The Government has issued Procurement Policy Note 04/20 (PPN 04/20) which provides updated information and guidance on how public bodies should approach payment of their suppliers during the COVID-19 outbreak. This follows the previous Procurement Policy Note 02/20 (PPN 02/20) which we covered in an earlier article that is available at this link: Commercial Contracts in the Public Sector - Relief for Suppliers.
PPN 04/20 will take effect on 1 July 2020, meaning that PPN 02/20 shall continue to apply up to and including 30 June 2020. In this article, we explore the implications of PPN 04/20 and the evolution from PPN 02/20.
Each of the above PPNs is applicable to all contracting authorities, including central government departments, executive agencies, non-departmental public bodies, local authorities, NHS bodies and the wider public sector (excluding the Devolved Administrations).
The aim of PPN 02/20 was to ensure service continuity and protect suppliers who are ‘at risk’ as a result of ongoing business disruption. The Government has since published its ‘COVID-19 Recovery Strategy’, which sets out the Government’s plan to rebuild the UK and a timetable for the lifting of restrictions subject to appropriate reassessment. PPN 04/20 recognises the intended shift back towards ‘business as usual’ and encourages public bodies and their suppliers to agree transition plans.
PPN 02/20 provides that, in most cases, public bodies should continue to pay suppliers who are ‘at risk’ (many will be), even where the delivery of goods or services is likely to be disrupted or even temporarily suspended. Further, suppliers should be paid as quickly as possible, and where possible invoices should be paid on receipt (subject to reasonable checks).
PPN 04/20 recognises that the delivery of goods and services may still be disrupted, but encourages public bodies to work with their suppliers to develop transition plans with a view to exiting from any contractual relief as soon as possible and before the end of October 2020. This may mean discussing termination where performance of the contract is no longer viable, or agreeing contractual variations where requirements have changed significantly. That said, public bodies should continue to pay suppliers as quickly as possible on receipt of invoices to maintain cash flow and protect jobs.
PPN 04/20 contains supplementary guidance on transition planning and what details transition plans should include. On the whole, PPN04/20 encourages an open and pragmatic approach, recognising that contracts must be sustainable and deliver value for money.
The PPNs sit alongside numerous measures offered by the Government to support businesses, including the Coronavirus Job Retention Scheme (CJRS), under which employers can apply for a grant to reimburse them for part of the salaries that they pay to those employees who are laid off because of the downturn in work (otherwise known as ‘furloughed workers’). PPN 02/20 is clear that suppliers should act with integrity and not take advantage of the PPN in addition to other support offered. In particular, suppliers should not expect to make profits on the undelivered elements of a contract. Suppliers should also act on an ‘open book’ basis, making relevant data available upon request. PPN 04/20 expressly deals with this point and confirms that suppliers must not be in receipt of multiple duplicative relief under PPN 04/20 and the CJRS. Each supplier’s circumstances should be considered independently to avoid a blanket approach. For example, PPN 04/20 confirms that it is possible for a supplier to receive part-payments for non-labour related costs from a public body customer and claim under the CJRS for labour costs.
Public bodies should keep a record of all decisions and the reasoning behind them, to support transparency and in case of future scrutiny. If you have chosen not to continue paying a supplier because you know they have been supported by the CJRS, for example, keep a detailed record of this decision.
PPN 04/20 takes effect on 1 July 2020. PPN 02/20 will continue to apply up to this date. We anticipate that most public bodies and their suppliers will now be aware of PPN 02/20 and operating within its guidance. Below we have set out some practical steps which you may wish to take as PPN 04/20 comes into force.
1. Review your contractual portfolio to identify which suppliers have benefitted from contractual relief throughout the COVID-19 pandemic. Consider if and how the current position might transition back towards the original contractual position and reach out to suppliers to discuss a transition plan. Consult PPN 04/20 for guidance on what this should include. If performance of the original contract is no longer possible or your requirements have changed significantly, consider if the contract can be varied to better suit your needs and if not, check what the termination provisions are. Any agreed variations should be documented carefully so that the parties are clear on the revised position and whether it is temporary or permanent. Take legal advice if you are unsure.
2. Ensure that suppliers are using the available support appropriately and are not ‘double-recovering’ by taking advantage of the PPNs alongside other support measures offered by the government.
3. Continue to pay supplier invoices quickly to support supplier cash flow and protect jobs.
4. It is possible, in some cases, that the extreme urgent need to obtain goods and services may have reduced. However, keep in mind all options available under the Public Contract Regulations 2015 (PCR) including direct award. As mentioned above, you may also be able to modify frameworks or contracts where necessary but keep in mind the restrictions on doing so. Whatever your decision, keep a clear record of your decision making in case you need to support it and take legal advice where necessary to ensure you continue to act within the PCR and general EU law principles.
1. If you contract with public bodies and have benefitted from contractual relief during the COVID-19 pandemic, it is likely that the public body will be in touch to discuss an exit strategy. Review your customer portfolio and consider how your customer’s requirements might have changed and whether performance of the original contract looks realistic. If it does not, consider whether contractual variations might achieve a mutually beneficial outcome and if not, familiarise yourself with the termination provisions. Keep an eye on your own supply chain to understand what is and is not possible as the hoped for ‘transition to normal’ occurs.
2. If you do continue to receive payment despite a disrupted or suspended service, continue to be transparent and act with integrity when raising invoices. This may mean charging the customer less where you are in receipt of support from other schemes
3. If performance of the contract now looks likely to resume as restrictions start to lift, be mindful of Government guidance particularly with regard to safety measures.
1. For contracts affected by the pandemic but not caught by the PPNs, we anticipate that most suppliers will have now agreed a way forward with the customer or taken steps to terminate if necessary. If your contract is still ‘up in the air’ it would be worth reviewing the contract anyway (or asking your legal adviser) to check the position on cancellation, force majeure and termination.
2. These are unprecedented times. A continued collaborative approach may be required to maintain business relationships where possible and often a sensible conversation is the best starting point to achieve a compromise that works for both parties. However please consider taking legal advice as there are legal risks when informing another party that you may be unable to perform your side of the contract. Alternatively, if a particular legal right has become exercisable in your favour, you may need to take steps to preserve this right otherwise you risk losing it.
If you would like to enquire about our advice on commercial contracts, please call a member of Knights' Commercial team. We hope that this note is helpful. We have created a special Coronavirus Hub which contains guidance on others areas as well as Commercial. The law is constantly changing and the position set out in this note may not be current. You should not rely on this note as a comprehensive statement of the law. Please contact us if you require specific legal advice on your situation.