New Government procurement policy notes
The UK Government recently published two procurement policy notes. These ‘PPNs’ provide public sector organisations (referred to as “contracting authorities”) with best practice guidance. As they cover goods, services and works contracts, they apply to the UK construction industry and its supply chain.
PPN 01/20 acknowledges that, in order to respond to Government’s COVID-19 measures, contracting authorities will need to consider taking a number of actions which may require them to procure goods, services and works with extreme urgency. PPN 01/20 clarifies that, in exceptional circumstances, this is permissible under current public procurement regulations and provides associated guidance. PPN 02/20 acknowledges the huge impact that COVID-19 is having on businesses of all sizes and that many contractors and suppliers are beginning to struggle.
Both guidance notes encourage authorities to circulate the documents internally and to forward them to the organisations for which they are responsible. Both PPNs are stated to have immediate effect; the intention is that the relief provided to suppliers by PPN 02/20 should continue at least until the end of June.
Maintaining cash flow and protecting jobs
Although the guidance is aimed at authorities and bodies within the public sector, the key messages will be of interest to the private sector: PPN 02/20 is focused on providing assistance to suppliers who are most at risk.
Authorities are encouraged to protect cash flow as much as possible and to continue to pay suppliers, even if service delivery is disrupted or suspended. This might include a range of approaches that includes advance and interim payments, payments being made on order (not receipt) and against revised timescales. Authorities are asked to accelerate their payment practices.
- Where payment is based on outputs or results, and the supplier’s ability to perform is impacted by COVID-19, the advice is that payments should be made based on the average of the invoices issued during the previous three month period.
- Payments should not be made where there is no contractual volume commitment to supply.
- Where possible, any payments made during the emergency COVID-19 period should be adjusted to ensure that the profit margin is not paid on any undelivered aspects of the contract.
- In their invoices, suppliers must distinguish the elements which are attributable to the impact of COVID-19 from the ‘business as usual’ amounts that relate to the on-going services they are continuing to supply.
The PNN states that all suppliers are expected to operate with integrity; where suppliers are found to be taking “undue advantage”, authorities will be able take action to recover payments made.
In order to benefit from the new payment measures, suppliers will be required to operate on an open book basis and to provide the authority with supporting documentation (including ledgers, cash-flow forecasts and balance sheets), as required and requested, to demonstrate that payments made have been used as intended (that cash is flowing through the supply chain).
Accelerating payment practices
Authorities are being told to accelerate their payment practices. The guidelines given include:
- Setting out invoicing procedures on the authority's website (to reduce the number of administrative and clerical errors in the invoicing process).
- Delegating authority to ensure invoices are not delayed: as staff absence is due to increase, ensuring there are sufficient numbers of staff with delegated authority to promptly receipt /authorise amounts as due for payment.
- Encouraging suppliers to invoice on a more regular basis (in order to promote better cash flow).
- Verifying invoices as quickly as possible and not sending invoices back for minor administrative errors.
- Paying immediately and resolving the dispute at a later date (in relation to disputed invoices in critical situations).
Putting into place robust business continuity plans
In addition to providing guidance on payment terms, PPN 02/20 encourages contracting authorities to look at ways of varying the terms of its contracts before seeking to invoke their rights to suspend and terminate contracts. The aim behind the guidance is that the suppliers are able to resume normal contract delivery once the outbreak is over. Accordingly, changes to be made to the original terms need to be considered on a case by case basis, limited to the specific circumstances of each situation and temporary in nature.
Alternative forms of relief
These may include:
- Extensions of time (revised delivery/ milestone/ key dates)
- Delaying (or even waiving) specific contractual rights of the contracting authority (such as claiming liquidated damages, service credits or terminating the relevant contract)
Communication is critical
The PPN notes that, despite the exceptional actions it recommends, risks still exist: these will need to be managed by contracting authorities on a case by case basis.
The steer being given is that contracts should return to their original terms as soon as the impact of the COVID-19 outbreak on the relevant agreement is over. Amendments made to the contracts must be formalised in writing and the variations limited to the effects of the pandemic.
To maximise prospects of mitigation during these times of uncertainty and distress, keeping lines of communication open remains critical.
Following the issue of PPN 02/20, the Government has also issued specific guidance in relation to PFI/PF2 projects which we have considered here.