Commercial Payments Bill: Implications for Public Authorities and Contractors

Juli Lau, Helen Arthur and Shyann Sheehy look into the new Commercial Payments Bill and what it means for both public authorities and larger contractors.

As referred to in our article on the implications of the King’s Speech 2026 for the construction sector, the government has announced new legislation which intends to improve commercial payment practices in the public and private sectors, and to address persistent late payment of commercial debts in the UK. The Commercial Payments Bill (the “Bill”) will introduce these changes by amending existing legislation, including the Late Payment of Commercial Debts (Interest) Act 1998 and the Housing Grants, Construction and Regeneration Act 1996.

Implications for public authorities

Timescales for payment

The Bill, which is making its way through the House of Lords at the time of writing, will amend the Late Payment of Commercial Debts (Interest) Act 1998 such that relevant commercial and construction payments must become due within a maximum period of thirty days where the purchaser is a public authority, subject to limited exemptions. This requirement under the Bill does not apply to contracts which already have prompt payment terms implied into them as a result of being covered by the Procurement Act 2023. Any payment terms that do not comply with those requirements will be void.

Changes to acceptance and verification procedures

Under the Bill, for non-construction contracts which make payment dependent on completion of an acceptance or verification procedure, a term will be implied so that the procedure is treated as completed by the end of a thirty-day period beginning on the day the relevant contractual obligation is performed, unless the contract contains an express, longer procedure. A longer procedure is then void unless it is “fair and reasonable”, and the burden will be placed on the purchaser to demonstrate such.

Payless Notices

In an effort to align the new statutory payment provisions with existing payment and dispute resolution legislation for construction contracts, Schedule 2 Part 1 of the Bill will amend s.111 of the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”) so that a Payless Notice must be issued no later than seven days before the final date for payment (parties can no longer agree a different prescribed period). This Payless Notice will only be valid if it satisfies both the content requirements and this new timing requirement. For authorities acting as employer under construction contracts, that is a direct operational change where periods closer to two or three days before final date for payment are often agreed.

Statutory interest and compensation

The Bill plans to imply the right to statutory interest (currently intended to be as 8% above the Bank of England base rate) on commercial debts into commercial contracts (including construction contracts). Any term excluding or varying that right will be void. Varying the right will include restricting it by conditions, changing the date interest starts to run, or specifying a different rate. Parties are still free to agree other terms dealing with the consequences of late payment but cannot exclude or vary the statutory interest right itself.

Schedule 1 of the Bill will also ensure that contractual terms are also void so far as they exclude or vary the right to compensation arising out of late payment.

Construction retentions ban

The Bill will amend the Construction Act to define retention practices, create a transition period, and then ban retention clauses in construction contracts. The effect is that new retention clauses will be void with remaining sums having to be returned under statutory arrangements. The staged mechanism described in the explanatory notes of the Bill is as follows:

• A two-year transition period beginning when s.113B of the Bill comes into force where retention clauses agreed or varied during that period are subject to the transitional regime.
• After the end of a three-year period beginning when s.113B of the Bill comes into force (referred to as ‘the last retention day’), those transition-period retention clauses become ineffective, and any retained sums (referred to as ‘transitional retained sum’) still withheld must be returned through the statutory payment-notice machinery. Where the payer is a public authority the final date for payment for a transitional retained sum is thirty days after the payment due date.
• After the end of the transition period, retention clauses agreed in new contracts, or inserted into existing contracts, become void.
• Variations of pre-existing retention clauses after the ban comes into force are also void, unless the variation is more favourable to the payee.

After the ban takes effect, where there is an unauthorised deduction of a retention sum, the Bill will imply a term entitling the affected party to recover a fixed sum equal to the higher of £40 or 50% of the retention debt. This is in addition to the retention debt itself, and the higher statutory interest, and compensation also introduced through the Bill. Any contractual term excluding or varying that implied right is void.

Implications for larger contractors

Sixty-day payment period

The general rule for non-public-authority purchasers will be a maximum sixty-day payment period, for commercial payments and for construction payments (this period remains at thirty-days for public authorities). There will be exemptions to prevent the duty applying to a purchaser who is the smaller party in the contractual relationship, or where both parties are large undertakings. The Bill provides that the Secretary of State may make regulations defining the reference to small undertakings, larger undertakings, etc.

Small Business Commissioner and Adjudication

The Bill will require the Small Business Commissioner (the “Commissioner”) to establish an adjudication scheme under which they (or appointed adjudicators) adjudicate relevant payment disputes between small businesses and larger businesses. Only the small business will have the right for a referral under this scheme. Any contractual term seeking to exclude or restrict the small business’s right to use this adjudication scheme is void. This will not replace construction adjudication as the Commissioner will not consider a dispute about matters that are within the remit of another public authority, ombudsman or regulator or where the small business has a statutory right to refer the matter to another person for adjudication or arbitration.

The Commissioner can also investigate larger businesses where there are reasonable grounds to suspect it has persistently engaged in poor payment practices, including engaging in practices that seek to circumvent prompt payment requirements.

What happens next?

We will continue to keep an eye on developments as the Bill progresses through Parliament. As currently drafted, it will introduce significant changes to long-established practices in the public and private sectors, which will likely lead to a reshuffle of risk allocation in commercial negotiations and drafting. Public authorities will need to be ready to review their standard form contracts to reflect the statutory changes once these are finalised, and to consider providing for alternative forms of security instead of retention funds, where the nature and scale of the contract necessitates this. The new statutory payment periods promise a much welcome change for organisations lower down the supply chain, but crucial detail will not be forthcoming until secondary legislation is passed, and eyes will be on the extent to which the Commissioner will actively investigate and adjudicate under its new powers.

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Juli Lau is a Partner, Helen Arthur is a Senior Professional Support Lawyer and Shyann Sheehy is a Paralegal at Sharpe Pritchard LLP.

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This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email This email address is being protected from spambots. You need JavaScript enabled to view it..