PT PCP clauses in the subcontract, to ensure the flow through of the PT PCP requirements to sub-subcontracts.
  • Contracting with subcontractors: The head contractor will need to ensure that the terms of any relevant subcontract contributing to the Commonwealth supply contract contain appropriate drafting complying with the PT PCP clauses (see above) – in particular, providing for a payment period that is not longer than the prescribed 20 calendar days.

As some of the required provisions to be included in the subcontract depend upon whether the subcontractor is itself a reporting entity, the head contractor will also need to ascertain from its subcontractors whether they are a 'reporting entity', as part of the head contractor's procurement processes.

  • Dealing with late payment disputes: The PT PCP provides that any disputes should continue to be first managed in accordance with the contractual dispute resolution process. However, if this does not resolve the issue, a complaint may be lodged with the PT PCP Policy Team.

The PT PCP expressly notes that disputes over whether there has been satisfactory delivery of goods or services, or whether an invoice has been correctly rendered, are not included in the policy scope.

The PT PCP Policy Team will assess the complaint, and recommend an appropriate course of action (which may include payment of the invoice, payment of interest on a late payment, completion of a remediation plan, or referral of the complaint to another party).

Complaints raised will not prevent participation in future procurement processes or compel termination of an existing contract.

Growing trend of short payment periods for government supply contracts

The introduction of the PT PCP broadly follows a trend that has had greater priority in the wake of COVID-19, where various Australian jurisdictions have introduced policies aimed at improving businesses' cash flow. This includes:

  • In May 2020, the Western Australia Department of Finance announced that it would commit to paying its suppliers, for goods, services and works, invoices of under $1 million within 20 days, an improvement from its earlier standard of 30 days.
  • The Queensland Government implemented its On-time Payment Policy from 1 July 2020, under which government payment timeframes for invoices from small business suppliers would be reduced from 30 calendar days to 20 calendar days.
  • In November 2020, Victoria announced its Fair Payment Policy, involving a commitment from the Government to pay its suppliers' invoices within 10 business days.
  • Earlier this year, the Commonwealth introduced its 'Payment Times Reporting' regime, requiring large businesses to report on their payment terms and practices in relation to small business suppliers.7 This followed the Commonwealth's introduction in January 2020 of its Supplier Pay On-Time or Pay Interest Policy requiring non-corporate Commonwealth entities to pay invoices for contracts valued up to $1 million within 20 calendar days.
  • From 1 July 2021, the NSW Small Business Shorter Payment Terms Policy requires large businesses with NSW Government contracts valued at $7.5 million or above to pay small business subcontractors within 20 business days. Further, the NSW Government's Faster Payments Policy commits to paying within five business days eligible small businesses that do business with the Government for goods or services up to the value of $1 million.

Footnotes

  1. While the PT PCP is only mandatory for non-corporate Commonwealth entities' procurements, corporate Commonwealth entities are also encouraged to use their best endeavours to apply the PT PCP.

  2. Where the procurement is coming from an established panel arrangement, the PT PCP only applies where the deed of standing offer is established on or after 1 October 2021.

  3. Eg where the procurement occurs under standard terms and conditions put forward by the supplier rather than the Commonwealth entity.

  4. Any subsequent change in status as a reporting entity is not relevant for the purposes of the application of the PT PCP to the supply contract.

  5. This requirement continues to apply to a subcontract even if the value is later varied to be higher than $1 million.

  6. Interest is not payable where the Commonwealth entity has failed to pay the head contractor in accordance with the supply contract or the amount of interest is less than $100 (GST inclusive). The interest rate is the general interest rate available on the ATO's website.

  7. See Payment Times Reporting Act 2020 (Cth), Payment Times Reporting Rules 2020 and the Payment Times Reporting (Form and Manner for Giving Report) Instrument 2021.