Summary

The Government has responded to the current crisis swiftly with two new Procurement Policy Notes which will bring welcome relief to suppliers to the public sector who are seeking ways to continue their operations and provide a safety net for their work forces:

• PPN 02/20 focuses on assistance and relief that may be offered to existing Suppliers within the bounds of their current contracts and/or with temporary variations;
• PPN 01/20 covers how the public sector might procure emergency supplies, services and works at speed, without risking procurement law challenge.

Both PPNs will apply to all public bodies in the UK, including central and local government, NHS bodies, executive agencies and non-departmental public bodies.

PPN 02/20 – Supplier Relief due to Covid-19

This welcome PPN gives the following comfort to suppliers contracted to the public sector which may find themselves in difficulty:

• that all suppliers which the public body believes to be at risk will be paid “as normal” at least until 30th June;
• relief from KPIs and service credits will be given rather than rely on draconian Force Majeure provisions;
• measures shall be put in place to support cash flow if necessary e.g. forward ordering or interim payments on order (rather than receipt);
• if payments are based on outputs or performance they can be calculated on previous averages (e.g. over the previous three months); and
• invoices should be paid immediately on receipt.

The public body will decide which suppliers fall into this “at risk” category; so if you believe your business may be eligible for contractual relief contact must be made as soon as possible.

Suppliers will need to be prepared to work on an open book basis and provide assurances that staff and subcontractors will be paid as a result. 

Profit cannot be made where services are not being provided and “as normal” here means essentially on an “continuity and retention” basis. Any payments in advance will be capped at 25% of the value of the contract (though this will be reviewed in June). Invoices must identify which elements are “business as usual” and which are attributable to the Covid-19 crisis. Supplier’s should also expect to receive requests to redeploy their workforce wherever possible.

However where volume risk sits with the Supplier payments in advance may not be made. This will obviously hit suppliers running concession agreements the hardest. Under concession agreements income depends on volumes of end-users taking up and funding the service.  Clearly volume risk would not have been accepted on the basis of this type of global crisis and Force Majeure clauses may not assist either. They are notoriously one-sided, often not allowing the Supplier to terminate at all but requiring them to do all they can to operate and sustain the service for when the Force Majeure event passes without income.

Other clauses may come to the rescue of Suppliers in this position, such as “Compensation Events” or “Relief Events”. However in many cases a Supplier may only be able to argue that its contract has been frustrated. In order to avoid contractual dispute and vital supply chains falling, public bodies are being urged to be pragmatic and potentially vary contracts to allow the required assistance to be offered. Variations must be proportionate and time limited to the period of the crisis. The PPN also makes clear that relief and assistance should not be given to Suppliers who were already failing prior to the crisis.

In the normal course of events these changes would be considered “substantial modifications” as they will be in the Supplier’s financial favour.  This could result in a challenge and a need to retender. PPN 01/20 however examines the potential exemptions which may be available and provides other alternatives.

PPN 01/20 – Responding to Covid-19

This PPN provides guidance to public bodies who may need to procure goods, services or works with extreme urgency in response to the crisis. The content will also apply if varying existing contracts to alleviate pressure on existing suppliers and protect future supply chain as envisaged under PPN 02/20.

It considers:

1. the “extreme urgency” exemption under Regulation 32(2)(c);
2. the ability to make a direct award where competition is absent for technical reasons or to protect an exclusive right under Regulation 32 (2)(b);
3. the possibility of calling off under existing frameworks or dynamic purchasing systems;
4. undertaking accelerated procurements; and finally
5. modifying existing contracts.

The PPN helpfully explains that the government does believe this crisis falls under the “extreme urgency” exemption in principle but there are caveats e.g. there must be genuine reasons as to why there is extreme urgency and action must be taken immediately; there must be no time to comply with the accelerated timescales for a procurement under the PCRs; and no time to place a contract under a framework.

The second exemption is may also be of assistance if there is no reasonable alternative to the particular supplier in the relevant time periods.

The most common situation in our view is likely to be variations to existing contracts to either ensure continuity of supply chain and/or to protect vital suppliers at risk from insolvency.  Regulation 72 (1) allows modifications to contracts where the need for the variation has been brought about by unforeseen circumstances; the nature of the contract is not altered by the change; and any price increase does not increase the original contract value by more than 50%. 

Given guidelines around limiting assistance to “continuity and retention” payments under PPN 02/20, these tests are likely to be met for the vast majority of changes which will be negotiated over the coming weeks.

To rely on any of these exemptions a written justification must be kept and the contract or variation must not be for longer than is necessary to meet the crisis. The justification must be clear that the contract or variation is related to the Covid-19 crisis with reference to specific facts.  Crucially, if the exemption for contract modifications to be relied upon a notice must be published to that affect in OJEU.

The PPN is not comprehensive in respect of all of the exemptions which may apply to changes to your contract. If you would like any assistance as to whether these or any other exemptions might apply to a variation or a direct award or indeed to any issue seeking contractual assistance pursuant to PPN 02/20 please get in touch with our procurement team who are available to assist.