Central government has recently come under criticism following the collapse of Carillion in January 2018. The criticism is related to the award of large public contracts to the company despite its publication of a profit warning in July 2018. In light of this criticism, Emily Powell, partner at top 100 law firm Hugh James, asks to what extent can contracting authorities exclude companies from the tendering process following profit warnings?
In the UK, the award of contracts by public bodies is governed by a range of procurement regulations. Most contracts awarded by the Ministry of Defence will be governed by the Defence and Security Public Contracts Regulations 2011 (DSPCR). The DSPCR sets out several conditions that may be imposed on those bidding for public contracts in the defence sector. These include minimum requirements for the economic and financial standing of bidders and grounds for excluding bidders from competitions.
The grounds for exclusion of bidders are found at regulation 23 DSPCR and should be familiar to those awarding public contracts in defence. These include a discretion to exclude any bidder which has:
“passed a resolution or is the subject of an order by the court for the company’s winding up otherwise than for the purpose of bona fide reconstruction or amalgamation, or has had a receiver, manager or administrator on behalf of a creditor appointed in respect of the company’s business or any part of the company’s business or is the subject of the above procedures or is the subject of similar procedures under the law of any other State”.
Therefore, formal steps must be taken before a discretion to exclude a bidder can arise. This would not assist a contracting authority in a situation such as Carillion – where a profit warning is issued or there are rumours that a company is in difficulty.
While the exclusion criteria may not offer a contracting authority the tools to avoid a Carillion-type situation, selection criteria may be used to impose minimum requirements upon bidders. Requirements for the use of selection criteria relating to the economic and financial standing of a bidder are found at regulation 24 DSPCR. This regulation sets out that in assessing the economic and financial standing of a bidder, a contracting authority may take into account:
(a)appropriate statements from the economic operator’s bankers or where appropriate, evidence of relevant professional risk indemnity insurance;
(b)statements of accounts or extracts from those accounts relating to the business of the economic operator where publication of the statement is required under the law of the Member State in which the economic operator is established; and
(c)where appropriate, a statement, covering the three previous financial years of the economic operator, of—
(i)the overall turnover of the business of the economic operator; and
(ii)where appropriate, the turnover in respect of the work, works, goods or services which are of a similar type to the subject matter of the contract
or, where this information is not appropriate “other information to demonstrate the economic operator’s economic and financial standing”.
It can be seen that on the basis of the DSPCR, contracting authorities have a margin of discretion in determining the information they require to demonstrate the economic and financial standing of a bidder. Any bidder not meeting the published requirements for a specific contract may not be awarded that contract. Therefore, selection criteria which would identify a Carillion-type situation may operate to prevent the award of a contract to a company in financial difficulty.
While the DSPCR affords a margin of discretion in the application of the selection criteria, the Cabinet Office mandates the use of its standard selection questionnaire (SSQ) for all contracting authorities in England, plus those in Wales and Northern Ireland exercising wholly or mainly reserved functions. This SSQ at Part Three contains standard questions for the establishment of the economic and financial standing of bidders. These questions cover:
- the bidder’s previous two years’ accounts; or if these are not available, one of the following:
- a Statement of Turnover, Profit and Loss Account/Income Statement, Balance Sheet/Statement of Financial Position and Statement of Cash Flow for the most recent year of trading; or
- a statement of the cash flow forecast for the current year and a bank letter outlining the current cash and credit position;
- any alternative means of demonstrating a bidder’s financial status if any of the above are not available; and
- any specified minimum level of economic and financial standing.
In addition, where a bidder has indicated that it is part of a wider group, the bidder is asked to confirm whether it can provide parent company accounts and a parent company or bank guarantee.
It is important to note, however, that these questions drive a contracting authority towards an assessment of a bidder’s historical financial data, which is not necessarily a good indication of a bidder’s current economic and financial position. Nonetheless, the Cabinet Office has indicated1 that it expects contracting authorities not to deviate from the questions set out in Part Three of the SSQ; and where any deviations are made, these must be reported to the Crown Commercial Service Mystery Shopper scheme. While this may help bidders that are participating in multiple competitions, it is perhaps less helpful for contracting authorities, particularly those awarding high–value or long–term contracts – common in the defence sector.
To avoid awarding contracts to a bidder in a Carillion-type situation, it is imperative that contracting authorities give careful consideration to the appropriate selection questions at the outset of a procurement. These questions need to ensure that the contracting authority is able to assess a bidder’s current and not historical financial situation. Suitably experienced staff, with the use of specialist expertise, should be used and contracting authorities should not shy away from deviating from the SSQ to conduct a suitable and proportionate financial assessment of bidders. Finally, contracting authorities are entitled to require up–to–date information prior to contract award; and in lengthy procurement exercises, it is advisable for contracting authorities to ensure that a winning bidder’s economic and financial standing continues to meet the selection criteria before contract award.
image © Crown Copyright
For more information on Hugh James, visit www.hughjames.com
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