Coronavirus and the Construction Industry: Cabinet Office Issues further Guidance as to Supplier Relief

United Kingdom

Correct as of 3pm on 14 April 2020. This article is not being maintained.

Last week the Cabinet Office released a further part of its Procurement Policy Note on Supplier Relief due to COVID-19 (“PPN 02/20”) entitled ‘Guidance Notes for Construction Contracts’. See here for our Law Now on the original part of that. PPN 02/20 now comprises 5 separate notes including the original note.

This Law-Now provides an overview of the further guidance given which, if followed, is likely to have a significant benefit for the construction and engineering sector.

As with the original part of PPN 02/20, PPN 02/20 sets out information and guidance for public bodies on payment of their suppliers to ensure service continuity during and after the current coronavirus, COVID-19, outbreak.

PPN 02/20 now includes:

  • general ‘Model Interim Payment Terms’ in the ‘Guidance Notes on Model Interim Payment Terms’ (March 2020) and model deeds of variation for NEC3 EEC and for JCT DB 2016 in these latest ‘Guidance Notes for Construction Contracts’ (06 April 2020);
  • some FAQs between both the ‘Frequently Asked Questions’ (27/03/2020) and these ‘Guidance Notes for Construction Contracts’; and
  • not being as relevant to procurement contracts in the construction and engineering sector, the ‘Guidance notes on Payments to Suppliers for Contingent Workers impacted by COVID-19’.

An “at risk” supplier - Our earlier Law Now noted that there was little guidance within PPN 02/20 as it was then as to what constitutes an “at risk” supplier, other than that the individual Contracting Authority can define which suppliers fall within this category “according to need”. The FAQs indicate that the Cabinet Office anticipates the majority of suppliers will be at risk and authorities do not need to undertake a detailed assessment of suppliers’ financial viability.

Staff -  

  • The FAQs indicate that if a supplier will continue to be paid in full, even where they are not able to deliver their contract in the usual way, they cannot make staff on the contract redundant.
  • The FAQs also indicate that the payments to be made under PPN 02/2002/20 are for continuity and retention and, as such, suppliers cannot be paid in full under the contract and claim for some or all of the same employees working on the contract under the Coronavirus Job Retention Scheme (CJRS). This is not only a double funding issue, but staff being recompensed under the CJRS would not be able to work.

Alternative supply - The FAQs also indicate that if the current supplier cannot deliver due to the impact of COVID-19 and the contracting authority needs to seek delivery from an alternative supplier, the contracting authority should not pay twice but the existing supplier should instead seek support through one of the other COVID19 support schemes such as the CJRS.

‘Guidance Notes for Construction Contracts’

This includes:

  • model deeds of variation for NEC3 EEC contract and for JCT DB 2016 contracts;
  • a table which outlines forms of relief and the effect on the supplier together with points for consideration by the authority and practical notes on the implementation of each relief which should be considered alongside the model deeds of variation noting that not all relief options will be necessary or appropriate for each supplier under each contract; and
  • further FAQs tailored to the construction and engineering sector but not many giving novel answers to the previous FAQs.

It notes that there may be a range of reliefs such as paying at usual contractual rates, payment against revised/extended milestones or timescales, interim payments, forward ordering, payment on order or payment in advance/prepayment and  specifically suggests project bank accounts but cautions against early release of retentions. However, the table considers only 4 options as follows.

Option 1 - Accelerated payment of invoices.

Option 2 - Certification of interim valuations where work has not been undertaken, based on previous valuations. The guide payment is the average of the previous three months’ valuations (less supplier profit) but reference is made to allowances (up or down) for projects that have recently commenced, for ordering long-lead items, where the previous months’ invoicing contains any disproportionately high values and where the value remaining in the works is greater than the proposed interim payments to be made. The quid pro quo is to preclude contractual claims for costs incurred as a result of the COVID19 outbreak.

Option 3 - Amendment to existing payment mechanism to make more regular payments or reorder existing payment schedule.

Option 4 - Advance payment(s) and raises, among other things, the issues of repayment and vesting certificates and/or bonds.

The model deeds of variation provide for Options 2 to 4 above (but not also Option 1) although, of course, only some may be appropriate. They also provide provisions for many of the other principles of PPN 02/20 and which are applicable for each Option including in relation to open-book reporting, restrictions on the right of the Contractor to terminate, good faith, restrictions on other COVID-19 reliefs and reconciliation of payments in due course.

They assume that there is no existing amendment to the relevant standard form or, in the case of the NEC3 version, any Z clause: which may not be the case for any contract you are looking at.  Accordingly, unless all due care is taken, simply following the models may have unexpected consequences to contracts with existing amendment to the standard form or, in the case of the NEC3 version, any Z clause. Also, the NEC model is for NEC3 and not the current NEC4.  Accordingly, unless all due care is taken, simply following that model may have unexpected consequences to NEC4 contracts.  Similarly, all due care should be taken when looking to use these models for other contracts in the extensive JCT and NEC suites of contracts.

They are largely consistent with one another although there are some differences in substance and it is difficult to see why this might be.  For example, the model for NEC3 include provisions to, broadly, preclude claims by the supplier as a result of the COVID19 outbreak whereas the model for JCT does not.Also, the model for NEC3 provides for shortening the period between the time of the payment application and the final date for payment but the model for JCT does not.

For Option 1 payments, neither model requires the parties to agree the amount before the deed of variation is entered into so a deed of variation in these forms will not guarantee any additional payment. There is also a test of the supplier suffering a specified COVID-19-related hardship at a relevant time where that does not extend to hardships related to mutations of SARS–CoV-2.

Conversely, for Option 4 payments, the amount of the payment (or at least a way to ascertain it), the repayment arrangements and whether or not a bond is required need to be agreed before the deed of variation is entered into.