Public Works- Where's the Cash?


14 Apr
14Apr

Public works are being affected across the board by Covid-19 and many businesses in the construction sector are struggling to cope. 

The Government and other bodies have issued a number of guidance notes to address issues such as procurement, payment delays and safety. 

See for example:

Payments and Financial Relief for Contractors

With Covid-19, many sites have shut down, either partially or entirely. Progress payments therefore cannot be invoiced and paid to contractors and sub-contractors under the terms of their contracts. This poses very real threats to those businesses.

The UK Building Engineering Services Association (BESA) has called on buyers to release £4.5bn currently being withheld from contractors in the form of retention payments to “inject much-needed cash into struggling construction supply chains” during the Coronavirus outbreak.

In its Procurement Policy Note (PPN) of March 2020, the Cabinet Office (CO) said many suppliers to public bodies are likely to struggle to meet contractual obligations, putting their “financial viability, ability to retain staff and supply chains at risk”. “Contracting authorities should act now to support suppliers at risk so they are better able to cope with the current crises and to resume normal service delivery and fulfil their contractual obligations when the outbreak is over,”

The CO has asked contracting authorities, including central government departments, local authorities and NHS bodies, to urgently review contract portfolios and inform at-risk suppliers they will be paid as normal, “even if service delivery is disrupted or temporarily suspended” until at least 30th June 2020. 

Authorities have been asked to put in place appropriate payment measures to support suppliers' cash flow, which could include forward ordering, payments in advance, interim payments and payment on order.

“If the contract involves payment by results, then payment should be on the basis of previous invoices, for example the average monthly payment over the previous three months,” it said. 

The PPN also outlined additional contingency measures contracting authorities should consider throughout the pandemic:

1. "Ensure sufficient numbers of staff with delegated authority are able to promptly receipt and authorise an amount due for payment as significant levels of staff absence are possible.

2. Receipt for goods promptly and monitor flow down to ensure payment is cascading down the supply chain.

3. Verify an invoice, undertake necessary checks and resolve any issues as a matter of urgency. Do not send invoices back for minor administrative errors and risk causing delay in payment. Reconcile minor discrepancies at a later date. 

4. Use procurement/payment cards where possible to ensure businesses are paid as quickly as possible. Consider increasing the upper limit of spend, open up categories and ensure an appropriate number of staff have the authority to use.

5. Be clear where suppliers should send their invoice, including email addresses and the process required. Issue a reminder to all suppliers to help them best prepare and ask for invoices to be sent in electronically to avoid hard copies sitting in unattended office buildings."

The Government's Guidance dated 6th April 2020 has gone one step further and made clear that the implementation of any financial relief given to suppliers must be on certain terms (emphasis added): 

  • "Any relief granted will need to be accompanied by provisions around open book transparency
  • The provision by the supplier of supporting information to allow the authority to check that the commercial principles are complied with when relief is given, which may include an ability to audit where savings are being applied during the period of relief
  • Will require the supplier to continue to pay employees as well as its supply chain and to do so promptly within any specified time scale; 
  • Will potentially require the supplier to warrant that it will not be in breach of any financial covenants by accepting the relief and ensure that the supplier does not enforce any security against a third party after receiving relief; 
  • Is subject to the authority being able to take all action necessary to recover any relief payments made if the supplier fails to apply the relief for the purposes agreed by the authority, fails to act transparently and with integrity, or takes an undue advantage of the relief; and 
  • Is provided on the basis that a supplier is prevented from claiming contractual relief from an authority as well as claiming separate relief from the Government to the effect that the supplier gains an undue advantage by claiming relief twice for the same hardship (save where separate relief from the Government is in relation to recovery of costs (e.g. furloughed staff costs under the Coronavirus Job Retention Scheme) which are distinct from any other relief available under the PPN and have been properly incurred by the Contractor)."

The PPN in its FAQ section poses, amongst others, this key question:

"If a contracting authority has a construction project which is paused due to the impact of COVID-19, should it continue to pay its suppliers?"

The PPN's answer is: 

"Contracting authorities should continue to pay suppliers at risk due to COVID-19 on a continuity and retention basis until at least the end of June 2020, to: 

● ensure supplier cash flow; 

● maintain cash flow into the supply chain; 

● protect jobs; 

● ensure suppliers are better able to cope with the current crisis and to fulfil contractual obligations once the COVID-19 crisis over; 

● ensure continuity of suppliers’ businesses during and after the crisis; and 

● ensure suppliers are able to resume delivery of public services once the outbreak is over. 

This could include, for example, in situations where: 

● works are required to be ceased or scaled back at short notice due to the impact of COVID-19 and non-payment could result in supply chains collapsing and/or significant financial implications for the supplier and consequential job losses at the supplier and supply chain level; and 

● it would be value for money and important to business continuity to continue to pay suppliers in the short term (regardless of whether contracting authorities are able to reconcile at a later stage) to ensure that the supplier can complete the works in due course."

Contractual Consequences of providing Financial Relief

Where financial relief is being considered, there will also be a need to look at how this is to be done contractually. 

The CO's Guidance Notes for Construction Contracts dated 6th April 2020 poses this question: 

"Should contracting authorities amend contract terms to reflect the fact that the supplier has been given relief?"  and answers it as follows:

"Yes, contracting authorities should obtain legal advice regarding how the relief agreed affects the parties’ respective obligations under the contract. Cabinet Office will shortly be publishing Model Terms which will set out some examples of how JCT and NEC contracts may be varied to provide relief to suppliers."

The Guidance Notes in fact also helpfully (from page 9) contain two template Deeds of Variation for standard form construction contracts used in the industry (NEC and JCT).


By the publications team at: Contracts-Direct.com

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