Procurement Guidance Note 01/20 - Supplier Relief Due to COVID-19
07 April 2020
Following on from publication of the UK Cabinet Office’s guidance on the same issue, Construction and Procurement Delivery (CPD) has released its own Procurement Guidance Note 01/20 (PGN) for Northern Irish contracting authorities, which details the steps to be taken to immediately support suppliers “at risk” as a result of COVID-19.
This PGN has been issued pursuant to an agreement by the Northern Ireland Executive that appropriate measures need to be implemented to maintain cash flow, protect supply chains and jobs and it proposes a number of practical measures to be implemented by contracting authorities without delay.
We are currently working with a number of our clients to provide assistance on implementing the requirements of this guidance and deliver the legal support the guidance recommends in relation to contract variations, a brief summary of which points has been provided below. As such, if you have any questions in relation to the guidance or need assistance with implementing temporary changes agreed, please do not hesitate to contact a member of our Procurement Team.
What is it?
The PGN sets out guidance on payment of suppliers and other relief events, to ensure service continuity, both during and after the current COVID-19 outbreak. It also sets out a list of immediate actions for contracting authorities to take. As such, this guidance is of critical importance for both contracting authorities and contractors/suppliers alike.
Which bodies must implement the guidance?
The PGN recommends actions to be taken by certain contracting authorities. This includes all bodies subject to the Northern Ireland Public Procurement Policy and beyond that, serves as guidance for other public sector bodies.
When does it take effect?
From 25 March 2020
What does it require contracting authorities to do?
There are a variety of general and specific recommendations contained within the PGN. Its main purpose however is to ensure that contracting authorities act quickly and take immediate steps to pay all suppliers as a matter of urgency, to support their survival over the coming months and so that services can resume as normal once the pandemic is over.
The key actions that the guidance recommends contracting authorities should take are as follows:
- All contract portfolios should be reviewed and “at risk” suppliers identified. No definition is offered of what constitutes an “at risk” supplier, however the FAQs made available with the PGN clarify that this assessment is to be undertaken at the discretion of the contracting authority on a case by case basis. Limited guidance is provided in undertaking this exercise, save that “We anticipate the majority of suppliers will be at risk and authorities do not need to undertake a detailed assessment of suppliers’ financial viability but clearly suppliers that are not impacted by Covid-19 do not need to benefit from advantageous terms. The key point is that we expect authorities to apply this as broadly as possible to ensure service continuity and protect infrastructure, supply chains and jobs.”
- Once identified, “at risk” suppliers should be informed 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.
- Contracting authorities should then put in place for such suppliers the most appropriate payment measures to support supplier cash flow (this could include a range of approaches such as forward ordering, pre-payment, interim payments and payment on order (rather than receipt)). The risks with each option (particularly pre-payment) need to be carefully considered in advance by the contracting authority;
- If a contract includes payment by results, then payment should be based off previous invoices; for example, the average monthly payment over the previous three months. If pre-payments are to be made, then any payments made during the emergency period should be adjusted to ensure profit margin is not payable on any undeliverable aspects of the contract;
- Payments should not be made to suppliers where there is no contractual volume commitment to supply (e.g. under framework agreements where no volume commitment has been put in place) and contracting authorities need to carefully consider the extent of payment to be made to suppliers who are underperforming and subject to an existing improvement plan;
- In all cases, contracting authorities need to keep records of decisions and agreements made, and ensure that suppliers keep records to enable future reconciliation, if necessary. Any agreement reached does not however operate in isolation of the existing contract terms – the agreement reached MUST be documented as a variation to the contract (more on this below);
- Any invoices submitted by suppliers should be paid immediately on receipt to maintain cash flow in the supply chain and protect jobs. This does not mean that basic due diligence checks should be dispensed with, but that contracting authorities should instead “exercise more flexibility.” The PGN includes a reminder that the public sector must pay its suppliers within 30 days, but goes further to state that contracting authorities need to act now to accelerate their payment practices. Some specific suggestions are included within the PGN, including: (a) targeting high value invoices where a prime contractor is reliant upon a sub-contractor to deliver the contract; (b) resolving disputed invoices as a matter of urgency (e.g. consideration should be given to paying immediately and reconciling at a later date); (c) invoicing on a more regular basis etc;
- Wherever possible, contracting authorities should seek to re-deploy capacity of suppliers unable to fulfil their contracts to other areas of need.
The PGN also advocates a number of general actions for consideration to ensure business continuity is maintained wherever possible. These actions include, for example, considering contract variations (such as time extensions or waiving contractual remedies such as liquidated damages or service credits) to
accommodate the current challenging environment, rather than reliance upon force majeure or frustration clauses. Whilst a pragmatic approach is advocated throughout, the PGN makes clear that the extent to which contractual changes are possible has to be considered on a case by case and that specific legal advice should be sought as required.
This legal advice will include consideration not only of any applicable procurement constraints (please refer to our earlier procurement update), but also the underlying contract provisions and commercial terms of the arrangement, such as the nature of the supply, regulatory constraints etc.
Of particular note in this regard is that the PGN provides a template set of Model Interim Payment Terms that contracting authorities may seek to use to amend their contracts for services and goods delivery. In particular, these Model Interim Payment Terms are designed to prevent a supplier from claiming contractual relief from a contracting authority under the PGN and claiming separate relief (i.e. to prevent double recovery) from the Government under the other measures put in place to assist with supplier hardship, such as the Coronavirus Job Retention Scheme.
Whilst this is a helpful step, further to the note referenced above regarding the need for contracting authorities to seek legal advice before amending contracts, the PGN explicitly makes clear that legal advice will again be needed to ensure that the Model Interim Payment Terms are consistent with the underlying contract that they are seeking to vary. Furthermore, the Model Interim Payment Terms have not been designed for use with works contracts, therefore again specific legal advice will be required.
What contracts does it apply to?
The PGN applies to all forms of works, supplies and services contracts, but not grants. Also – as above, note that the Model Interim Payment Terms have not been designed for use with works contracts.
What should suppliers do?
- Suppliers need to work closely with their contracting authority customers to identify and deal with any contracts where they believe the current situation makes them an “at risk” supplier.
- For suppliers to qualify for the relief detailed in the PGN, they must agree to act on an “open book” basis and make cost data available to the contracting authority during this period. This means they must make available to the contracting authority “any data, including from ledgers, cash-flow forecasts, balance sheets, and profit and loss accounts, as required and requested to demonstrate the payments made to the supplier under the contract have been used in the manner intended.”
- Suppliers should not expect to make profits on elements of a contract that are undelivered during this period and are expected to “operate with integrity”. The PGN includes a specific warning that suppliers not meeting these obligations, or who are found to be taking undue advantage, may be liable to actions for recovery of payments made.
- Suppliers availing of assistance should also continue to pay employees and flow down funding to their subcontractors.
- As a practical point, suppliers receiving assistance will need to ensure that their invoices identify which elements of the invoice relate to services they are continuing to supply (i.e. “business as usual”) and which elements are attributable to the impact of Covid-19.
- Payments made under the PGN are to ensure continuity and retention; the supplier must be able to deliver in full as set out in the contract when required by the contracting authority. Suppliers cannot therefore be paid in full under the contract and claim for some or all of the same employees working under the contract under the Coronavirus Job Retention Scheme. Suppliers must therefore ensure that all of the parts of the workforce identified to deliver the contract in full are not furloughed during this period under the Coronavirus Job Retention Scheme because the supplier is receiving the continuity and retention payment.
- Any supplier that is found to have acted fraudulently by claiming under the Coronavirus Job Retention Scheme (or other Covid-19 support schemes) for workers that are being paid under a public sector contract, may be excluded from future public contracts on grave professional misconduct grounds under the Public Contracts Regulations 2015.
If you have any queries please contact Kerry Teahan at Carson McDowell for further information.
*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.