Insights for Procure-to-Pay and Finance Leaders

A public good: shifting attitudes to supplier payments in the public sector

In May, the City of Montreal postponed the revamp of Saint Catherine Street — the city’s 11km main commercial thoroughfare. This is after it received just one bid to carry out the work, which the city considered overpriced and not up to standard.

It’s a rare occurrence. Public construction contracts like this are usually hotly contested by private contractors.  So why was this not the case in Montreal? According to Eric Côté, an executive vice-president at the Corporation des entrepreneurs généraux du Québec, late payment is the issue. He told the Montreal Gazette that contractors didn’t bid because they know the city will not pay them in 30 days.

Most construction firms in the city are small enterprises – employing less than five people. Cash flow is tight for these firms: if they don’t receive payment on time, they cannot afford the labour or materials to start work on new jobs. So somewhat paradoxically, these companies stay away from lucrative public contracts because of frequent late payments and risk this poses to their short-term survival.

Authorities in the city have recognised that this is a problem and are working to fix it by speeding up invoice processing. The Canadian government are also exploring the issue as part of the Bill S-224, the Canada Prompt Payment Act, which is currently working its way through Parliament. But for now, late public sector payments in Montreal are costing taxpayers money, causing civic disruption, and harming local businesses.  

Supplier pressure

The City of Montreal is not the only public authority accused of paying suppliers late. The New York Post recently revealed that public authorities in the city of New York are doing the same. In particular, it called out the city’s Department of Homeless Services for registering and paying 78% of its contracts late since 2013, with 43% of these contracts paid over 100 days late.  
Late payments are putting these companies, many of whom are not for profit, under cash flow pressure—with some considering whether they want to continue working with the city of New York.

To improve matters, New York City Council is planning to introduce legislation that promotes prompt payment from public sector departments. Known as Intro 1067, the law will mandate the Procurement Policy Board to create a process that spurs city agencies to keep its vendors informed about late payments and the reasons behind them.

The law will also set a maximum amount of time for contract registration. If the time elapses, interest accrues and is charged to the budget of the agency that has failed to pay.

Stepping up

It’s not just US public authorities paying late. In the UK, nine out of ten government suppliers have been the victim of late payments, according to research from the Federation of Small Businesses (FSB). This is despite the UK government introducing rules back in 2015 that said the public sector will have to pay both contractors and subcontractors within 30 days.

In a statement, FSB National Chairman Mike Cherry said: “It is unfair and unacceptable that so many small firms, many of which are already struggling with the high cost of doing business, are also being forced to wait for money they are owed for work completed for the public sector.”

In response to this, UK Chancellor, Philip Hammond, launched a Call for Evidence to “eliminate the continuing scourge of late payments” in his Spring Statement. More recently, the government announced it’s committed to paying 90% of undisputed invoices from SMEs within 5 days.

It will also ensure that government departments have a dedicated non-executive director responsible for prompt payment. Their role will focus on improving payment practices and exploring to use technology to make payment processes more efficient.

A better way

The public sector has a unique role to play in the global economy and should set the standard for the private sector. It isn’t doing this when it comes to paying suppliers on time.  

The fact that many public sector bodies recognise they must improve in this area is a good first step. So is putting in place legislation that promotes prompt payment. But ultimately, this situation will only improve when public sector bodies have the tools to digitize, streamline and automate AP processes.

Find out how Tradeshift is bringing AP automation to the public sector.