The COVID-19 pandemic clearly has the potential to cause significant impacts on supply chains. Managing procurements and contracts during these uncertain and dynamic times will continue to be challenging.
On 11 May 2020, the Department of Finance issued the COVID-19 – Procurement Policy Note (the Policy Note)1, which appears to be the first ever policy note it has issued. The Policy Note provides guidance to Commonwealth entities which are considering or currently undertaking procurements or are encountering performance or contractual issues with suppliers impacted by COVID-19.
In summary, the Policy Note:
- Foreshadows that many suppliers will struggle to meet their contractual obligations with Commonwealth entities for various reasons arising from COVID-19;
- Recommends that Commonwealth entities utilise more flexible aspects of the current procurement framework to help streamline procurement processes; and
- Sets an expectation that Commonwealth entities will support suppliers at risk, where possible, throughout the COVID-19 pandemic.
While the Policy Note is useful in providing guidance and encouragement in relation to concepts of flexibility and support in these times, the steps it mentions raise some serious legal and procurement issues that Commonwealth entities will need to deal with soundly, efficiently and consistently.
We examine the key takeaways of the Policy Note in this alert.
The importance of flexibility
Flexibility in working with suppliers is a guiding theme of the Policy Note. The below extract outlines the flexible approach that is to be adopted by Commonwealth entities dealing with affected suppliers:
'Contract managers are expected to maintain their relationships with suppliers and to manage any specific issues arising as a result of COVID-19 in a collaborative and sensible manner. In this context, when considering possible options with suppliers, entities should consider the requirement in the Public Governance, Performance and Accountability Act 2013 (PGPA Act) to ensure that public resources are used in an efficient, effective, economical and ethical manner. Consistent with those requirements agencies can where appropriate and possible, work with suppliers to ensure business continuity is maintained by providing relief (eg agreeing that termination rights will not be exercised or liquidated damages will not be claimed), varying the contract or waiving specified requirements to address the COVID-19 circumstances.' (our emphasis added)
The Policy Note emphasises that consistent with the requirements of the PGPA Act, where appropriate and possible, Commonwealth entities can address the impact of COVID-19 on suppliers by working with them to ensure that business continuity is maintained by:
- Providing relief (e.g. by agreeing that termination rights will not be exercised or liquidated damages will not be claimed);
- Varying contracts; or
- Waiving specified requirements.
It also provides that Commonwealth entities pay all suppliers as quickly as possible to ensure that those suppliers maintain cash flow. Entities can also consider alternative payment arrangements such as interim payments, payments against revised or extended milestones and payments in advance/prepayment, as long as the requirements under the PGPA Act are satisfied.
It is important that Commonwealth entities have particular regard to the limitations emphasised in bold in the above extract – these limitations should guide the nature and extent of the approach to be adopted when working with suppliers to maintain business continuity (or indeed, whether flexibility can be applied at all).
Termination, damages and waiver are among the most complex and risky areas of contract law. As such, any proposal to "stand still" a party's rights or to waive / vary rights in any of these areas should be the subject of tailored legal advice from specialists in these areas.
In the context of the pandemic and its impacts, there are clear benefits to both Commonwealth entities and suppliers in some circumstances by standing up arrangements to:
- Create a moratorium on certain rights and obligations;
- Focus on continued performance; and
- Establish an orderly, evidence-based process to resolve the impacts of the pandemic once those impacts have become clearer.
Some agencies are presently undertaking such things, and if Commonwealth entities are intending to do so they should involve an appropriately-sized and dedicated team of subject matter experts (given the complexities and risks of the issues involved). And there should be the full support of relevant executives and Ministers.
In determining whether it is appropriate and possible to provide relief to affected suppliers by designing and implementing alternative payment arrangements, it will be important for Commonwealth entities to:
- Approach the design of such mechanisms sensibly;
- Apply sound risk management principles and practices noting that they raise issues of supplier solvency / credit risk / the potential need for some form of security; and
- Work closely with their financial and budget specialists, to ensure the feasibility of such arrangements.
In determining the nature of any contract variations that may be appropriate, it will be important for Commonwealth entities to:
- Consider each proposal to vary the terms of the contract on a case by case basis; and
- Ensure that any variations that are agreed to are precise and responsive only to the circumstances which have prompted the change.
Approaching the market during COVID-19
The Policy Note recommends that approaches to market be progressed on a case by case basis and that due consideration be given to how the COVID-19 pandemic may impact suppliers' capacity to respond to an approach to market or deliver on a Commonwealth entity's requirements.
The Policy Note states that the following factors should be considered in preparing an approach to market:
- How COVID-19 may impact plans in the immediate future;
- Appropriate timelines depending on the nature of the market;
- The amount of time potential suppliers require to make a submission;
- The potential to structure procurements into practical achievable deliverables; and
- Bringing forward procurements that are less reliant on substantial material supply.
The Policy Note reminds Commonwealth entities that they are able to engage with the market to understand capability before formally approaching the market.
The Policy Note's guidance in relation to market engagement processes is a timely reminder of the importance of:
- Minimising the time and costs of tendering;
- Structuring procurements, and programming procurement plans, so as to minimise stress on the market; and
- Actively looking for cost-efficient and time-efficient ways to better understand the market, and its capabilities, capacity and challenges.
In designing and employing more flexible and trim procurement processes on a case by case basis, Commonwealth entities will need to rapidly draw on advice from appropriately skilled specialists in procurement, technical, legal and financial matters. And as the Policy Note reinforces, it will be essential to focus on achieving demonstrable value for money, and to keep appropriate records to support the soundness and defensibility of approaches that are taken and decisions that are made.
It will also be critically important to seek specialist advice on COVID-19-related matters – whether they relate to assessing tenderers' financial or capability positions, proposed bespoke / special clauses dealing with pandemic-related risk (or "force majeure" more broadly), or are claims for relief based on the impacts of the pandemic. Prudence suggests that Commonwealth entities should develop organisation-wide positions on such matters, if they have not already done so.
Application of the CPRs during COVID-19
Whilst it is not listed as a procurement connected policy on the Department of Finance website, as web-based guidance issued by the Department, the Policy Note forms part of the Commonwealth's broader procurement framework (see Rule 2.4(a) of the CPRs). It provides useful guidance on matters to consider when undertaking procurements during the COVID-19 pandemic, and procurement projects generally.
The Policy Note highlights two rules of the Commonwealth Procurement Rules (CPRs) which might be used by Commonwealth entities to streamline processes to engage suppliers:
- Rule 2.6, which allows accountable authorities to apply any measures that they determine necessary to protect human health; and
- Rule 10.3(b), which allows entities to run a limited tender for goods and services due to reasons of extreme urgency brought about by unforeseen events in circumstances where the goods or services could not be obtained in time under open tender.
From our experience, and despite the obvious relevance of Rules 2.6 and 10.3(b) in this climate, it will still be necessary to balance pragmatism with wisdom in their use. In particular, it will be important to make out persuasive, documented justifications for their use, based (again) on advice from relevant specialists.
Notably, where a Commonwealth entity is entitled to rely on Rule 2.6 this has the effect that the procurement will not be a covered procurement under the Government Procurement (Judicial Review) Act 2018 (Cth), and the Commonwealth will therefore not be subject to the injunction, compensation and complaint provisions that ordinarily apply.
Supply chain limitations and increased demand for some goods and services could cause the costs of those goods and services to increase. For this reason, it is more important than ever that Commonwealth entities carefully consider how to achieve value for money when progressing procurements (noting that COVID-19 may have an impact on how value for money is assessed). Rule 4.5 of the CPRs contains guidance on matters which should be taken into consideration when determining value for money. If a procurement is impacted by COVID-19 this may mean it is particularly challenging to assess value for money due to:
- Increased prices of goods and services that are in high demand or deep discounts where service providers have lost customers and are looking to stay afloat;
- The need for flexibility in supply chains that may be impacted by the changing economic environment;
- The importance of awarding a contract to suppliers with relevant experience and performance history, including the ability to ensure delivery of goods and services in varying circumstances;
- The quality of the goods and services may be compromised as a result of unavailability of inputs or usual supply channels being impacted;
- The responsiveness or robustness of the relevant supply chain; and
- Whole of life costs being higher due to untested, unsupported or inferior quality goods or services.
The most significant and novel aspect of the Policy Note is the requirement that Commonwealth entities should, where appropriate and possible, support suppliers impacted by the COVID-19 pandemic. The expectation that entities will work with suppliers in a collaborative and sensible manner to provide relief to ensure business continuity is maintained will require entities to re-examine how they deal with performance issues.
We recommend that Commonwealth entities consider proactively engaging with key suppliers to discuss any COVID-19-related issues and mitigation strategies which can be put in place. When dealing with performance issues with suppliers, Commonwealth entities should pay close attention to delays or defaults caused by the COVID-19 pandemic, as distinct from any operational issues or constraints.
If you or your team require assistance in managing procurements or dealing with performance issues under existing contracts throughout this time, our team of specialist lawyers would be pleased to assist.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.