PLC Public Sector reports:
On 10 February 2012, in its action note (01/12) on the use of pre-qualification questionnaires (PQQs), the Cabinet Office highlighted that half of all complaints made to its mystery shopper scheme (which had then been in place for a year) related to the use of PQQs. Details of the complaints processed from February-June 2012 have also now been published and, again, problems with PQQs top the list of most complained about aspects of public procurement processes.
Therefore, it seems an appropriate time to look back at the guidance published by the government in April 2008 on supplier financial appraisal.
The problem
Contracting authorities are faced with something of a conundrum given that they must open up the market to smaller suppliers but also act as responsible custodians of public funds by not placing the funds at undue risk. It should be noted that a large percentage of contracting authorities are achieving the correct balance but it is clear from the nature of the complaints made to the Mystery Shopper scheme that many are not. Examples of issues in the latest mystery shopper report include:
- Requirements for financial guarantees.
- Requirements for published accounts.
- Requirements for a minimum turnover.
- Need for clarity over the scoring system and use of pass/fail hurdles.
- The general complexity of the PQQ and the financial appraisal process.
- The use of minimum financial requirements at the second stage of a two-stage process.
The general message from the action note is that contracting authorities must ensure that:
“pre-qualification requirements are appropriate to the nature of the requirement and do not create unnecessary barriers which prevent SMEs from competing for public sector business.”
With a specific statement that authorities:
“should not use a PQQ, or any other pre-tender selection process to pre-qualify suppliers to be invited to tender, when procuring goods or services with a monetary value of less than the EU Procurement threshold.”
However, the action note does appreciate that a public authority should not allow a supplier’s financial position to place public money or services at an unacceptable financial risk. Therefore, the questions appear to be what exactly is an unacceptable financial risk and how do you go about spotting one.
The government guidance
In April 2008, the OGC updated its guidance on supplier financial appraisal, and this is the current guidance in force. This is a little surprising given that since it came into power in 2010, the government has been critical of the standard of, and approach to, financial appraisal by contracting authorities. The surprise is not that the content of the guidance is no longer in tune with government policy, since it too focuses on not locking out the SME market and basing financial appraisal on commercial or business judgement rather than a mechanistic view of figures. More that, the action note, the reports on the mystery shopper scheme and the government’s own repeated calls for a change in approach, seem to suggest that this guidance has not done the trick and that a different approach may be needed.
Putting such worries to one side, perhaps the best piece of advice in the guidance comes in the introduction, which states that: “only suitably experienced staff should conduct supplier financial appraisals, calling on specialist advice where necessary.” Many of the problems that suppliers have faced and complained about will have been caused by the fact that procurement officers have been asked to perform a role they may not be qualified for. Turning this problem back on the government, more needs to be done to stop and reverse the skills drain from the public sector so that the skills required to carry out such roles are not lost to the public sector.
The guidance moves on to provide an overview and in-depth coverage of the appraisal process. Aside from the requirement that business judgement is used rather than just a mechanised process, key messages include:
- Financial standing should only be considered as part of the risk assessment and should not be the sole arbiter of a supplier’s ability to deliver.
- While standard information can be requested, an authority should detail what alternative information will be accepted where this information does not exist. For example, it may be appropriate to consider projections as well as historic information.
- Maximum contract awards based on supplier turnover can be useful but a supplier should not be eliminated on this basis alone.
- Credit ratings from specialist providers may be useful but again should not be relied on in place of a detailed examination of a candidate’s financial standing. Since this guidance was published, doubt has been cast on the legitimacy of using such providers, see Opinion, Do credit checks and the public procurement regime add up?.
- A review of the profit and loss account and balance sheet of a company can provide a misleading picture and cash flow statements should also be taken into account when undertaking an appraisal.
Other issues also addressed by the guidance include:
- Requirements for guarantees and indemnities.
- The use of financial checks when awarding call-off contracts under a framework agreement.
- Post-award monitoring of suppliers’ financial health.
- The key financial terms and ratios that will be used.
Clarity as important as content
When reviewing the detailed guidance, contracting authorities should be aware of a more general point that is highlighted by a number of the complaints made under the mystery shopper scheme. It is often not the appraisal process that is the problem (admittedly it is a lot of the time!), but that suppliers (particularly those with little experience of the tendering to provide services to contracting authorities) don’t understand:
- What they are required to provide.
- How it will be used.
- The implications of failing to meet certain requirements.
This then leads to wasted effort and, unsurprisingly, complaints about the process. A first simple step that all contracting authorities should be taking is a review of their PQQs to ensure that the requirements (both what must be submitted and the minimum levels required) are clearly set out.