Ian Holyoak
Posted on 14 Apr 2020

Coronavirus (COVID-19) and public sector contracts – supplier relief PPN 02/20

On 20 March 2020, the Cabinet Office published a new Procurement Policy Note - PPN 02/20 in relation to goods, services and works contracts procured by public bodies in the UK. It aims to ensure service continuity during and after the current COVID-19 outbreak, and will be in effect until 30 June 2020.

The Cabinet Office has subsequently issued related information:

  • FAQ guidance.
  • Guidance notes and model interim payment terms.
  • Guidance in relation to contingent workers (e.g. self-employed contractors and those using a personal services company).
  • Guidance in relation to construction contracts.

The PPN applies equally to concession contracts and contracts procured under e.g. the Utilities Contracts Regulations.

Existing Contracts

Currently, standard public sector contracts tend to operate on maximum 30-day payment terms (as required by PCR15) and include provisions such as liquidated damages for late delivery due to the supplier’s fault; service credits for missing specified service levels; and required levels of inputs / presence / availability.

Payments

The Government is conscious of the pressures that its suppliers are facing. It wants to ensure service continuity and protect jobs during and after the current Coronavirus (COVID-19) outbreak. As a result, and perhaps also mindful of the disruption to services following Carillion's collapse, PPN 02/20:

  • Discourages the use of force majeure provisions or arguments around frustration, where these could affect post-pandemic continuity.
  • Advises the public sector to pay undisputed invoices 'immediately' and resolve disputed invoices as a matter of urgency.
  • Stresses that payments should be made as normal over the next three months even if the supplier cannot fully fulfil its contractual obligations.
  • Expressly advises public bodies not to send invoices back for minor administrative errors when the goods / services have been delivered.

Other options for 'at risk' suppliers

Additional options are available for 'at risk' suppliers. The Cabinet Office FAQ guidance states that whilst whether a supplier is 'at risk' is at the discretion of the contracting authority, they anticipate that the majority of public-body suppliers will be 'at risk' and authorities do not need to undertake a detailed assessment of suppliers’ financial viability. Options available to public bodies to assist their suppliers' cash flow include:

  • Advance payments or forward ordering to ensure service continuity.
  • Authorities should continue to pay at risk suppliers whose goods and services are either reduced or paused temporarily to ensure cash flow and supplier survival.
  • Possibly waiving or delaying enforcing rights and remedies such as liquidated damages or service credits, varying terms to provide relief on KPIs.

In return, suppliers must operate on an open book basis. The PPN and its associated FAQs contain various warnings such as:

  • Staff needed to provide services under public sector contracts should not be furloughed. FAQ Q9 advises that suppliers must notify the relevant contracting authority in advance of any proposed staff cuts and redundancies as it may affect payments made. However, FAQ Q13 clarifies that staff on other contracts in respect of which relief is not being sought under PPN 02/20 can be furloughed.

The position in relation to employees previously working on contracts where some services are continuing, but others have ceased is not entirely clear, particularly where employers (sensibly) pre-empted the PPN – or, at least, dialogue with affected public bodies - by furloughing unutilised staff. It is, though, clear that there must be no double recovery, so suppliers should expect to give credit where they have avoided employee costs by using furlough.

  • Fraudulent claims under Covid-19 support schemes will be reclaimed and those companies may be excluded from future public contracts.
  • Suppliers should not make any profit on elements of a contract that are undelivered. The payments are so that suppliers have sufficient cash flow to maintain their staff and assets; and can pay their supply chain on time.  

Businesses receiving relief under PPN 02/20 should keep records to show that the relief payments have been used for these legitimate purposes. FAQ Q15 warns that a failure to do so may lead to the contracting authority seeking to recover some or all of the relief payments made under PPN 02/20.

What should a party do in relation to PPN 02/20?

The PPN is clear that contracting authorities should be taking the initiative with 'at risk' suppliers. As such, all contracting authorities should seek to implement this PPN. However, given time demands on contracting authority personnel, we would recommend suppliers start the process if a supplier believes that they are 'at risk' and have not heard from the relevant contracting authority. Suppliers seeking relief should check the change control provisions in the relevant contracts and consider following that with a commercial proposal consistent with the PPN. Formal variations may be necessary to cover the period of relief and continuity payments.

If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Ian Holyoak or Nathaniel Lane in our Commercial team.

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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.