UK: Faster Payments, Tougher Rules: How the Commercial Payments Bill Could Transform UK Aerospace and Defence Contracting

The Commercial Payments Bill has landed and it demands attention. Completing its Committee stage in the House of Lords on 21 July 2026, this isn’t a minor regulatory update: it’s a fundamental overhaul of how payment works in UK commercial contracts. For the Aerospace and Defence sector, from government buyers and prime contractors to SMEs and specialist suppliers, the implications are significant and far-reaching.

Here’s what you need to know: once the Bill comes into force, every new contract, whether negotiated bespoke terms or standard T&Cs, will need to actively engage with its requirements. Payment terms exceeding 30 days (for public authorities) or 60 days (for private sector buyers) will be automatically void and replaced by statutory defaults. Statutory interest at 8% above base rate can no longer be contracted out. And critically, even where parties believe exemptions apply, for example, because both contracting entities are large undertakings, the contract must expressly state the specific exemption being relied upon. Silence won’t suffice: get it wrong, and the default caps apply regardless of size. This Insight explores what the Bill means for the UK Aerospace and Defence industry so you can be prepared for when it is ultimately implemented.

The Bill

In its current form, the Bill, if passed, would overhaul the UK’s contractual payment regime, chiefly by modifying the Late Payments of Commercial Debts (Interest) Act 1998 (Act). It would dispense with the long-standing tradition of freedom to contract in the commercial payments space and instead impose a strict system with the goal of balancing the commercial bargaining power between larger customers and smaller suppliers to ensure that suppliers are afforded with contractual certainty and prompt payment.

To do this, the Bill will:

1. introduce mandatory maximum payment periods of 30 days for public authorities and 60 days for private sector buyers in contracts where the supplier is smaller than the buyer, with non-compliant payment terms being void and replaced with statutory defaults;
2. make any contract term that excludes or varies the right to statutory interest on late payment void;
3. require disputes on invoices to be raised within a short timeframe, with the supplier entitled to recover a fixed sum payment from the buyer if disputes are raised late;
4. require the Small Business Commissioner to set up an adjudication scheme to deal with payment disputes involving small businesses; and
5. give the Small Business Commissioner power to investigate persistently poor payment practices by large businesses and to issue recommendations, directions and fines in relation to these practices.

Importantly, there are no exemptions to the payments regime where a public authority is the purchaser or where the contract is for or related to an export from the UK.

Impact on Governments

Where the Ministry of Defence (MOD) procures equipment, services or support from industry, it will be subject to the 30-day maximum payment period as a public authority. For most direct MOD contracts, the practical change is modest: the Procurement Act 2023 already implies 30-day payment terms into public contracts and public sub-contracts. The Bill reinforces that regime by making statutory interest non-excludable and introducing fixed-sum penalties for late-raised disputes.

For government-to-government (G2G) export transactions, the position is less clear. The Bill applies to contracts for the supply of goods or services where both parties act ‘in the course of a business’, and the underlying Act contains conflict-of-laws rules limiting its reach where a contract governed by the laws of England and Wales has no significant UK connection. Pure sovereign arrangements, such as treaties or memoranda of understanding, may fall outside the Bill’s scope. However, the domestic back-to-back contracts between the UK Government and UK industry that sit beneath G2G export campaigns will likely be caught. Defence businesses involved in G2G exports should map their contractual chains carefully.

Impact on Large Primes / OEMs

For prime contractors, the most significant operational risk sits in the supply chain. The Bill voids any payment term exceeding 60 days in a private-sector contract. It also voids terms in related contracts, including settlement agreements and waivers, that override compliant payment terms in the main contract. Acceptance and verification procedures will be deemed complete after 30 days unless the contract includes a longer term that is ‘fair and reasonable’, with the burden of proof on the purchaser.

Primes that persistently engage in poor payment practices face investigation by the Small Business Commissioner, who may issue enforcement directions, publish findings, and impose financial penalties of up to 1% of UK annual turnover. With MOD policy now requiring primes to advertise subcontracting opportunities and improve SME supply-chain experience, the reputational and regulatory cost of non-compliance will be real.

Where a large prime or OEM contracts with an equally large supplier, the parties may fall within one of the Bill's size-based exemptions. However, simply being large undertakings is not enough: the contract must be in writing and must expressly specify which exemption condition applies. Without this express contractual acknowledgment, the default payment term restrictions will apply regardless of the parties' size.

Impact on SMEs

For SMEs and Aerospace and Defence-tech start-ups, the Bill delivers three concrete protections. First, payment must be due within 60 days at most, with any longer term automatically void and replaced by a 30-day implied term. Second, statutory interest at 8% above base rate cannot be contracted out. Third, small businesses gain access to a dedicated adjudication scheme through the Small Business Commissioner, producing binding interim decisions enforceable through legal proceedings.

This matters because the Government’s own data shows that 75% of defence SME spend flows through the supply chain rather than direct MOD contracts. An SME building sensor technology for a Tier 2 subcontractor, for example, will benefit directly from the 60-day cap and the right to claim interest without needing to rely on a prime’s goodwill or a protracted court process. As the Defence Office for Small Business Growth works to increase MOD SME spend by £2.5 billion by 2028, the Bill provides a legislative backstop to the policy ambition.

Practical Considerations

The Bill is not yet law. It entered Lords Committee stage on 21 July 2026, with 97 amendments tabled on topics including IP, digital accessibility, and public construction contracts. The Government has committed to a lead-in period before commencement, and the measures will not apply retrospectively. Even so, businesses should start to consider this now so they are prepared for when it does ultimately come into effect:

1. Review standard payment terms across templates and live contracts, particularly any term exceeding 60 days or relying on extended verification periods.
2. Assess dispute-notification processes. The Bill penalises buyers that raise disputes late or without sufficient information.
3. Map G2G and export contractual chains to identify which agreements may be caught and which may fall outside scope.
4. Monitor secondary legislation. The Bill gives the Secretary of State broad powers to exempt certain contract types. Those exemptions could prove critical for complex Aerospace and Defence programmes.