March 30, 2020

COVID-19 Projects & Construction: PPN 02/20 - Timely Relief for Social Infrastructure Projects?

Public Policy Note 02/20 is the Government's second recent PPN, focusing on practical steps to be taken by contracting authorities to provide financial support to their supply chains across goods, services and works contracts being delivered in the UK. PPN 02/20, whilst drafted as guidance, urges that contracting authorities "must act now" to protect at risk suppliers. The nature of this intervention from central government and the extent of relief that contracting authorities are expected to provide to at risk suppliers is unprecedented. It includes measures to accelerate payment of invoices, and even for advance payments, and allows contracting authorities to waive their own rights and remedies (e.g. to levy LADs and service credits).

At a time of huge pressure for social infrastructure assets, especially healthcare, PPN 02/20 provides welcome support for private sector companies. The guidance sets out how contracting authorities should operating results-based contracts (from now until 30th June 2020), and reflects a pragmatic and collaborative approach that we understand many healthcare projects are already following.

A key action point from PPN 02/20 is that suppliers continue to be paid as normal, even where service delivery is disrupted or temporarily suspended. For results-based contracts (including PFIs and PPPs), payment should be on the basis of previous invoices, calculating the average monthly payment for the past three months. Payment processes should also support supplier cash flow, including allowing for weekly rather than monthly invoicing, advance payments (where appropriate), and invoices should be paid immediately upon receipt. The guidance is clear that reconciliation can take place in the future, but is not a condition to payment being made in critical situations.

In addition to the contractual protections and reliefs that parties may already be using (such as compensation or relief events and excusing causes), PPN 02/20 highlights that contracting authorities should if appropriate provide relief against the contractual terms (including relief on KPIs and service credits/deductions or revising delivery dates) to maintain business continuity, and avoid relying on force majeure provisions. Contracting authorities are also encouraged to work with suppliers to amend or vary contracts on a case by case basis, in advance of operating contractual relief, and to record in writing any temporary changes agreed. The clear message is that contracting authorities are encouraged to maximise all commercial flexibility in order to maintain cash flow and protect jobs for affected contracts. This is stated to override rights that a contracting authority may otherwise have to reduce payment (e.g. performance deductions).

A note of caution

Whilst generally positive for project companies and service providers (and their own supply chains), parties should be aware of the requirements or restrictions on the relief offered under PPN 02/20. This includes agreeing to act on an open book basis and to make cost data available to the contracting authority (further detail on which is set out in the Note), and continuing to pay employees and subcontractors.

PPN 02/20 is also focused on 'at risk suppliers', to be defined by each contracting authority according to need, which had the potential for confusion and uncertainty as to which parties will benefit. However, since the publication of PPN 02/20, the Cabinet Office has issued further guidance (Frequently Asked Questions – Procurement Policy Note 02/20) confirming that "the majority of suppliers will be at risk and authorities do not need to undertake a detailed assessment of suppliers' financial viability" and that contracting authorities are expected "to apply this as broadly as possible".

For project companies and service providers operating results based contracts, the look-back calculation for payment may not assist them if they have been under-performing in the immediately preceding months. However, providers should welcome the government's confirmation that suppliers should continue to be paid over the next 3 months even if they are unable to fulfil their contractual requirements. This does not include providers who are unable to perform for reasons unrelated to COVID 19, although there may be difficulties in disentangling reasons for under performance in the coming months. 

Payments should also be adjusted to ensure that no profit margin is paid on undelivered services, and invoices should clearly distinguish between provided and disrupted services. For contracts with no contractual volume commitment, PPN 02/20 also advises that payments not be made, and contracting authorities should give careful consideration to the extent of payments to underperforming suppliers who are subject to an existing improvement plan. For suppliers concerned about claw-back, the government has confirmed that "in many cases" suppliers will not be required to pay back continuity and retention payments made, even where they have not been able to deliver the goods/services/works as a result of COVID-19. The circumstances in which claw-back may be appropriate would therefore seem to include those where payments are made for future delivery of goods/services/works but such goods/works/services are not delivered, and of course where the supplier fails to comply with the requirements of PPN 02/20 (e.g. breaches the open book requirements or does not pay its suppliers and staff in full). 

Project companies and service providers must ensure that they maintain records to enable future reconciliation of payments versus performance (if necessary) and if found to have taken undue advantage or failed to act transparently, contracting authorities will take action to recover payments made during this period. Any changes to public contracts also need to be compliant with the procurement regulations which impose restrictions on the extent of permitted variations . Please see our separate briefing on these issues.

Before receiving relief under PPN 02/20, suppliers should carefully consider whether they intend to benefit from any other government relief for COVID-19, as double recovery is not permitted. The Cabinet Office has since confirmed that a supplier who continues to be paid under a contract as a result of PPN 02/20 cannot also claim under the Coronavirus Job Retention Scheme ("CJRS") for employees working on that contract and such employees should not be furloughed during this period. Only staff not involved in delivering the contract in full can be furloughed under the CJRS. Given the rapidly changing landscape, and the unprecedented levels of government intervention and relief, there may be unintended consequences of obtaining relief under PPN 02/20. For example a supplier may be locking themselves out of future government relief which they could not possibly have known about at this time. This risk of course needs to be balanced against the short-term needs of the project and of each supplier.

The Cabinet Office has also provided a Guidance Note on Model Interim Payment Terms which contracting authorities may use in implementing PPN 02/20. The terms do not themselves document any relief that the Parties may have agreed, but rather provides for the supplier to make proposals about the relief it may seek and for the Parties to explore other means of relief (e.g. relief against KPIs/service credits/delivery dates/LADs). The terms define the open book data that a supplier must provide and confirms the restrictions on a supplier's entitlement to relief as set out in PPN 02/20. They also set out claw-back provisions and restrict the rights of the Parties to invoke force majeure or frustration rights. The Model Interim Payment Terms are not mandatory and it may be that suppliers would want to have the terms of relief agreed and documented first, rather than sign up to the obligations in the Model Interim Payment Terms without certainty on the relief that will be obtained.

Whilst there are no new sanctions for non-compliance with PPNs, it is to be hoped that public sector sponsors will apply both the spirit and the letter of the guidance.

For more information or advice please contact Liz Jenkins, Lucy Frith, or Laura Coates.