Out-Law / Your Daily Need-To-Know

Coronavirus: support for suppliers on UK public contracts

Out-Law Analysis | 27 Mar 2020 | 2:45 pm | 4 min. read

The UK Cabinet Office has issued guidance for contracting authorities on payment of suppliers, designed to ensure service continuity during and after the coronavirus outbreak.

Procurement Policy Note 02/20 (PPN 02/20), which includes a set of model terms, covers goods, services and works contracts being delivered in the UK. The guidance is of immediate effect and applies until 30 June 2020.

PPN 02/20 acknowledges that the outbreak of Covid-19 is unprecedented and will have a significant impact on businesses of all sizes. It also acknowledges the problems faced by many suppliers to contracting authorities which may struggle to meet their contractual obligations putting financial viability, staff retention and supply chains at risk.

It is clear from the context of the note that contracting authorities must act quickly and take immediate steps to pay all suppliers as a matter of urgency over the next couple of months.

The concern shown to suppliers potentially at risk and safeguarding cash flows in particular is an important example of adding substance to government headlines pledging support for businesses.

PPN 02/20 is a welcome response to a fast-moving situation, and the concern shown to suppliers potentially at risk and safeguarding cash flows in particular is an important example of adding substance to government headlines pledging support for businesses. The challenge is going to come in ensuring that the relevant procurers engage with suppliers in a timely and pragmatic way, to make sure that the thinking behind the guidance is put into practical effect as soon as possible.

We have also heard concern from the industry that public bodies are not yet respecting the guidance, and further clarification may be required from the government to address this.

PPN 02/20 is designed as a temporary measure, but given the fast-moving situation it is difficult to predict whether it may be extended further. The longer the scheme runs, the more time may be needed following the shutdown to enable applicants to re-adjust.

What should contracting authorities do now?

For contracting authorities, the immediate action is to confirm with their at risk suppliers that they will continue to pay them until at least the end of June to ensure business and service continuity.

PN 02/20 provides a range of ways to support at risk suppliers in maintaining cash flow, as well as providing guidance as to the nature of the payments to be made and the nature of invoicing.

Where payments are made on an output basis – such as all operational PFI/PPP projects - it is proposed that payments to suppliers should be made on the basis of an average calculation for the last three months of invoices. However, the guidance is clear that no profit margin should be payable in relation to any undelivered services and that payments should not be made to suppliers which are underperforming. All suppliers must be aware that if they are found to be taking undue advantage or of failing to act transparently and with integrity, contracting authorities will take action to recover payments made.

Additionally, no guidance is given to help contracting authorities determine whether a supplier falls within the 'at risk' category. PPN 02/20 states that contacting authorities can define their at risk suppliers "according to need". It is foreseeable that this could cause problems going forward as contracting authorities grapple with what suppliers are at risk. We would hope that all contracting authorities will seek to apply this as broadly as possible to ensure cash flow and jobs are protected.

PPN 02/20 reminds contracting authorities of the need to conduct appropriate and proportionate due diligence to ensure that payments are necessary for the continuity of supply of critical services and that records are maintained to enable future reconciliation if necessary.

In the PFI/PPP sector, we are already seeing suppliers seeking to re-deploy resource and critical assets on a fluid and evolving basis as other areas of need are identified, either within the context of a specific project or within a geographical region. This is reinforced by PPN 02/20.

What other forms of contractual relief might be available?

We do not believe that Covid-19 will be classed as a biological contamination that would trigger the force majeure provisions in operational PFI/PPP contracts and others that make use of similar wording.

PPN 02/20 stresses the need for contracting authorities to work with suppliers to ensure business continuity is maintained wherever possible, and that contracting authorities should take a pragmatic approach. It states that, where a supplier seeks to invoke a force majeure clause or any other form of contractual relief that would entitle them to suspend performance, the contracting authority must work with the supplier to amend or vary contracts instead. It is anticipated that these variations could include changes to contract requirements such as targets and performance indicators, but that the changes must be limited to the specific circumstances of the situation and considered on a project by project basis.

That said, it is clear that these amendments are temporary and that the contract should return to its original terms as soon as the impact of the coronavirus on the project has passed. Equally, it is recommended that contracting authorities should not accept claims from suppliers who were already struggling to meet their contractual obligations before the outbreak.

The model terms which have been issued by the Cabinet Office allow a supplier which has been identified as 'at risk' because of Covid-19 to set out to the contracting authority the contractual relief that it requires to deal with outbreak-related business disruption. It includes an interim payment proposal, allowing the supplier to request an interim payment structure. This process is available after the supplier and contracting authority have considered whether other forms of relief might be more appropriate, and suppliers must agree to operate on an 'open book' basis with the contracting authority.

As all suppliers are rightly focusing on the delivery of services throughout the current pandemic, we hope that a more fluid mechanism can be established to record changes rather than starting a paper 'war of notices' to ensure compliance with the contracts or issuing requests for formal variations. Focusing attention on ending the outbreak is more important than diverting key resources into contract management.