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

The Cabinet Office has published a second Procurement Policy Note which applies to all contracting authorities, including education institutions who consider themselves to be contracting authorities, local government, and NHS bodies, as well as central government bodies and NDPBs.

It applies with immediate effect, until June 2020 when it will be reviewed. The policy aims to support suppliers under public contracts where contract performance is affected due to Covid-19.  

The PPN requires immediate actions in terms of contract review and supplier liaison. We imagine this will be challenging for procurement and commercial contracts teams who are themselves already short staffed and dealing with the challenges of remote working. In this blog post we highlight the key points but urge you to read the PPN itself for more detail.

Immediate Actions

Immediate actions for every authority to take are as follows (quoted from the PPN):

• Urgently review your contract portfolioand inform suppliers whom you 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.
• 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 (rather than 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.

For central government, the requisite Treasury approval of payments in advance of need has been granted in advance due to the exceptional circumstances, provided accounting officers remain satisfied that a value for money case is made by virtue of securing continuity of supply of critical services in the medium and long term. This consent is capped at 25% of the value of the contract and applies until the end of June 2020.

Points arising from the PPN

How do you identify a supplier who is “at risk”?

The PPN suggests liaison with suppliers and identifying these suppliers “according to need”, on a case by case basis.

What about transparency and vfm considerations?

The PPN recognizes that there will need to be pragmatic decisions on a case by case basis. However the requirements for transparency and ensuring value for money remain. Authorities should keep careful records of discussions had and measures taken in relation to each supplier in order to demonstrate the decision making process.

What if a supplier claims “force majeure”?

Most contracts will contain a clause allowing either party to terminate the contract in the event of an unforeseeable crisis such as Covid-19. The PPN urges authorities and suppliers to explore all other means of keeping the contract going before force majeure clauses are invoked. These could include waivers by the authority of certain of its rights, relaxation of KPIs, extensions of time and so on. The decision about whether to keep a contract in place should be taken in the light of all the circumstances, for example:

• how dependent is this supplier on this contract,
• how critical is the performance of the contract to the authority, and
• does the cost to the authority of keeping the contract alive represent value for money when looked at in the round?

What if a supplier can no longer perform a contract due to external circumstances related to Covid-19?

Some suppliers will be at significant financial risk because they can no longer perform a service – for example, school catering services where a school has closed, or school transport services where children no longer need to travel. The PPN suggests the authority explores the possibility of redeploying that supplier into other areas of need for which the authority has responsibility (and potentially using the variation mechanisms at Regulation 72 Public Contracts Regulations 2015 to effect the change in service, although do seek legal advice on this).

Change Control

You might be dealing with an unusually high number of contract extensions/variations. It is important, for legal certainty, to keep careful record of all contractual amendments made, in accordance with any change control mechanism set out in the contract itself, and to ensure you always have an up to date composite copy of the contract.

We will continue to keep you updated – but do get in touch if you have any matters you would like to discuss.