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Commonwealth procurement guidance sets expectations for engagement by Australian government agencies during COVID-19 – Government, Public Sector


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Introduction

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.

Takeaways

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.

Takeaways

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.

Takeaways

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.

Concluding remarks

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.

Footnote

1 See
https://www.finance.gov.au/government/procurement/covid-19-procurement-policy-note.

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.

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