Procuring in a pandemic: Cash-flow, Contracts, Construction, Cards and (Curtailing) Competition

1. Introduction

The Covid-19 crisis has created acute challenges for public sector buyers (contracting authorities) and suppliers alike. On the one hand, contracting authorities have been forced to scramble to stockpile such essential supplies as Personal Protective Equipment (“PPE”) for healthcare workers and ventilators to enable them to respond effectively to the outbreak of Novel Coronavirus. On the other hand, business has been hurt by restrictions on free movement necessitated by the imperative of reducing Coronavirus cases, forcing business to curtail normal revenue generating activities.  

To address this difficult and pressing situation, the UK Crown Commercial Service has released a series of three Procurement Policy Notes (“PPNs”), together with sectoral guidance for construction contracts. These aim to assist public purchasers in navigating these difficult waters and also to help ensure that they do not lose their suppliers to insolvency events.  We have reviewed below the content of the PPNs.  

2. PPN 1 of 2020: “Responding to Covid-19” (“PPN 1”) 

The public procurement rules set an obstacle in the path of rapid purchasing: they mandate competitive tender processes, requiring the creation of tender documents, specifications and the formulation and application of rules of the competition.  Contracting authorities who flout the rules risk being sued by aggrieved suppliers and dealing with lawsuits could mean that precious time is lost. Supply contracts can be ripped up by the Courts where the buyer contracted directly without a tender process, only for the Court to hold that there should have been one.  The authority may also be forced to pay damages.  

PPN 1 aims to assist public buyers in procuring in a compressed time-frame, providing guidance on the mechanisms available for procuring more quickly.  For example, the Public Contracts Regulations 2015 (as amended) include a number of exemptions from competitive procurement. These exemptions are rarely used and available for use only in exceptional circumstances only.    

Regulation 32(2)(c) of the PCRs allows for direct contracting where this is necessary because of “extreme urgency” due to circumstances which the contracting authority could not have foreseen. The urgency cannot have arisen from the buyer’s failure to plan or from acting too late. This exemption was successfully invoked by the Scottish Government in 2014 when it was forced to make emergency purchases of de-icing salt during the sudden and unexpected onset of the coldest winter in 100 years. Following a challenge, the Scottish Court accepted that the severe cold weather could not have been foreseen and that it was reasonable for the Scottish Government to negotiate directly with one supplier to procure the stocks it needed to keep roads safe [1]. 

The guidance note helpfully supports the view that the Coronavirus pandemic is indeed an event which contracting authorities could not have been expected to foresee and which has generated legitimate urgency. Whilst that might seem like stating the obvious, it will provide comfort to contracting authorities that they are not acting in a maverick fashion by negotiating with selected suppliers directly.  

The buyer must however undertake and record its own analysis based on the facts.  This should explain how and why the need for the type of goods or services it wishes to procure are linked to Covid-19. The buyer must also satisfy itself that its needs could not be met through procuring under one of the “accelerated procedures” under the rules, under which the time-frames of the tender procedure can be truncated to 10 or 15 days. 

As PPN 1 points out, subsequent purchases will require a fresh analysis rather than a mechanistic reapplication of the exemption. If the Covid-19 crisis drags on, it may no longer be sustainable to argue that the outbreak is an unforeseen event justifying a direct purchase. By then, public buyers would have had time to make provision and could be accused of failing to plan earlier. That is unless there was a sudden further escalation in cases which could not have been forecast. 

A further exemption mentioned in PPN 1 [2] relates to the ability to contract directly with a supplier who is the sole point of supply for a particular type of good or service. That may become relevant in the context of Coronavirus if for example a particular entity develops a vaccine and protects it through intellectual property. In those circumstances, there would be no purpose served from tendering competitively if it is known that there are no functional alternatives.  

Other options discussed in the guidance include buying through a “Central Purchasing Body” (“CPB”). These are organisations which buy goods through a central purchase point under the procurement rules for the benefit of classes of different public bodies.  Public buyers may opt into these purchasing structures, even during their lifetime and make purchases directly on the terms which have been negotiated with suppliers by the CPB.  

Buyers may also consider in certain circumstances modifying existing supply contracts to increase the volume of purchases under the contract. PPN 1 provides some guidance as to when and how changes to a contract can be made without triggering the need for a re-tender of the contract. For example, the PCRs allow for variations to be made where necessitated by unforeseen events provided that the value of the changes (e.g. new purchase volumes) do not exceed 50% of the total contract value [3]. 

PPN 1 notes that certain essential items are currently subject to high demand and therefore prices may be substantially higher than normal. This is not in itself prohibitive but does require procurement officers to maintain a record of the prices which were paid and the reasons for their acceptance. Contracting authorities should consider including mechanisms within the contract to try to control the possibility of price rises. One such mechanism could, in my view, include a benchmarking protocol, coupled perhaps with a clawback provision (although admittedly such clauses are often difficult and time-consuming to negotiate). 

PPN 2 of 2020: “Supplier Relief due to Covid-19” (“PPN 2”) 

PPN 2 focuses on the need for public buyers to help their contracted suppliers through difficult circumstances. It makes the observation that the current outbreak of COVID-19 is unprecedented and will have a significant impact on businesses of all sizes. 

Many suppliers to public bodies will struggle to meet their contractual obligations and this will put their financial viability, ability to retain staff and their supply chains at risk. PPN 2 encourages public bodies to maintain prompt contractual payments to their suppliers with a view to ensuring continuity. In particular need are the suppliers at greatest risk of insolvency.    

Suppliers’ cash flow is a particular concern. Contracting authorities should pay suppliers as quickly as possible to maintain cash flow and protect jobs. Contracting authorities should act now to ensure payment is made as quickly as possible to their suppliers, including: 

• Targeting high value invoices where a prime is reliant on a supply chain to deliver the contract.
• Resolving disputed invoices as a matter of urgency; consider paying immediately and reconciling at a later date in critical situations.
• Take a risk based approach as to whether 2-way matching is always needed (rather than adopt regular 3-way matching against receipt and Purchase Order).
• Encourage suppliers to invoice on a more regular basis to help cash flow (eg every week rather than monthly). 

PPN 2 explains that pursuant to the guidance “Managing Public Money”, payments in advance of need are prohibited in absence of HM Treasury consent. However, in the circumstances HM Treasury has decided to provide consent for payments in advance of need where the Accounting Officer is satisfied that a value for money case is made by virtue of securing continuity of supply of critical services in the medium and long term. This consent is capped at 25% of the value of the contract and applies until the end of June 2020. HM Treasury will review in mid-June whether this consent needs to be extended for a further period. 

Contracting authorities are directed to work with suppliers and, if appropriate, provide relief against their current contractual terms (for example relief on KPIs and service credits) to maintain business and service continuity rather than accepting claims for other forms of contractual relief, such as force majeure. Contracting authorities are also advised to consider amending payment terms which may, for example, be linked to results or the achievement of milestones which are practically impossible given the current restrictions to protect public health.   

The overriding message appears to be that it is better to adapt the contract to the realities of the situation and allow some limited performance than simply to allow an inertia to set in which benefits neither the supplier or the purchaser. If there is one, the contract change control procedure should be employed to keep records of any changes made and the decision making behind each one.   

Contract variations could include changes to contract requirements, delivery locations, frequency and timing of delivery, targets and performance indicators etc. Changes to the original terms should be limited to the specific circumstances of the situation, and considered on a case by case basis. Modifications should be temporary and should be reversed once the current difficulties subside. 

Other reliefs sought by a supplier could relate to any contractual obligation but usually takes the form of one, or both, of the following:

• an extension of time for contract performance (eg revised milestones dates or delivery dates, etc);
• a waiver or delay in the ability of the contracting authority to exercise a right and/or remedy (eg to claim liquidated and ascertained damages, service credits or terminate the contract) 

PPN 2 recalls that changing a contract could trigger a risk of non-compliance with the PCRs. That is particularly the case as the sorts of changes contemplated in the note will be made in favour of the contractor or supplier [4]. For that reason, contracting authorities are directed to the guidance in PPN 1 of 2020 on the specific subject of making contract changes. It is also worth recalling that where changes can be made through a change mechanism set out in the original contract, it may be the case that no issues of non-compliance arise from the modifications made.  

“Guidance Notes for Construction Contracts - Procurement Policy Note 02/20” 

On 6 April, the Cabinet Office issued a further note to explain how the guidance in PPN 2 could be applied to construction contracts with public bodies. The purpose is to set out guidance for contracting authorities in relation to supporting construction suppliers effectively and appropriately, applying the general principles of the earlier note to the specificities of the construction sector. The contracting authority should identify their suppliers at risk and this should be taken on a case by case basis. 

The Note contains a useful table to assist contracting authorities in selecting from four contractual relief options for contractors, setting out the particular advantages for each and providing guidance on appropriate implementation. The options include accelerated payment of invoices, certification of interim valuations where work has not been undertaken (based on previous valuations), amending existing payment mechanisms (to make more regular payments or reorder existing payment schedule) and making advance payments to suppliers.  

Also included with the Note are two different model Deeds of Variation which can be applied by contracting authorities to incorporate these contract relief options into existing contracts. These are adapted to the JCT and NEC3 standard forms of contract. 

The Note also sets out useful guidance on how contracting authorities should deal with and assist their construction contractors at the current time. Protecting cash flow is again a central concern. The note advises that even where works have had to be paused or scaled back, contracting authorities should continue to pay suppliers at risk due to COVID-19 on a continuity and retention basis until at least the end of June 2020 in order to:

• ensure supplier cash flow;
• maintain cash flow into the supply chain;
• protect jobs;
• ensure suppliers are better able to cope with the current crisis and to fulfil contractual obligations once the COVID-19 crisis over;
• ensure continuity of suppliers’ businesses during and after the crisis; and
• ensure suppliers are able to resume delivery of public services once the outbreak is over. 

This could include, for example, in situations where: 

• works are required to be ceased or scaled back at short notice due to the impact of COVID-19 and non-payment could result in supply chains collapsing and/or significant financial implications for the supplier and consequential job losses at the supplier and supply chain level; and
• it would be value for money and important to business continuity to continue to pay suppliers in the short term (regardless of whether contracting authorities are able to reconcile at a later stage) to ensure that the supplier can complete the works in due course. 

Aside from averting the collapse of retained construction contractors, the guidance is also concerned to avoid businesses benefiting simultaneously from contractual relief measures and other Government Covid-19 support measures. This is related to a desire to avoid an overcompensation to affected businesses.   

The guidance is clear that suppliers cannot be paid under delivery of the contract and claim for some or all of the same employees working on the contract under the Coronavirus Job Retention Scheme (“CJRS”). Payments under CJRS are for staff who are furloughed and not working. Relief provided by contracting authorities should therefore be contingent on suppliers ensuring that during the relief period, all of the parts of the workforce identified to deliver the contract are not furloughed under CJRS.

Any supplier found to have acted fraudulently by claiming under the CJRS (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 Regulation 57(8)(c) of the PCRs. 

One other notable piece of advice relates to contractual retention payments. The note anticipates authorities may be asked to release retentions but advises caution before acceding to any such requests. The authority will need to bear in mind that an early release of a retention may leave it exposed to unpalatable levels of risk for the remainder of the construction contract.  

PPN 3 of 2020: Use of procurement cards (“PPN 3”) 

In the third and final note, the CCS has directed that contracting authorities should increase the spending limits on procurement cards in order to allow for expedited buying and payment for goods and services. The note directs that the daily and monthly limits should be raised to £20,000 and £100,000 respectively. Procurement cards are identified within the note as the preferred and most efficient means for making payments, a conclusion that builds on earlier work by the National Audit Office (NAO). The Note cautions that while this will facilitate faster payments, it is not intended to relieve Accounting Officers of their duty to secure value for money. 

Conclusion 

The PPNs are practical and well thought out. They will be extremely valuable tools in assisting contracting authorities formulate plans of action for procuring quickly and effectively through the Covid-19 crisis. Nonetheless, as the Notes recognise, the successful implementation of the different options they address will require legal advice. Modifying contracts, for example, must be carried out in a way which meets the requirements of Regulation 72 of the PCRs. Even using the prescribed templates for modifying construction contracts must be carried out with care, in order to ensure that the variation dovetails with the existing contract and is reversible once the crisis has passed. A thought should also be spared for Accounting Officers, who have the unenviable job of seeking to secure value for money in markets characterised by critical shortages in an extreme pressure situation.