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Covid-19 relief for financially troubled suppliers with public contracts

01 April 2020

On 20 March 2020 the Cabinet Office published guidance designed to ensure that all public bodies provide support under existing contracts to suppliers of “goods, services and works” who are financially “at risk” as a result of the COVID-19 outbreak.

The Cabinet Office’s aim is to help these suppliers maintain cash flow continuity, retain employees, and be in a position where they can resume normal activity at the end of the crisis.  However, it remains to be seen whether contracting authorities will take note of this and whether the relief will flow down the contractual chain as intended. 

Which suppliers can ask for relief?

It is left up to the contracting authority to decide which suppliers are at risk but the Cabinet Office has stated that it anticipates that most suppliers will be at risk and there is no need for a detailed assessment.

What should contracting authorities do now?

Under the guidance, contracting authorities are directed to take the following measures in relation to “at risk suppliers”:

  • Continue to make normal contractual payments until at least 30 June 2020. This applies to most suppliers even where the provision of goods or services is reduced or paused (whether to risk paying suppliers headed towards insolvency is to be “managed by contracting authorities on a case by case basis”)

  • In some cases, suppliers are to be paid more than what would ordinarily have been required under the contract, for example where there is a decreasing scale as a result of performance or where payment is outcome-based. In this latter scenario, the guidance states that payment should be based on the average of the last three months of invoices

  • Consider making prepayments or implementing other payment options or schedules to improve the cashflow of ‘at risk’ suppliers

  • Accelerate the administrative processes around verifying invoices and authorising and making payments to suppliers

  • Provide extensions of time for contract performance where relevant and show flexibility and leniency on other contractual terms such as KPIs. Contracting authorities are to try to accommodate suppliers by temporarily varying contracts rather than using mechanisms such as force majeure clauses
  • Waive delay remedies under the contract such as liquidated and ascertained damages

What is in the small print?

  • No profit margins can be charged by the suppliers on the undelivered portions of contracts

  • Payments are not to be made to suppliers with no contractual volume commitments, which will exclude quite a large proportion of suppliers

  • Payments also can’t be made to the extent that a supplier was underperforming and subject to an improvement plan
  • Lastly, note that this can’t be combined with other government Covid-19 relief such as the Job Retention Scheme

What do suppliers need to do?

  • As a condition for receiving these benefits, ‘at risk’ suppliers are expected to:

  • Keep an “open book” policy of sharing any data requested by the contracting authority for the purpose of establishing whether its payments have been used appropriately

  • Maintain appropriate records of all relevant decisions and agreements so that these can be reconciled with the contracting authority’s records

  • Promptly pay out money intended for the supplier’s staff and sub-contractors
  • Provide invoices which differentiate normal services from amounts which are “attributable to the impact of COVID-19”

If suppliers fail to properly apply payments received, fail to comply with obligations or seek to take undue advantage then the contracting authority can require repayment of any sums paid.

How do parties implement this?

There will need to be an amendment to contract terms.

The Cabinet Office has published model interim payment terms to assist contracting authorities in putting in place these measures, but further advice is likely to be needed for specific circumstances or complex contracts.

The change is intended to operate on a temporary basis until 30 June 2020 unless extended or ended earlier. After that, Contracts are to return to their original terms.

Click here to view the full guidance.

 

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