Contracts for fair payments

Contracts to which the provision applies

Fair payments provisions apply to contracts entered into from 1 July 2007 where the value of the goods or services does not exceed $3 million.

While it is acknowledged that a $3 million threshold will capture some contracts involving larger businesses, it is considered as the appropriate minimum requirement to ensure the likely coverage of all contracts involving small and medium businesses.

Standard contract clause

Agencies should include an appropriate fair payments clause in these contracts. Clauses should provide for:

  • Payment of debts within 30 days
  • Penalty interest for late payments
  • Requirement for the supplier to give notice of the late payment in order to receive penalty interest
  • Suspension of the 30-day payment period in the event of a dispute.

Fair payments clause

A standard clause has been drafted, as follows, for use by departments and agencies. Each agency should consult its legal officers to ensure that the clause is appropriately tailored on a case-by-case basis.

1.1 [The Agency] will, on demand by [the Contractor], pay simple interest on a daily basis on any overdue amount, at the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 (Vic).

1.2 For the purposes of clause 1.1, "overdue amount" means an amount (or part thereof) that is not, or is no longer, disputed in accordance with this Agreement:

(a) that is due and owing under a tax invoice (as defined in the A New Tax System (Goods and Services Tax) Act 1999 (Cth)) properly rendered by Contractor in accordance with this Agreement

(b) which has been outstanding for more than 30 days from the date of invoice or the date that the amount ceased to be disputed, as the case may be.

Monitoring, reporting & evaluation

Agencies should ensure that appropriate monitoring and reporting mechanisms are established. This will enable an evaluation of the fair payments provisions to determine their effectiveness in ensuring prompt payment of Government debt to business.

Specifically, information should be collected on:

  • Number of claims for penalty interest
  • Value of the invoices involved
  • Overall payment terms, i.e. percentage of all payments made within 30 days.

Interest on late payments

The interest payable on late payments will be in accordance with existing Victorian legislation, namely, the Penalty Interest Rates Act 1983. Under this legislation, the penalty interest rate which would apply to the late payment of commercial debts by agencies would be the interest rate expressed as a percentage fixed by the Attorney-General from time to time by notice published in the Government Gazette.

Such penalty interest would accrue 30 days after the debt arises.

The current penalty interest rate is available from the Department of Justice and Community Safety website,

Example penalty interest calculation

Assuming the following:

  • Penalty interest rate is 10 per cent
  • Value of the invoice is $100,000
  • Payment occurs 12 days after the conclusion of the 30-day period
  • Interest owing = $ 100,000 × 10.00 per cent × 12/365 = $328.77.

Initiation of penalty payments

In respect of the ongoing administration of the commitment, the penalty interest component on late payments will be based on the supplier's initiation, which will minimise tracking of individual payments by departments.