Public contracts and Covid-19: transitioning out of crisis measures

The Cabinet Office has published the latest in its series of notes on procurement policy for public sector organisations on managing their response to Covid-19. Procurement Policy Note (PPN) 04/20 sets out important actions for contracting authorities and suppliers to take now as part of the recovery and transition from Covid-19.

Who does the PPN affect?

PPN 04/20 applies to all contracting authorities (that is central and local government, executive agencies, NHS bodies and wider public-sector bodies) in England. It affects suppliers of goods, services or works into those organisations.

Contracting authorities and suppliers

PPN 04/20 builds on the previous guidance issued to contracting authorities under PPN 01/20 and PPN 02/20. It reinforces the Cabinet Office's message that contracting authorities should consider whether supplier relief measures are required to support contracting authorities' supply chains during the crisis, for example by taking steps including:

• Making interim or advanced payments to suppliers;
• Providing relief against contract terms (for example, KPIs and service credits); or
• Varying the scope or terms of contracts to reflect the impact on requirements.

The guidance confirms that contracting authorities should continue to offer relief where required, including to suppliers who may not have needed relief previously.

PPN 04/20 raises the prospect that contracting authorities' requirements and priorities may have shifted as a result of the crisis, and suggests that contracting authorities should consider variation or termination of contracts where necessary as a result.

The policy note also encourages contracting authorities to start to engage with suppliers to plan how to exit the relief measures and transition to a "new sustainable operating models" reflecting "strategic and reprioritisation needs."

Where contracting authorities have varied payment terms as part of relief provided to a supplier, they are now required to put in place transition plans to move to a longer-term position. The transition plan should be developed in conjunction with suppliers to be ready to implement "as soon as possible and before the end of October 2020."

What will a transition plan look like?

Cabinet Office expects that transition plans for contracts currently operating under payment relief will include, as a minimum:

• Exit dates for the current supplier relief arrangements;
• Agreement on when suppliers will deliver any outstanding goods or services that a contracting authority has made advanced payments for;
• A process to reconcile the payments made to suppliers against the costs they incurred;
• Evaluation of any costs incurred by the supplier in following Public Health England guidance while delivering the contract; and
• An assessment of whether the contract remains viable, or whether variation or termination is necessary.

What this means for affected public contracts

The message under PPN 04/20 is clear: contracting authorities and suppliers should now be getting around the "virtual table" to work out if and how to resume something approaching business as usual under their existing public contracts.

Where the contracting authority and supplier agree that the relevant goods, services or works are still required and able to be delivered under the existing contract terms, the policy note suggests the parties should be working to have in place by the end of October 2020 a plan for resumption of "normal" performance.

Where the ground has shifted as a result of Covid-19 and the scope or requirement for the contract has been affected, parties should be considering whether they need to renegotiate terms or terminate.

The policy note makes clear that any variation of existing contracts as part of this transition will remain subject to the limitations imposed under the Public Contracts Regulations 2015 (PCR 2015). Variations are tightly restricted under PCR 2015, and any organisations looking at variation should take legal advice on available exemptions and options to structure changes lawfully.

PPN 04/20 also suggests that parties should be exploring existing termination provisions within affected contracts if either party considers the contract is no longer required or is not deliverable. Termination is an inherently risk-laden step and parties should engage with their legal advisers before taking any action in relation to termination. It recommends that parties should also be taking into account the Cabinet Office's non-statutory guidance on responsible contractual behaviour during the Covid-19 crisis.