The Cabinet Office has published a Procurement Policy Note (PPN) regarding the relief and support that should be given to suppliers under public contracts where contract performance is affected by COVID-19.
A copy of the PPN can be found here.
The PPN applies to all contracts (including construction contracts) awarded by “contracting authorities” as defined in the Public Contracts Regulations 2015 (PCR 2015), which include not for profit Registered Providers of housing, local authorities, NHS Trusts and central government bodies.
The PPN applies with immediate effect, until 30 June 2020 after which time it will be reviewed by the Government.
The PPN states that all contracting authorities should take the following actions immediately:
- Urgently review their contract portfolio and inform suppliers whom they believe are “at risk” that they will continue to be paid as normal (even if service delivery is disrupted or temporarily suspended) until at least the end of June.
- Put in place the most appropriate payment measures to support supplier cash flow. This may include a range of approaches such as forward ordering, payment in advance/prepayment, interim payments and payment on order (not receipt).
- If the contract involves payment by results then payment should be on the basis of previous invoices, for example the average monthly payment over the previous three months.
- To qualify, suppliers should agree to act on an open book basis and make cost data available to the contracting authority during this period. They should continue to pay employees and flow down funding to their subcontractors.
- Ensure invoices submitted by suppliers are paid immediately on receipt (reconciliation can take place in slower time) in order to maintain cash flow in the supply chain and protect jobs.
What is meant by an “at risk” supplier?
The PPN states that contracting authorities should identify suppliers that are “at risk”, but it does not explain in any detail how this is to be assessed. In particular, it is not clear whether these measures should only apply to suppliers who are at risk of insolvency. If so, how is the contracting authority able to determine this?
Where our clients have been talking to their suppliers, and a supplier informs them that they are having difficulty because of outstanding payments due to them from others (as will not be an unusual occurrence) we at Devonshires have a specialist team who are able to assist those suppliers in collecting in their outstanding debts. See here for further information.
Force majeure claims
Contracts will often contain provisions which allow either party to terminate the contract if a force majeure event occurs leading to a suspension of the works for a prescribed period of time. The PPN states that contracting authorities and suppliers should explore all other means of keeping the contract in existence before exercising a right of termination for force majeure. These might include the authority agreeing to extensions of time, payment deduction “holidays” and waiving certain other rights it may have under the contract. This may also involve the authority agreeing to vary the terms of the contract for a period of time until the COVID-19 crisis has passed, for example by varying a completion date. The decision on whether to keep a contract going should be assessed on a case by case basis, taking account of all relevant circumstances, including value for money considerations.
If a contracting authority agrees to vary a contract it is important that an accurate record of that variation is made, in accordance with the variation provisions of the contract. The contracting authority will also need to ensure that in varying the contract it is acting in compliance with the PCR 2015. Regulation 72(1)(c) of the PCR allows a contracting authority to vary a contract where the need for the variation has been brought about by circumstances which a diligent authority could not have foreseen, provided that the variation does not alter the overall nature of the contract or result in a price increase of more than 50% of the original contract value. In a large number of cases it may be possible for the authority to justify making the variation pursuant to this Regulation, though specific legal advice should always be sought on this.
For further information on this please refer to the separate PPN issued by the Cabinet Office on the impact of COVID-19 on public procurement.
The Regulator of Social Housing
A specific consideration for Registered Providers is the position of the Regulator on this issue. Our understanding is that compliance with this PPN takes priority over the Regulator’s VFM and Governance Standard, subject to RPs acting sensibly and pragmatically in this regard.
A further point for RPs to note is that this PPN will apply equally in circumstances where they are the “supplier” to another contracting authority (eg a local authority) under a contract for works, services or supplies.
The overriding message from the Government in this PPN is that contracting authorities should take a pragmatic approach and do what they can to support and assist suppliers that are identified as being at risk – with the core objective being to ensure that the supply chain is paid as quickly as possible to preserve cashflow. The PPN is not overly prescriptive in setting out the steps that contracting authorities should take in this regard, instead leaving it up to individual authorities to agree appropriate measures with their supply chain and to seek their own legal advice where necessary.
Ultimately, contracting authorities will have to consider how to apply this new guidance on a supplier by supplier basis having regard to the following: –
- The nature and type of the contract;
- Whether the supplier was in breach of contract or not performing prior to the current crisis;
- Whether the risk of making advance payments is too great if the supplier may become insolvent;
- Whether the works, services or supplies being paid for in advance can be secured and delivered by the supplier.