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Civil Engineer blog

Change to payment terms for government suppliers likely to help the construction industry

27 March 2020

The UK Cabinet Office has published two Procurement Policy Notes (PPNs) setting out information and guidance for public bodies on their relationships with providers during the COVID-19 difficulties.

Change to payment terms for government suppliers likely to help the construction industry
Change to payment terms for government suppliers.

Recognising the potential issues around procurement during the Covid-19 situation, the UK Cabinet Office has published advice for public bodies.

The two new Procurement Policy Notes (PPNs) set out information and guidance for public bodies on their relationships with providers for the immediate future.

PPN 01/20 concerns the urgent procurement of goods and services in response to the current coronavirus crisis. A second note, PPN02/20, concerns payments to existing suppliers and is the subject of this blog. The Government is urging public sector bodies to relax normal payment controls and adopt a, what I would term "laissez faire" approach to claims for amended payment terms from suppliers.

How the notes are being applied

Although published by the UK Government, the advice expressly excludes the ‘devolved administrations’ so presumably only applies to public sector bodies in England. Consistent with the language of the procurement regulations, the guidance refers to contracting authorities.

Examples will include all central government departments (eg NHS, defence, transport etc), NHS Trusts, local authorities, transport authorities and so on. In the civil engineering industries, these organisations, either acting alone or through frameworks represent a significant client base.

What the guidance covers

The stated aim of the notes is to ensure that "suppliers at risk" are able to resume normal contract delivery once the outbreak is over. The intervention is consistent with the Chancellor’s desire to keep the economy capable of responding at the end of the current difficulties.

The note urges public sector bodies to continue to pay at risk suppliers to ensure cash flow and supplier survival where goods and services are either reduced or temporarily paused.

What can suppliers ask for?

The PPN suggests several ways that suppliers can seek payments on different terms to those stated in the existing contract. These suggestions override existing provisions dealing with force majeure or business continuity. The note contemplates payments based on:

  • Usual rates
  • Revised or extended timescales or milestones
  • Interim payments
  • Forward ordering
  • Immediate payment
  • Advance payment (capped at 25% of the contract value)
  • An average of the previous three months’ invoiced amounts
  • No payments for profit on as-yet undelivered services

Suppliers with no contractual volume commitments are ineligible for these payments and public sector bodies are also cautioned to be careful with payments to underperforming suppliers.

Where necessary, suppliers will be required to cooperate on an open book basis making the necessary costs data available to the client body.

Relief can also be requested from contractual mechanisms such as liquidated damages, relief events, extensions of time, termination etc.

What should public sector clients do?

Clients should:

  • Urgently review their suppliers and identify the ones at risk and therefore need paying normally even if there is a downturn in supply.
  • Notify the supplier that it will be paid as normal at least until the end of June 2020.
  • Put in place the most appropriate form of support in terms of payments
  • Pay invoices on receipt and not return them in the event of minor administrative errors or queries.

All of these actions support getting money into the supply chain quickly and the Government stresses that it expects the money to flow to employees, suppliers and subcontractors.

PPN 02/20 is accompanied by a model contract variation agreement for parties to use when formalising their amended payment terms.

Administrative advice is also offered for the quick processing of invoices within client bodies. Contract administrators, such as project managers or service managers under NEC Contracts, will need to be aware of these needs, as invoices often follow the contract certification processes in construction contracts.

The effect on construction

The construction industry is renowned for the complexity of its contracts and payment terms. On the face of it these changes may provide for simpler payments for the time being, encouraging as they do a light touch or pragmatism from clients. The intent and the desire are clear but as always, the detail may matter too. Client representatives (either in-house or outsourced) will be nervous in applying these temporary rules. Whilst clients are encouraged to relax normal controls, there are still references to them doing their due diligence and making checks before allowing payment.

Amendments to contracts will need to respect the original agreement; for example, NEC contracts require any amendments to be made in writing. Existing clauses refer to force majeure type incidents. Anyone amending a standard form contract must be familiar with what the original form says.

This week, I have been advising a number of PFI project companies and civil engineering contractors. All are suffering from a shortage of people, equipment and materials, whilst still trying to provide the ongoing service or works.

Those in the PFI arena face major difficulties if they cannot provide their core service. PFI contractors are typically one-project, special purpose companies with only one client. If that project’s revenue stream ceases, then due to limited working capital their obligations to lenders will be impossible to honour with consequent difficulties.

One client working under an NEC term service contract for a major city council has been instructed, in very loose terms, to stop work, but with no mention of any assistance as mentioned in PPN 02/20. It is now raising a claim based on the Cabinet Office proposal.

Collaboration and open book accounting are existing features of NEC contracts, particularly those using the main options C, D, E and F. The Government is right to demand these behaviours particularly if the money it pays is to reach its desired end recipients. By way of example payroll data might be used to demonstrate that people are being paid. The Government cautions against any supplier double-recovering by using two or more schemes to seek relief.

These proposals from government are welcome but their ultimate success will depend upon their effective implementation. There is plenty of scope for positive contributions from clients but also for delay if clear guidance is not provided. I think that delegated authority within client organisations will be key.

  • Patrick Waterhouse, director at Bowdon Consulting Ltd