PPN 02/2020 – Construction FAQs and draft NEC and JCT contract wording

The Government has released an additional guidance document on PPN 02/20. This includes responses to “Construction FAQs” and specific drafting to vary NEC and JCT construction contracts along the lines set out in PPN 02/20. Our earlier e-briefing on PPN 02/20 can be found here.

Like PPN 02/20 itself, this new “Construction Guidance” is only advisory. Contracting authorities are under no legal obligation to follow it or even to have regard to it, although some will want to do so, particularly where they are experiencing problems on-site due to the pandemic. The answer to Q3 in the “Construction Guidance” makes it clear (as does PPN 02/20 itself) that a contracting authority’s main motivation for providing any support to a contractor should be “to ensure that the contractor can complete the works in due course”, but only where this support represents “value for money”.

As in PPN 02/20, this “construction-specific” guidance suggests various ways in which contracting authorities could assist their supply chains. These include:

• accelerating the payment of invoices;
• amending the contractual payment mechanism to make additional payments even though no work is being done; or
• making an “advance payment” for future work.

The Construction Guidance provides template wording for Deeds of Variation to vary NEC3 Engineering and Construction Contracts (April 2013 edition) and JCT Design and Build Contracts 2016 to provide some of the kinds of support referred to in PPN 02/20.

The template wording covers only “project contracts” for a defined project, such as a new build construction or a refurbishment project. There is no drafting for “term contracts” such as the NEC Term Service Contract or JCT Measured Term Contract 2016.

The drafting (for both NEC ECC and JCT D&B contracts) covers the following options:

• Contractual shortening of payment periods: There is drafting to reduce the deadline for paying invoices. However, a drafting change is not required to achieve this. A contracting authority can always pay invoices more quickly than the contract provides for, and there is no need to amend contracts to cover this. If a contracting authority shortens the payment timescales and then doesn’t pay within them, they will be in breach of contract. Voluntary swifter payment rather than a contract amendment has the added benefit of not unintentionally shortening the payment terms for the whole length of the contract (see below);
• Providing an additional “Covid-19 Relief Payment”: This clause provides for an “agreed amount” to be paid on top of the Contract Sum (JCT) or Prices (NEC3). The draft Deeds include detailed drafting saying how this amount is to be calculated and that this must be “consistent” with the amounts certified in the previous three payment certificates/payment notices, less Contractor and Subcontractor profit. It is not clear what is intended to happen if both parties, in good faith, miscalculate the amount so that the calculation is not consistent with the wording of the draft Deed. If an additional amount is “agreed”, there is no need for a contract to state how it is calculated. It would be clearer either just to state that the amount is fixed or (if desired) to provide expressly how it was calculated and how it is to be adjusted if the calculation was based on incorrect assumptions; and/or
• Providing for the employer to make an advance payment for work that has not yet been completed due to Covid-19: This is simply an advance payment, with the contractor still being required to deliver the project, without extra payment, once the Covid-19 period ends. Whilst this will help the contractor’s cash flow, it will do nothing to assist their underlying long-term solvency and profitability. There is, therefore, a danger here of the contractor becoming insolvent before they have delivered the work the contracting authority has paid for.

The draft Deeds seek to prevent the contractor from terminating the contract (for any reason including employer breach of contract or non-payment) during the Covid-19 period or any subsequent period when Covid-19 payments are being made, or advance payments are being recouped. In the case of JCT D&B suspension of the works for force majeure for a longer than a period stated in the contract (two months is the default) gives either party the right to terminate the contract. For NEC ECC, this will be an issue only if the project manager has given an instruction to stop or not to start any substantial work (although the project manager may be required to do this due to the “prevention” caused by Covid-19). Whilst neither party is likely to want to terminate, removing the risk of termination is likely to be beneficial to both parties.

The draft Deeds also seek to stop the contractor from claiming relief from the employer and furloughing employees at the same time. If the contractor does this, the employer is given the right to reclaim any payments made.

There are several issues with the template wording, for example:

• Embedded amendments: Some of the drafting changes contract terms (e.g. to shorten payment periods), which will have a long-term impact throughout the contract. If the intention is to provide temporary relief just during the “Covid-19 Relief Period” it is necessary not just to amend the contract for this period, but to “restore” the original contract drafting at the end of that period;
• Concepts not thought through: Some of the concepts used in the draft Deeds have not been properly thought through. For example, the Deed requires any additional payment to the contractor to exclude both the contractor’s and their Subcontractor’s profit, but there is no mechanism in the Deed for the employer to be given details of subcontractors’ profits. The obligation to provide “open-book” information is limited to the “payments” made to subcontractors and any Government support received by them but does not include the right for the employer to be provided with “actual cost” information down the supply chain. The only “actual cost” information the employer is entitled to is that concerning the contractor;  
• NEC drafting is “not NEC”: The NEC Deed, in particular, uses language that is inconsistent with the NEC drafting style and approach. This includes a clumsily drafted term that rides roughshod over the NEC termination clauses “Notwithstanding clauses 90 and 91, the contractor shall not be entitled to terminate this Contract neither (sic) during a Covid-19 Relief Period nor for any period thereafter… where Covid Relief payments are being made or reviewed”. It is unlikely that the contractor would be entitled to terminate under either of these clauses anyway (unless the project manager has instructed the contractor to stop or not start work for 13 weeks or more). The amendment is unnecessary (unless a project manager instruction has been given) and removes the contractor’s right to terminate the Contract for non-payment; and
• Unclear contractual status: There are some curious provisions whose contractual status is unclear. For example, in the Introduction to each Deed, each party “acknowledges that they will act in good faith and work together towards the aims and principles set out in PPN 02/20”. There is no “good faith” clause in the body of the Deeds of Variation, so it is not clear whether the parties are required to act “in good faith”. The employer can recover payments made if “in the Employer’s opinion the Contractor takes undue advantage of any COVID-19 relief”. It is not hard to predict the possibility of an adjudication over whether any decision to recover relief is subject to a “duty of good faith”.

One of the main issues with PPN 02/20 and the associated Construction Guidance is that it is not clear how it is intended to interface with the general approach from Government that construction work should continue as far as possible despite Covid-19. If a site remains open, then contractors may well have additional PPE costs, materials and their transport costs may be higher, and work may take longer to complete because of social distancing. Whilst the employer may be prepared to contribute to these additional costs, linking this to the last three monthly payments for works makes no sense at all.

If a site closes, though, employers may well question why they should continue to pay for work that is not being delivered, rather than the contractor furloughing the workforce and claiming government support towards their costs of this. If the Government’s objective is to keep the workforce employed rather than on furlough, the Government should provide financial support to contracting authorities to enable them to support their contractors in some of the ways set out in the PPN.

As the PPN 02/20 Construction Guidance says (in at least four places) it is important for contracting authorities to take legal advice before amending any of their contracts. This is not only (as the PPN 02/20 Construction Guidance recognises) to ensure that any contract amendment reflects bespoke amendments that might have been made to the standard form contract, but also to ensure that any amendments are clearly limited to the period for which the contracting authority wishes to provide relief and are consistent with the rest of the contract. It is also important to ensure that any relief offered or contract changes made are consistent with a contracting authority’s other obligations under procurement law, state aid law and charity law (as applicable to the authority).

Further information

If you have any questions on this e-briefing, please contact Andrew Millross, your usual ACS contact or another member of our Construction and Procurement Team.