COVID 19: Public sector construction projects and supplier relief

Contracting authorities have been told to act now on payment to ensure suppliers at risk are in a position to resume normal contract delivery once the coronavirus outbreak is over.

The Cabinet Office has published a Procurement Policy Note: “Supplier relief due to COVID-19” (PPN 02/20) and Guidance notes on Model Interim Payment Terms. It is temporary emergency guidance which takes effect immediately and will last until 30 June 2020. This PPN applies to all contracting authorities, including central government departments, executive agencies, non-departmental public bodies, local authorities, NHS bodies and the wider public sector (excluding Devolved Administrations)’.

Separately the Scottish Government has issued a Scottish Procurement Policy Note: “Supplier relief due to COVID-19” (SPPN 5/2020 26 March 2020). It is in very similar, but not identical, terms to the Cabinet Office policy note, also applying with immediate effect. The Scottish PPN covers goods and services contracts put in place by Scottish public bodies. The principles are also stated to apply to works contracts, but the SPPN says that further guidance will be issued for works contracts in Scotland. A further blog will follow when the Scottish works contract guidance is issued.

Cabinet Office PPN

The PPN covers goods, services and works contracts being delivered in the UK and will therefore apply to contractors and consultants engaged in public sector construction projects. All contracting authorities are advised to immediately:

• “Urgently review their contract portfolio and inform suppliers who 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. Contracting authorities can define ‘at risk’ according to need.
• Put in place the most appropriate payment measures to support supplier cash flow; this might 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.”

A range of ways to support cash flow is considered in the PPN. Payment in advance is one of the more radical options. There are qualifications. Central Government contracting authorities that are subject to Managing Public Money should note that Treasury consent is granted for payments in advance of need if a value for money case is made, but this consent is capped at 25% of the value of the contract and applies until the end of June 2020. HM Treasury will review in mid-June whether this consent needs to be extended for a further period. Consent for payment in advance of need in excess of this amount can be sought from HM Treasury.

Scottish PPN

The SPPN  covers goods and services contracts put in place by Scottish public bodies. The principles are also stated to apply to works contracts, but the SPPN says that further guidance will be issued for works contracts in Scotland. While both policy notes are similar in their terms, the Cabinet Office PPN is more assertive about the onus being on contracting authorities to act e.g. the SPPN does not expressly  state that contracting authorities should review their contract portfolio and contact suppliers at risk. The SPPN identifies key points, the first of which is that “It will be for a supplier to set out proposals to vary an existing contract and/or request interim / advance payment”. It is also clearly stated that it is “a condition of payment” that thesupplier must also promptly pay its staff and supply chain under the contract.

Comment

The PPNs should be read in full, along with the model interim payment terms. There is a lot of detail to absorb. This is a fundamental change of approach to payment, even if it is only for a temporary period. However, remember that the PPNs are guidance only. It will be up to government departments, local authorities, NHS bodies and the wider public sector to decide whether they follow it.

Suppliers are required to operate on an open-book basis, making cost data available as required. Both PPNs say “This means they must make available to the contracting authority any data, including from ledgers, cash-flow forecasts, balance sheets, and profit and loss accounts, as required and requested to demonstrate the payments made to the supplier under contract have been used in the manner intended.” The impact of disclosing open-book information should be carefully considered before agreeing to a new payment regime.

Suppliers must also identify in their invoices the elements of the invoiced sum that are attributable to the impact of COVID-19 and which elements relate to services which are continuing. They are also encouraged to invoice more frequently, even weekly, to help with cash flow and ensure that employees and subcontractors are paid. Invoices are to be verified quickly and not sent back for minor administrative errors. This is all very positive but take care: the strict, mandatory, payment rules imposed by the Housing, Grants, Construction and Regeneration Act 1996 as amended still apply. Payment Notices and Pay Less Notices must still be given in line with the contractual timetable.

It should be noted that the PPNs also issue guidance on contractual relief mechanisms (eg. extensions of time; revised milestone dates, LDs, suspension of performance): “If a supplier seeks to invoke a clause relating to a form of contractual relief that would allow them to suspend performance, such as force majeure, contracting authorities should first work with the supplier to amend or vary contracts instead. These variations could include changes to contract requirements, delivery locations, frequency and timing of delivery, targets and performance indicators etc. Changes to the original terms should be limited to the specific circumstances of the situation, and considered on a case by case basis”. “Model Interim Payment Terms” have been issued to prevent suppliers claiming relief twice. It is strongly recommended that legal advice is taken before agreeing to any variation of a contract on these terms.

The Procurement Policy Notes are a positive, and bold, step in assisting the construction sector with the cash flow difficulties which they face due to Covid-19.