The Covid-19 crisis has caused many employers across many sectors to consider the proposition and actualisation of furloughing staff.
Before doing this you need to consider, if you furlough commercial and financial staff, can you maintain your payment obligations on live projects in accordance with the timescales set under the contract or at law?
All construction contracts must comply with Part II Section 110 of the Housing Grants Construction and Regeneration Act 1996 (“the Act”), updated by Part 8 section 142 of the Local Democracy, Economic Development and Construction Act 2009. In that regard, your live construction contracts will either carry compliant payment obligations, or your contract will be governed by Statute and the Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment)(England) Regulations 2011 will apply, which require applications for payment, in the case of complying with section 110A (3) of the Act, management of those applications and service of payment and payless notices to be made timely in accordance with the dates incorporated into your live contracts.
How will the payment procedures across your live projects be managed where commercial and finance staff have been furloughed? How will you know if an application for payment has been issued by the supply chain?
It has become common practice that applications for payment from the supply chain and to the employer are e-mailed to a single individual between the supply chain and the contractor; and between the contractor and the employer.
Have you thought how this can be managed where such an individual has been furloughed?
The Government guidance to employees is that such staff cannot work so they should not be accessing company e-mails during a time of furlough and passing on the same.
What are the consequences of missing a supply chain application for payment and no payment notice or payless notice is issued in a timely manner?
The answer of course is that the supply chain application becomes the notified sum and subject to section “111 Requirement to pay notified sum” of the Housing Grants Construction and Regeneration Act 1996, such sum must be paid, regardless of the true value of the Sub-Contract Works at the date of the application.
It is therefore important that regardless of the furloughing of commercial staff a business must maintain the normal due diligence checks before allowing payments to be released to the supply chain.
The due diligence around this subject matter also includes understanding the relationship with the supply chain in terms of their furloughing actions. This is more relevant if alternative and/or a new variation to payment terms are agreed or negotiated between the parties (employer – contractor and contractor - supply chain). A supplier should not benefit from alternative monthly payment terms if it has furloughed project staff under a Covid-19 related support scheme.
Is it a requirement of your current live contracts that you must make an application to the employer, for the payment procedures under the main contract to be triggered?
Again, have you thought how this can be managed where a commercial resource has been furloughed?
In such an instance, contractually, this may preclude payment at all.
Depending on the type of employer you are working with, the following may be applicable to your projects and therefore discussions with your employer along the Cabinet Office Procurement Policy Notices guidelines may assist to develop practical management techniques to work through this current pandemic.
In the short term, on 24 March 2020, the Cabinet Office released a Procurement Policy Note on Supplier Relief due to COVID-19 (“PPN 02/20”) which provides guidance for public bodies on payment to suppliers to ensure business continuity during and after the outbreak of Covid-19. PPN 02/20 covers goods, services and works contracts being delivered in the UK and therefore will apply to engineering and construction contracts and consultant appointments.
The scope of PPN 02/20 applies to all contracting authorities, including central government departments, executive agencies, non-departmental public bodies, local authorities, NHS bodies and the wider public sector (excluding Developed Administrators) from 24 March 2020 until 30 June 2020. Together these are referred to as “Contracting Authorities”. PPN 02/20 is drafted as guidance which urges Contracting Authorities to act now to protect at risk suppliers.
The guidance is unprecedented and includes measures to accelerate payment of invoices, apply advanced payments and allows Contracting Authorities to waive their own rights and remedies which Driver Trett take to mean the levy of LADs and other types of delay related damages that a contracting organisation may be exposed to in these very challenging times.
The ethos of PPN 02/20 is for Contracting Authorities to maximise commercial flexibility within contracts and take a pragmatic approach in considering requests for contractual relief from suppliers. There are model deeds of variation which provide a set of terms that Contracting Authorities can use for NEC and JCT standard forms of contract. Many suppliers to public bodies will struggle to meet their contractual obligations and this will put their financial viability, ability to retain staff and their supply chains at risk. Contracting Authorities are urged to support those suppliers at risk so they can cope with the immediate effect of Covid-19 and resume normal service delivery.
However, Contracting Authorities are not expected to accept claims from those suppliers who were not meeting their contractual obligations prior to Covid-19. So, there is a balance to strike here.
Suppliers should contact the relevant Contracting Authority to seek relief as soon as possible where any performance under contracts will be impacted by Covid-19. Further guidance is available on GOV.UK, please click here.
Because of these challenging scenarios Driver Trett set out below the following generic suggestions to help you protect your commercial position, as far as is possible. Do be aware that each contract will have different clauses and different obligations and there is no “one size fits all” approach and the below suggestions may not apply to your current Projects.
The suggested practical steps, Driver Trett hope, but cannot guarantee, seek to go some way to protect your position. However, please consider that matters may not always be settled amicably and may have to be resolved by Adjudication or some other third party means. All your actions now may therefore be re-considered by others in the future so ensure that they are wholly appropriate.
Practical steps for dealing with the administration of payment provisions
- Recover monies owed to date. This must be a priority, including pursuing any outstanding retention.
- Communication is key at any stage of a construction project and the first point of call will be to negotiate alternative payment measures on an interim basis to maintain continuity for the main contractor and continuing delivery by the supply chain. Where possible any alternative payment plans/measures agreed with the employer should be mirrored back down to the supply chain.
- PPN 02/20 suggests averaging future payments based on the average monthly payment over the previous three months.
- If alternative arrangements cannot be agreed:
- 4.1 - Before you furlough staff involved on projects that have been temporarily closed, organise the commercial team to prepare a number of months of future payment notices to the supply chain dated in accordance with contractual future payment notice dates based on the current valuation at the instant date.
- 4.2 - Where it is a condition precedent to the payment provisions operating under the main contract that an application for payment must be issued to the employer, again the commercial staff should prepare in advance, pre-dated future applications for payment increasing the value of its preliminaries claim each month.
- 4.3 - The next hurdle will be releasing the payment notices/applications for payment on the correct dates or within the timescales set down in the contract. Perhaps this could be organised with your IT Department who may be able to set future e-mail distributions on the relevant dates along with the appropriate attachments.
- 4.4 - Alternatively, the obligation to release payment notices will have to be designated to non-furlough staff or an outside organisation. Where an outside organisation is used the Parties to the contract will need to be informed and possibly a variation to the contract in terms of updating the address for the issuing of Notices etc. will need to be drawn up.
- 4.5 - On the theme of issuing Notices required under the contract, it is common that Notices must be issued in writing and normally to the head office of your organisation or at the very least the company address identified in the contract. If an e-mail address is not identified in the contract, then you need to ensure that policing of post received at the head office/named company address is diligently undertaken to avoid missing any important time sensitive Notices e.g. a notice of Adjudication, Termination, Suspension etc.
The longer-term repercussions need to be considered at the outset prior to the furloughing of commercial and finance staff and systems need to be deployed to avoid the risk of falling subject to a default payment notice from the supply chain causing financial burden to the company. Although the option of a “true value” adjudication after falling victim of a missed application for payment by the supply chain is available, will the supplier still be trading to recover the monies paid out?
If you do need any assistance on any of the above, particularly in providing advice on your commercial position, drafting notices and issuing payment notices and/or applications to the employer or amending any new contracts please do contact Driver Trett. Of course, if it is not possible to reach any appropriate commercial solutions with your clients and/or suppliers, The Team at Driver Trett can also assist with this as well. Driver Trett is already advising many organisations on the above matters.
I truly hope you all keep well in this difficult period.
Written by Carl Morris
Operational Director, Driver Trett UK