Are you contracting with the UK government? UK Cabinet Office publishes specific guidance for construction contracts further to its measures to protect government supply chains

The UK Cabinet Office released guidance this week on how contracting authorities should provide relief to at risk suppliers in existing construction contracts. This is further to the government’s recent procurement policy note (PPN 02/20) on the payment of suppliers to ensure service continuity during and after the COVID-19 pandemic (see our post on PPN 02/20). 

The Cabinet Office has noted that the FAQs in PPN 02/20 will be updated as feedback is received. We will continue to monitor developments and provide updates as the guidance evolves.

This week’s guidance expands on how the measures set out in PPN 02/20 should be implemented under existing construction works contracts to provide contractual relief to at risk suppliers and their supply chain including:

• clarification that suppliers may not obtain double relief by claiming from both the contracting authority (under the contract) and the government (under the Coronavirus Job Retention Scheme (CJRS) or other COVID-19 support schemes) to the effect that the supplier gains an unfair advantage by claiming relief twice for the same hardship;
• further details regarding the various forms of relief a contracting authority may agree with a supplier to address the business disruption caused by COVID-19 (as set out in PPN 02/20); and
• model deeds of variation for NEC3 and JCT standard form contracts.

Our colleagues recently discussed in a blog the mixed messages received by the construction industry on how projects should proceed in a landscape of general, but not construction-specific, restrictions.

While the additional guidance does not offer an explicit view on whether projects should continue in the current climate, by choosing to focus on construction, the government has certainly shown that it envisages works are likely to be paused or scaled back and that the emphasis is on adapting to ensure the financial health of supply chains and continuity of services.

Conditions of receiving relief: no double recovery

Suppliers cannot claim equivalent relief for the same loss from both a contracting authority (under PPN 02/20) and from the Government (under COVID-19 support schemes). 

As an example of how suppliers may be prevented from recovering relief twice for the same loss, the guidance advises authorities to ensure that, during the relief period, no parts of the workforce identified to deliver the contract are furloughed under the CJRS.

Further details regarding the various forms of relief 

The additional guidance reiterates that suppliers must act on an open book basis, continuing to pay employees and flow down funding to subcontractors. The authority must be able to take all necessary action to recover payments if these are not applied for the purposes agreed with the supplier.

The contracting authority should consider all forms of relief available under PPN 02/20, whether or not these are requested. Authorities and suppliers should engage in discussions on a case-by-case basis to decide the most effective form, or combination of forms, of relief. 

The four available forms are:

1. Accelerated payments of invoices

This measure should be considered for all at-risk suppliers, to enhance cash flow for the supply chain.

Suppliers should be aware that reconciliation of invoice issues may occur following the relief period and should properly document the payment of any disputed invoices.

2. Interim valuations based on previous progress

Where progress is affected by COVID-19, authorities may certify interim valuations based on progress in previous months rather than actual advancement of the works.

Suppliers should note that if this relief is given, they will not be able to make contractual claims for costs incurred as a result of the outbreak.

3. Amending payment schedules

Authorities may consider making more regular payments or re-ordering the schedule to bring certain payments forward.

4. Advance payments

Authorities may consider securing the continuity of critical works via advance payments. Agreed purposes should be clearly documented and proof that funds have been used appropriately may be required.

Granting any form of relief is likely to require amendments to the contract.

Which suppliers should continue to receive payment (for example, when a construction project has been paused due to COVID-19)? 

The additional guidance expressly states that contracting authorities should continue to pay suppliers who are at risk due to the impact of COVID-19 until at least 30 June 2020. This is to maintain cash flow into the supply chain, protect jobs and ensure government services can be delivered following the crisis.

This requirement could include situations where either:

• works have ceased or been scaled back at short notice, jeopardising the supply chain or threatening job losses; or
• it would represent value for money to continue payments to ensure suppliers can continue the works in due course.

Suppliers on paused projects are therefore very likely to fall under the general payment requirements lasting until the end of June 2020. The additional guidance anticipates that the majority of suppliers will be at risk during this period.

Model deeds of variation

The guidance provides model sets of terms which can be used to vary the NEC3 and JCT standard forms of contract. The deeds will document the interim proposals for offering relief from hardship caused by COVID-19.

The model terms contain options which align with the forms of relief available under PPN 02/20, for example, to allow for advance payments, or the certification for payment of undelivered work. These options may be adopted or left unused as appropriate. The terms also cover conditions for receipt of relief, for example, requiring open book reporting and prohibiting double recovery.

Both model sets of terms contain warranties that the contractor will not be in breach of any financial covenants by accepting the relief and will not enforce any security against a third party after receiving relief.

Authorities should seek legal advice to ensure the model deeds of variation are consistent with any bespoke amendments already made to the relevant contract.

For more on the impact of COVID-19 on your business, visit our risk and compliance blog and coronavirus alert hub.