By Daniel Hunter

Companies with major Government outsourcing contracts are continuing to pay their small to medium-sized enterprise (SME) subcontractors late despite pressure from the Government for fairer payment terms, says EMW, the commercial law firm.

EMW says that the average wait for suppliers to be paid by major public sector outsourcing companies was 38 days in the past year, much longer than the five days in which Government departments pay those big outsourcing companies.

EMW’s numbers are based on an analysis of the financial results of the ten largest public sector outsourcing groups, which have combined revenues of more than £30 billion.

EMW explains that many Government departments ask their outsourced contractors to pay their subcontractors within 30 days, although enforcing this is dependent on businesses reporting breaches of their payment terms to the Government.

Prime Minister David Cameron recently added to the pressure on the major outsourcing groups by announcing a consultation aimed at improving payment terms for SMEs, saying that “late payment can have devastating effects on our small and medium-sized businesses.” The consultation will open later this year.

EMW says that only three major outsourcing groups managed to pay their suppliers within 30 days on average, while two outsourcers took an average of more than two months to pay their SME subcontractors.

Damon Watt, Principal at EMW, says: “These figures show that some of the biggest holders of outsourced public sector contracts are getting their money in five days, and then sitting on it for more than a month. They are effectively using their powerful bargaining position to force their SME subcontractors to provide them with interest-free short-term loans.”

EMW says that while 38 days is the average wait for subcontractors to receive payment, many small businesses are waiting for much longer than that before they get paid by the big outsourcers.

Damon Watt continues: “In a world of instant electronic payment, there is very little justification for making suppliers, who may have incurred considerable costs in fulfilling contracts, wait more than two months to receive payment for their work.”

“The Government has made it clear that it supports prompt payment to SMEs. However, the steps that it has taken so far seem to have had little effect, as they are mostly reliant on small businesses reporting late payment — something they are unlikely to do for fear of jeopardising relationships with their key customers.”

“The upcoming consultation on encouraging prompt payment must focus on how the Government can use a carrot and stick approach towards outsourcers to promote better payment terms along the supply chain, rather than putting the onus on SMEs to report their customers. That tactic is unlikely to yield any results.”

Carillion, a major supplier of construction services to public sector projects such as the London Olympics Media Centre and the High Speed 1 rail line, recently increased its standard payment terms — the time in which it pays suppliers — to 120 days.

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