Yesterday the Cabinet Office published Procurement Policy Note 04/20, which gives guidance to public bodies on their outgoing payments under contracts which have been affected by the coronavirus.

Many contracting authorities have been providing various forms of relief to suppliers. The key message of this note is that the COVID-19 outbreak is “not a short term crisis” and that there is a need “to plan an eventual exit from any relief and transition to a new, sustainable, operating model”.

In other words, the current set-up is not sustainable, and in light of the fact that the effects of the pandemic are not going anywhere, the time has come to adjust to the “new normal”.

These reliefs cannot last forever – and public contracts are going to have to change at some point. The note sets out advice for a period of transition from the start of July until the end of October.

What reliefs are in place?

As we have seen in other sectors – most notably Commercial Property – one result of the pandemic has been that certain contractual obligations have not been enforced. Public contracts are no exception.

Social distancing, school closures and loss of income have made the fulfilment of many contractual duties impossible.

The key difference with public contracts is that contracting authorities have the added incentive of playing their part in the government’s aim to support and protect the economy at this time.

Possible supplier reliefs were published in a Procurement Policy Note in March, and include:

  • continuing payments to at risk suppliers in spite of what contractual provisions might say regarding non-performance, force majeure or business continuity;
  • extending the time allowed for contract performance in light of the effects of the coronavirus on suppliers; and
  • payment of suppliers in advance up to 25% of the value of the contract.

With all of these reliefs, there is also of course the benefit to the contracting authority of a greater likelihood of service continuity and avoiding having to procure contracts again if suppliers are financially affected in the current climate.

What is the way out?

The policy note requires contracting authorities to review their contract portfolios, including any contracts where they are providing some form of relief due to COVID-19.

They should consider whether and how contracts have been affected by the pandemic, and the appropriateness of continuing any relief measures taken. In itself, this will be a labour-intensive task and contracting authorities should actively consider the capacity required and who will take responsibility for this.

Next, contracting authorities must communicate with suppliers – especially those who have received some form of relief – and come to a transition plan which can be implemented as soon as possible and before the end of October. This transition plan should detail to what extent reliefs will continue in the short term and how contracts can be practiced without these reliefs going forward.

If contracts are operationally relevant and viable in their current form, they can continue. If not viable for either party then contracts might need to be varied. Timescales, operational requirements and extent of services could all be changed in order to allow the contract to continue.

However, it may be necessary to consider termination of contracts. This should be done – where possible – based on existing contractual remedies and by constructive engagement with suppliers.

What else can be done?

Contracting authorities will doubtless be concerned that some suppliers rely on their contracts financially, and will be reluctant to remove financial reliefs which are potentially keeping businesses solvent and people in jobs.

It is imperative that reviews and conversations with suppliers are started early in order to give the best opportunity to find a mutually beneficial solution and the most time for both parties to prepare for any changes which are coming.

As well as acting soon, it is important that contracting authorities act transparently. If suppliers know what kind of discussions are happening and what potential outcomes are in store, they can act and plan accordingly.

This need for transparency cuts both ways – as contracting authorities can only act in the best interests of suppliers (especially suppliers in hardship) if they know what their situation is and what other financial pressures they are currently facing.

The note also reemphasises the importance of contracting authorities paying invoices as quickly as possible in order to maintain supplier cash flow.

The general rule is that the public sector must pay suppliers within 30 days, but at this time of economic hardship there is an obligation to accelerate this wherever possible.