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Procurement in a Nutshell – Assessing and monitoring the economic and financial standing of suppliers

In February, the Government Commercial Function published a guidance note considering the need to assess and monitor the economic and financial standing of suppliers. The guidance explains that such an assessment is essential in safeguarding the delivery of public services and establishing whether a bidder has the financial capacity to perform a contract.

Click here to view the guidance note.

The guidance provides advice on how to:

  • Assess the economic and financial standing of bidders during a procurement;
  • Mitigate the financial risks arising from the economic and financial standing of a bidder or deal with the implication where there is a change to such standing; and
  • Monitor the ongoing economic and financial standing of suppliers during the life of a contract.

Assessing the economic and financial standing of bidders

The vital nature of public contracts, combined with the fact that such contracts are funded by the taxpayer, mean that it is crucial that selected bidders are able to fulfil their contractual obligations in the manner expected of them.  As such, Contracting Authorities must be confident that such bidders will not experience any significant financial difficulties during the lifetime of the contract which would have the effect of jeopardising their contractual performance.  In this regard, the guidance emphasises that importance of such economic assessments.

However, with regard to such assessments, the guidance emphasises that:

“All assessments of bidders’ economic and financial standing should be proportionate, flexible, contract specific and not overly risk averse while ensuring protection of taxpayer value and safety and compliance with relevant procurement law.”

At the same time, the guidance also explains that bidders should be treated equally irrespective of their size and composition.  Similarly, where there is a finding that an organisation has a poor economic and financial standing this is not in itself sufficient to result in the rejection of a bid.  In this regard, it is stressed that such an assessment must be “transparent, objective and non-discriminatory” and bidders should be able to see their risk classifications and, where relevant, given the opportunity to explain why different risk classifications are appropriate.

When determining what constitutes a proportionate assessment of economic and financial standing, Contracting Authorities should, prior to the commencement of a procurement, look to determine the criticality of that contract.  Once this has been established a Contracting Authority can then begin to ascertain the evidence it will need to consider e.g. bank statements, financial reports or statements detailing overall turnover.

However, it is important that Contracting Authorities recognise that such information can, at times, prove inaccurate and may be subject to change.  Consequently, despite the initial economic and financial assessment taking place prior to awarding the contract, ongoing reviews of the supplier’s economic health should take place throughout the life of the contract.

Mitigating financial risk

The guidance outlines a number of ways that a Contracting Authority can look to reduce its exposure to the risks arising from a bidder’s poor economic and financial standing.  These range from insurance to the creation of step-in rights.  With regard to each of these, the guidance sets out the following general principles:

  • Contracting Authorities should look to avoid “blanket” approaches and should instead consider contracts on a unique basis.  This includes the use of insurance where the required levels of cover should focus on the risks inherent in the contract under procurement.
  • Contracting Authorities must appreciate the limits of risk mitigation mechanisms.  For example, when considering the use of guarantees, Contracting Authorities should bear in mind that guarantors may themselves become insolvent or unable to rectify the financial inadequacies of a supplier.
  • Contracting Authorities must review the position of suppliers on an ongoing basis.  Where financial distress events have been set out, and it appears that these have been triggered, a Contracting Authority should act promptly to discuss the position with the supplier.  In circumstances where the Contracting Authority remains concerned that the supplier is entering into financial distress, it should look to actively pursue the situation.

Monitoring the economic and financial standing of supplier

Finally, the information sets out a series of helpful strategies which should be adopted by Contracting Authorities when monitoring the ongoing economic and financial standing of suppliers.

With regard to this, Contracting Authorities should consider the following:

  • Identifying and paying closest attention to those organisations that they would consider to be “key” suppliers.  In doing so, Contracting Authorities should focus primarily on liquidity because, in terms of risk, it is the lack of this which is the most typical cause of financial failure.
  • Seeking assurances from Boards of Directors of organisations with whom the Contracting Authority has entered into critical contracts that no financial distress events have taken place.
  • Attempting to review current and forward looking financial information where possible to maximise the reliability of financial assessments.  In particular, this could include financial projections or, where the organisation is a publicly listed company, share price information.

Why is this important?

Over the past two years there have been a number of high profile insolvencies involving public sector suppliers which have had significant ramifications on the performance of public contracts.  Consequently, the importance of monitoring and reviewing the economic and financial standing of such organisations is clear and it is essential that Contracting Authorities are best placed to prepare for, and reduce the impacts of, any future situation where a supplier suffers economic distress.

If you have any queries in relation to this, or in relation to procurement more generally, please click here or contact our procurement hotline on 0330 137 3451.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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