Coronavirus and the Construction Industry: Cabinet Office Issues Guidance as to Supplier Relief

Correct as of 3pm on 24 March 2020. This article is not being maintained.

Late last week the Cabinet Office released a Procurement Policy Note on Supplier Relief due to COVID-19 (“PPN 02/20”) which provides guidance for public bodies on payment to suppliers to ensure business continuity during and after the outbreak of COVID-19. This is the second in a series of Procurement Policy Notes that the Cabinet Office has released in respect of COVID-19 and contains a range of practical management advice. This Law-Now provides an overview of the guidance given which, if followed, is likely to have a significant benefit for the construction and engineering sector.

Scope of PPN 02/20

PPN 02/20 applies to all contracting authorities, including central government departments, executive agencies, non-departmental public bodies, local authorities, NHS bodies and the wider public sector, but specifically excludes Devolved Administrations (each a “Contracting Authority”). It is therefore important to ensure, before acting, that the relevant contracting authority falls within the scope of PPN 02/20.

PPN 02/20 applies with immediate effect and shall apply until 30 June 2020. At this point, PPN 02/20 may be extended, dependent upon the circumstances. PPN 02/20 covers goods, services and works contracts being delivered in the UK, and therefore will apply to engineering and construction contracts, and consultant appointments.

In all instances, where the parties agree a temporary change to a contract such as changes to the payment regime, reduction of liquidated damages, waiver of termination rights etc, such changes should be in writing and limited to the specific circumstances surrounding COVID-19 and the contract should return to the original contract terms as soon as the impact of COVID-19 is over for that particular contract. Care should be taken when drafting any such variations to ensure that the scope is limited to the impact of COVID-19 only.

Payment practices

PPN 02/20 provides that where goods and/or services are reduced or paused on a temporary basis as a result of the impact of COVID-19, Contracting Authorities should continue to pay “at risk” suppliers in order to ensure (i) business continuity; (ii) cash flow; and (iii) supplier survival. There is little guidance within PPN 02/20 as to what constitutes an “at risk” supplier, other than that the individual Contracting Authority can define which suppliers fall within this category “according to need”.

The best practice guidance given to Contracting Authorities in respect of payment in affected contracts is as follows:

• Contracting authorities can continue to pay at usual contractual rates, or consider other options such as payment against revised/extended milestones or timescales, interim payments, forward ordering, payment on order or payment in advance/prepayment.
• Where payment for each month is ‘output/ outcome based’, and the Supplier’s ability to perform the services is affected by the impact of COVID-19, payment should continue to be made to the Supplier, based on a calculation of the average of the invoices from the previous 3 months. It is not clear what is meant by ‘output/ outcome based’, but this would appear to capture most construction contracts (i.e. whether payment arise by the achievement of milestones or periodic valuations). Nevertheless, payments under a construction contract rarely follow a straight-line trend and a 3-month average may over or under-compensate a contractor depending on the stage of the project. However, whilst the PPN 02/20 is not clear on the point, it would not be a stretch to think that Contracting Authorities will be sympathetic to requests for payment of site prelims costs and hire costs based on earlier averages even if there has been no work done (i.e. no output).
• Where a Supplier has partially met the outcome requirements within the contract, the invoice should clearly specify which elements of the invoice are for continued services, and which elements are attributable to COVID-19.
• As far as possible, and without delay in payment. any payments made which are attributable to COVID-19 should not include any profit margin.

Such amended payment obligations will not apply to a contract where there is no contractual commitment to provide a particular volume of services.

In order to benefit from the above payment measures, Suppliers must agree to operate on an “open book” basis, making available to the Contracting Authority any ledger books, data, balance sheets, cash-flow forecasts etc which are required and requested by the Contracting Authority to demonstrate that the payments made are being used as intended (ie employees are being paid on time and cash flow through the supply chain is operating correctly).

The Contracting Authority may recover payments in cases where it is proven that a Supplier is taking undue advantage or is not acting with integrity or transparency.

Other contractual relief

PPN 02/20 also provides guidance on other contractual reliefs which may be available to Suppliers and encourages Contracting Authorities to first look at varying contracts before invoking contractual provisions such as suspension of performance or termination. Contracting Authorities are required to maximise commercial flexibility within particular contracts.

Reliefs which may be sought by Suppliers include:

• Extensions of time for performance (including to Key Dates or delivery dates, as relevant); and
• Waiver or delay in the Contracting Authority’s exercise of a right or remedy (such as claiming liquidated damages, service credits or terminating the relevant contract).

Under PPN 02/20, Contracting Authorities are encouraged take a pragmatic approach in considering requests for contractual relief from Suppliers. However, it is clarified that Contracting Authorities are not expected to accept claims from those Suppliers who were not meeting, or were struggling to meet, their contractual obligations prior to COVID-19.

As with any changes to the payment regime, any extensions of time, waiver of rights or remedy or other contractual relief should be recorded in writing and should only apply to the extent that the impact of COVID-19 is felt to that particular contract.

Accelerating payment of invoices

PPN 02/20 outlines that payment should be made as soon as possible from the Contracting Authority to the Supplier and in any event quicker than the 30 days required by the Public Contracts Regulations 2015.

PPN 02/20 provides practical guidance to Contracting Authorities to ensure fast payment of invoices, including:

• Ensuring that there are delegated authority measures in place to deal with (i) approval and authorising payment; and (ii) receipt and checking of goods;
• Verifying invoices as quickly as possible, and ensuring that minor issues in invoices do not cause delay;
• Using payment cards to make payments to speed up payment process; and
• Providing clarity to the Supply Chain on where invoices are to be sent and the process required. Where possible, this should be displayed on the relevant Contracting Authority’s website.

Conclusion

In summary, the key points emerging from PPN 02/20 are as follows:

• Any changes to contracts should be formalised in writing, with any variations being limited in scope to the effects of COVID-19 only. Contracts should return back to their previous form once the impact of COVID-19 is over;
• Parties need to work together in order to ensure service continuity, taking a pragmatic approach to requests for relief;
• Where Suppliers are paid in accordance with PPN 02/20, the Supplier should act transparently and with integrity; and
• Suppliers should contact the relevant Contracting Authority to seek relief as soon as possible where the performance under contracts will be impacted by COVID-19. Suppliers would benefit from ensuring any proposals to the relevant Contracting Authority are well-reasoned and proportionate to give Suppliers the best chance of receiving adequate support.

References: Procurement Policy Note - Supplier relief due to COVID-19