The Cabinet Office has published a second Procurement Policy Note (PPN) 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. The PPN 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. The key points are highlighted below. The full PPN is available here.
Does PPN 02/20 apply to schools and colleges?
There has been some confusion about whether or not the PPN documents issued by Cabinet Office over the last week apply to schools and colleges. The Cabinet Office has now confirmed that PPN 02/20 is designed to capture all contracting authorities. Universities, Further Education Colleges, Schools, Academies and Academy Trusts where the majority of income (over 51%) is derived from public grants will be ascribed the status of a Contracting Authority.
What does the PPN require?
The PPN Is NOT an instruction from Government that Contracting Authorities should begin to pay all suppliers for all goods and services through to June 2020 automatically in advance. Rather, the PPN is an advisory: Contracting Authorities should take a pragmatic, risk-based approach to their contracts and suppliers, follow the steps suggested in the PPN and, where appropriate and business critical, look at payment methodologies which may include those detailed within the PPN.
The PPN requires Contracting Authorities to take the following actions:
- urgently review your contract portfolio and 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.
Any decision as to whether to make changes to contractual payments is for each Contracting Authority to make. If, for example, you are satisfied that there is a real risk of a supplier going into administration, then the contractual payments may be varied even if there is a (smaller) risk that the supplier may default.
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 value for money considerations?
The PPN recognizes that pragmatic decisions will have to be taken 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.
Can a supplier still ‘furlough’ staff?
Contracting Authorities are neither required nor expected to support every supplier. Any enterprise providing commercial services is entitled to furlough employees in accordance with the guidance in appropriate circumstances. This is the case even where an enterprise provides commercial services to public bodies.
What if a supplier claims ‘force majeure’?
A ‘force majeure’ clause in a contract allows either party to suspend for a specified period or terminate the contract in the event of the occurrence of an unforeseeable event. The drafting of each individual clause will need to be reviewed but it is possible that a crisis such as the COVID-19 pandemic may trigger a party’s right to argue that force majeure applies. 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 that an authority should explore the possibility of redeploying that supplier into other areas of need for which the authority has responsibility.
Varying contracts and change control
The PPN states that contracts should not be varied without legal advice. Before agreeing changes to the terms of your supplier contracts, please speak to Caroline Redhead, Sally Johnson or your usual Burnetts contact on 01228 552222 or e-mail email@example.com . Please note that both telephone and video appointments can be arranged during this period of self-isolation.
It is important to keep detailed record of any contractual amendments made, in accordance with any change control mechanism set out in the contract itself and to ensure that an up-to-date composite copy of the contract is maintained.