Posted on 18 Jun 2020
By Nathaniel Lane
Commercial & Regulatory Disputes
Government guidance on recovery and transition from COVID-19
On 9 June 2020, the Cabinet Office published a new Procurement Policy Note PPN 04/20 in relation to recovery and transition from COVID-19.
PPN 04/20 aims to ensure service continuity during COVID-19 and when normal business resumes. It acknowledges that COVID-19 may be with us for the long term and certain contracts may not be sustainable post COVID-19. In summary it:
Updates and builds on supplier relief under PPN 02/20 that we have previously analysed.
Makes clear that the various forms of relief set out in PPN 02/20 are still available.
This includes proactively considering and making payment in advance of need due to the impact of COVID-19 and/or providing relief against their current contractual terms, for example relief on KPIs and service credits, to maintain service continuity. However, it reminds contracting authorities that suppliers are not automatically entitled to payment or other relief under this PPN, advance payments are only as necessary and other sources of Government support should be considered.
Sets out the need for transition plans to exit from relief and into a sustainable contract that will deliver value for money for the medium-to-long term.
Will be in effect for the period 1 July to 31 October 2020.
To whom does the guidance apply?
The PPN applies to all contracting authorities, including local authorities and NHS bodies. However, it does not apply to the Devolved Administrations in Wales, Scotland and Northern Ireland. It covers goods, services and works contracts (including PFI and PF2 contracts).
What is the reason for PPN 04/20?
The PPN reflects a number of the Government's recent comments about switching focus to the re-opening of the economy and the Government winding down economic support schemes while people are eased back into work.
In this context, paragraphs 8 and 9 are a useful overview of its purpose – contracting authorities and their suppliers now also need to work in partnership to plan an eventual exit from any relief and transition to a new, sustainable, operating model taking into account strategic and reprioritisation needs. In some cases, it is possible that the basic commercial assumptions that underpinned the viability of the original contract can no longer be maintained. Contracting authorities and their suppliers will need to work in partnership, openly and pragmatically, during this transition to ensure that contracts are still sustainable... It may be necessary for the parties to discuss contract termination. If a contracting authority views a contract as no longer relevant or viable, they should work with the supplier to pursue termination based on the existing contractual remedies. Unreasonable expectations around transfer of risk and cost are likely to increase the probability of contract failures and may mean suppliers exit the market and weaken competition. The Outsourcing Playbook sets out how contracting authorities should constructively engage with suppliers.
There are slight nuances to this in the Introduction with value for money over the medium to long term added as an outcome.
What should a contracting authority do in relation to PPN 04/20?
Two paragraphs of the PPN give a general overview of how contracting authorities should act.
Paragraph 2 of the PPN states that all contracting authorities should:
Review their contract portfolio, including where they are providing any contractual relief due to COVID-19 and, if appropriate to maintain delivery of critical services, continue or commence measures in line with PPN 02/20.
Work in partnership with their suppliers and develop transition plans to exit from any relief as soon as reasonably possible. This should include agreeing contract variations if operational requirements have changed significantly.
Work in partnership with their suppliers, openly and pragmatically, during this transition to ensure contracts are still relevant and sustainable and deliver value for money over the medium-to-long term.
Continue to pay suppliers as quickly as possible, on receipt of invoices or in accordance with pre-agreed milestone dates, to maintain cash flow and protect jobs.
The PPN goes on to state that where relief has been provided, the contracting authority should work with the supplier to develop a transition plan ready to be implemented as soon as possible and before the end of October 2020. This transition plan should be agreed by both parties and should include the following:
A planned exit date for when any supplier relief will end; this should be kept under review to reflect the changing situation, e.g. local restrictions being reintroduced.
If advanced payments have been made, the parties should agree if and when any outstanding goods or services are to be delivered.
Note: Paragraph 10 caps advance payments at 25% of the contract value and states Treasury consent will again be required for advance payments after 31 October 2020.
The process for reconciling payments made against costs as set out in the model interim payment terms accompanying PPN02/20.
An assessment of any costs associated with implementing Public Health England guidance specifically in relation to delivering the public contract. This should be considered by the authority on a case-by-case basis.
An assessment as to whether, as a result of COVID-19, the contract is still operationally relevant and viable and, if not, proposals for variation or termination.
There is a new focus on sustainability and partnership, although the need for viability and the possibility of termination are also mentioned in several places. This (along with references to variations) signals a shift by the Government, bearing in mind the current, operational context in dealing with COVID-19.
Contracting authorities should take legal advice before approaching a supplier to suggest varying or terminating an agreement. Contract provisions should be reviewed in relation to variations and/or termination (as appropriate); and thought should be given to approaching the supplier on a 'without prejudice' basis.
A contracting authority may also wish, commercially, to identify best and worst case scenarios in relation to the proposed change or termination before approaching the supplier.
Understandably, contracting authorities may be reluctant to take the first steps. There will be time demands on their hard-pressed personnel; and working effectively with a supplier to identify commercial solutions specific and appropriate to the relevant arrangement, whilst remaining within the bounds of the procurement law, will require a particular skill set.
The PPN also advises contracting authorities to:
Use the contract portfolio review to see if relief granted is still appropriate (e.g. milestones may no longer be affected by COVID-19), but noting that suppliers of critical services who may not previously have requested relief… may require it going forward.
Keep a comprehensive record… of all decisions, reasoning behind key decisions and actions taken to support transparency and future scrutiny, including in relation to value for money, why advance or pre-payments were made and to enable any necessary future reconciliation.
Take account of the Cabinet Office guidance on responsible contracting behaviours (our article on that guidance can be found here). The guidance encourages the parties to engage constructively and reasonably; and, among other things, strongly encourages them to resolve any emerging contractual issues responsibly before they escalate into formal intractable disputes.
Ensure that any actions still comply with procurement law (including the Public Contracts Regulations 2015 - PCR15) and other regulations.
Consider the possibility of supplier insolvency and manage this on a case-by-case basis.
Accelerate payment practice from the 30-day limit under PCR15. The final section entitled Accelerating Payment of Invoices builds on PPN 02/20 and provides several contingency measures contracting authorities can adopt to process invoices more quickly.
Key points for suppliers include:
As per PPN 02/20, they must agree to operate on an open-book basis to demonstrate payments have been used in the manner intended.
They should not expect to make profits on elements of a contract that are undelivered during this period and all suppliers are expected to operate with integrity. Suppliers should be made aware that in cases where they are found to be taking undue advantage, or failing in their duty to act transparently and with integrity, contracting authorities will take action to recover payments made. Again, this is consistent with Government concerns that certain of its COVID-19 support schemes have been misused by certain businesses.
They cannot claim labour costs through the Coronavirus Job Retention Scheme (CJRS) and relief for the same costs under PPN 04/20. However, a supplier can claim non-labour related costs under the PPN and labour costs under the CJRS.
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 Nathaniel Lane or Ian Holyoak in our Commercial team, or your usual Michelmores' contact.
CORONAVIRUS STOP PRESS – Click here to keep up to date with all of our latest articles.
This article is for information purposes only, 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.