Long-term value: ethical contracts & payment practices

Business Case

Innovation and adaptability

Outcome-based and vested contracting models that align buyer and supplier incentives create opportunities for innovation and continuous improvement that transactional contracts suppress, creating shared value that wouldn't be achieved alone.

Legal and regulatory compliance

Late payment and unfair contract terms put the buyer at legal risk, with buyers potentially facing financial penalties, lawsuits or reputational damage for non-compliance.

Market access

Buyers known for fair payment and contracting practices attract higher-quality suppliers, receive more competitive bid, and are better positioned to secure supply in constrained markets where suppliers can choose their customers.

Operational continuity

Unfair payment terms and contract conditions that transfer disproportionate risk to suppliers undermine their financial stability, reducing their ability to invest in quality, sustainability improvements and decent work for their employees.

Productivity and quality

Suppliers under chronic financial pressure are more likely to reduce investment in quality controls, workforce training and production standards, directly affecting the consistency and reliability of the goods and services the buyer receives.

Stronger supplier relationships

Fair contracting and prompt payment build trust and long-term supplier loyalty, reducing the cost of supplier turnover, re-tendering and relationship management while improving supplier willingness to invest in shared sustainability goals.

Strategy & Planning

Assessment

Initial Action

Review standard contract templates and current procurement practices to establish a baseline understanding of:

  • payment terms and actual payment timelines
  • liability requirements and contractual insurance requirements (whether they are proportionate to contract value, supplier size and risk level)
  • dispute reporting and resolution mechanisms
  • risks such as overly long payment terms, one-sided clauses or lack of clarity in contractual obligations
Intermediate Progress

Conduct a structured review of procurement practices to identify where your own procurement practices are contributing to supplier financial vulnerability, stress or unsustainable conditions, such as:

  • how long it takes to pay suppliers on average and how often payments are late
  • whether payment terms such as net 90 or net 120 are creating cash flow problems for suppliers
  • whether contract prices allow suppliers to cover labour and environmental standards
  • whether order volumes and lead times are stable or force suppliers into overtime, subcontracting or cost-cutting
  • whether contract terms transfer disproportionate risk to suppliers such as retroactive price reductions or penalty clauses
  • how often last minute changes or cancellations are happening
Advanced Practice

Conduct in-depth qualitative assessments with suppliers to evaluate whether contracts are fair and effective in practice, including:

  • supplier feedback on contract fairness, clarity and negotiation processes
  • identification of hidden or structural barriers created by contract terms or buyer's procurement behaviour
  • any differences between contractual terms and actual purchasing practices (e.g. late payments, unfair changes, informal agreements)
  • effect of current contracts on long-term viability
  • whether insurance terms required by the buyer cause excessive financial burden

Policy

Initial Action

Embed ethical contracting principles into procurement strategy and policy, such as:

  • proportionate risk allocation based on contract value and supplier capacity
  • fair, transparent, and timely payment practices
  • fair change management requirements
  • fair insurance obligations (e.g., liability, professional indemnity, product liability), such as a “Proportionate Insurance Standard” defining acceptable insurance requirement ranges by risk tier and contract type
Intermediate Progress

Introduce vested or outcome-based contracting as the preferred model for strategic supplier relationships, including shared desired outcomes, aligned pricing incentives with outcomes and commitment from both parties to collaborative governance.

Advanced Practice

Require strategic suppliers to adopt their own fair contracting and payment policies covering their relationships with their own suppliers.

Targets

Initial Action

Set a targets for reviewing contracts and addressing unclear or one-sided contracts terms, late payment times, embedding fair payment terms, unfair insurance requirements and eliminating unfair changes.

Intermediate Progress

Set targets for the percentage of supplier contracts transitioning to outcome-based or vested contract models.

Advanced Practice

Set targets for the percentage of strategic suppliers with fair contracting and payment practices in place across their own supply chains.

Supplier Selection

Screening

Initial Action

Review your own prequalification and RFP process for practices that may disadvantage suppliers unfairly, such as:

  • unclear or overly complex tenders
  • enough time to prepare a bid
  • clear evaluation criteria
  • conditions that create a sole-source award
Intermediate Progress

Assess and refine screening processes based on supplier feedback and data to ensure they are perceived as fair and accessible in practice, including:

  • unintended barriers in qualification processes
  • accessibility and clarity of requirements
Advanced Practice

Include questions in RFPs about the supplier's own ethical contracts within their supply chain, covering average payment times, proportionate risk, fair RFP processes, harmonised insurance practices and vested contracts.

Selection

Initial Action

Ensure the supplier selection process is transparent, documented and free from bias by requiring bid evaluations to be conducted by more than one person and applying pre-published criteria consistently across all bidders.

Intermediate Progress

Select suppliers based on total value rather than lowest price alone, including quality and sustainability, with evaluation criteria that also account for quality and sustainability.

Advanced Practice

Allocate points in tender evaluations for suppliers that demonstrate fair contract practices with their own supply chains, including prompt payments, transparent pricing with subcontractors and vested contracts.

Contracts

Initial Action

Ensure all supplier contracts include fair and clearly defined payment terms, transparent pricing structures, proportionate insurance requirements in contracts, reasonable penalty clauses, protections against last-minute changes, retroactive price reductions or disproportionate risk transfer to the supplier, such as through use of insurance terms to shift undue risk to suppliers.

Intermediate Progress

Introduce performance-based and outcome-oriented contract structures, including introduction of vested contracting principles where appropriate.

Advanced Practice

Require strategic suppliers to cascade fair contracting and prompt payment requirements to their own key subcontractors, with evidence of compliance provided to the buyer on request.

Supplier Engagement

Goal Setting

Initial Action

Work with suppliers to identify buyer procurement practices that create unfair or unsustainable conditions and set goals to address identified issues.

Intermediate Progress

Work with suppliers to set goals for adopting fair and transparent contracting practices in their own supply chains, including payment timelines, proportionate risk and clear terms.

Advanced Practice

Co-develop multi-year fair contracting and payment roadmaps with strategic suppliers, including cascading fair contracting requirements through their own supply chains and creating vested contracts.

Capacity Building

Initial Action

Provide procurement staff with training on the impacts of late payment, extended payment terms, and unfair contract terms on supplier financial health, labour standards and sustainability performance.

Intermediate Progress

Provide training to suppliers on ethical contracting principles, including fair risk allocation, transparent pricing, insurance literacy and responsible purchasing practices.

Advanced Practice

Expand training to cover advanced topic, including dispute resolution, change management and vested contracting (how to define desired outcomes, structure incentive-aligned pricing models, and governance frameworks that foster trust and collaboration).

Data

Initial Action

Monitor your own payment performance data, such as average payment times, late payment rates, late changes, and use findings to identify where procurement practices are creating financial stress for suppliers.

Intermediate Progress

Request data from suppliers on ethical contract practices with their own suppliers, such as payment timelines, use of standard contracts, frequency of disputes or last-minute changes.

Advanced Practice

Work with suppliers to implement monitoring systems covering their own procurement transactions on ethical contracts, payment processes, insurance requirements and vested contracts.

Advisory

Initial Action

Provide suppliers with guidance on how to raise concerns about payment delays, unfair contract terms or pricing inadequacy through the buyer's reporting channel without fear of commercial retaliation.

Intermediate Progress

Provide advisory support to suppliers on identifying and addressing unfair contract terms as well as implementing fair contract terms in their operations, including examples and model clauses.

Advanced Practice

Work with strategic suppliers to co-design vested contract frameworks for their supplier relationships.

Financial Support

Initial Action

Support suppliers in accessing external financing by providing payment performance records, reference letters or contract documentation that suppliers can use to secure working capital or trade finance from financial institutions.

Intermediate Progress

Offer advance payments or deposits to reduce the upfront burden on suppliers, allowing suppliers to receive payment ahead of standard terms where cash flow is a constraint.

Advanced Practice

Link commercial incentives such as contract extensions, volume increases and pricing adjustments to verified achievement of fair payment and contracting targets, and to progress on transitioning to outcome-based contract models across the supply chain.

Audits

Initial Action
  • conduct internal audits of your own payment performance and existing contract terms, reviewing on-time payment rate, prevalence of non-standard or extended payment terms and whether contract terms are consistent with your fair contracting policy
  • request suppliers to complete a self-assessment questionnaire on ethical contracts and fair payment terms for their own supply chain
Intermediate Progress

Include ethical contract practices in supplier audits, covering payment practices, use of fair and transparent contract terms and management of contract changes and disputes within their supply chain.

Advanced Practice

Commission independent reviews of strategic suppliers' payment performance and contract terms with their own supply chains, verifying compliance with fair contracting commitments and identifying systemic issues that require remediation.

Project Partnerships & Innovation

Initial Action

Pilot innovative approaches to risk-sharing, pricing transparency, and performance-based contracts or work with suppliers to design more efficient and fair contracting structures that improve delivery and reduce disputes.

Intermediate Progress

Engage with industry peers and procurement networks to share good practice on fair payment and ethical contracting.

Advanced Practice

Convene a cross-industry working group with strategic suppliers, peers and contract specialists to develop shared vested contracting templates and toolkits adapted for sustainable procurement contexts.

Continuous Improvement

Metrics

Initial Action

Track the following:

  • buyer average payment time and on-time payment rate
  • number of disputes or escalations from the supplier
  • number of supplier complaints related to payment or contract terms
Intermediate Progress

Track the following:

  • progress against payment delay reduction targets by category
  • percentage of suppliers audited for fair contracting practices
  • progress on contract disputes and resolution rates
Advanced Practice

Require strategic suppliers to report on fair contracting and payment performance across their own supply chain tiers, including payment times, frequency of contract disputes, use of last-minute changes and progress against outcome-based contract milestones.

Scorecards

Initial Action

Include fair contract practices as a component in supplier scorecards, covering timely payments and change management.

Intermediate Progress

Rate suppliers on the quality and consistency of their fair contracting practices and improvements.

Advanced Practice

Weigh fair contracting and payment performance in strategic supplier scorecards, with top performers receiving preferential weighting in tenders and bottom performers required to submit improvement plans.

Impact Verification

Initial Action

Gather feedback from procurement teams and suppliers on effectiveness of fair contracting programs.

Intermediate Progress

Assess whether supplier engagement and capacity building initiatives are improving fair contracting practices.

Advanced Practice

Measure the effectiveness of ethical contract programs and vested contracting transitions in improving commercial relationships across supply chain tiers, including reduction in disputes, improvement in payment performance and value created through outcome-based contracting over time.

Sources consulted

Bribery, Extortion and Conflict of Interest Just Transition & Responsible Exit