In the wake of the Carillion liquidation news last week, procurement teams are understandably nervous about awarding critical contracts where there is or could in future be a risk to the financial stability of the supplier in question.
Our last briefing focused on existing contracts with Carillion and this briefing focuses on the steps that can be taken to protect procuring organisations against the impact of supplier insolvency in future.
Public sector bodies currently running procurement processes or looking to procure complex, large contracts in the future may be concerned as to how they can ensure that they award contracts to providers in a healthy financial position who are able to perform the relevant contracts.
The rules around financial checks
In above threshold procurement processes, the Crown Commercial Service ("CCS") Selection Questionnaire ("SQ") must be used. The minimum financial requirements must be clearly set out in the SQ including the way that the financial information will be assessed. Although the guidance in the SQ sets out that normally, potential suppliers should be able to self-certify that they meet the minimum financial requirements, it is important that the financial tests are right and appropriate for the size and nature of the contract. The SQ includes some forms of financial assessment and public sector bodies can select those relevant and proportionate for the contract. If additional/different tests are added, then these would have to be reported as a deviation to CCS.
Public sector bodies may set a minimum yearly turnover that the bidders are required to have. As a reminder, the Public Contracts Regulations 2015 provide that except in duly justified cases (which may include special risks attached to the nature of the relevant contract), the minimum yearly turnover that bidders are required to have cannot exceed twice the estimated contract value.
How can risks be mitigated?
Procurement documents should set out that the bidders are under a continuous obligation throughout the procurement process to update the relevant procuring authority where any information that they might have submitted as part of the selection/pre-qualification stage (including financial information) has changed. This is particularly important in lengthy procurement processes where the date of contract award could be a number of months after the date that financial information was first assessed.
In terms of assessing supplier financial risk, public sector bodies should look at PPN 02/13 which provides suggestions on how financial risk can be assessed. Only experienced staff should conduct financial assessments obtaining special in-house or external expertise where necessary. PPN 02/13 suggests that public sector bodies can request financial projections. This may be prudent as one of the issues with reviewing financial information at the selection stage of a procurement process is the fact that the information is historic and will not necessarily reflect the current/pending position of an organisation. Bidders can also be asked to provide financial guarantees (not just from parent companies) and/or bonds.
Practical tips in relation to future contracts
Public sector bodies will want to ensure that the assumed risk transfer is realistic and commercially balanced in any contract they are awarding. They can also attempt to protect their position within the contract terms by including the following non exhaustive list of suggestions:
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standard termination provisions including the right to terminate in an insolvency event (which should include liquidation and administration);
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reporting requirements on the part of the contractor including their financial position to be provided periodically throughout the term of the contract (or in the event of financial hardship) so that the public sector body could become aware of a contractor's financial position before an insolvency event occurs;
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step in rights in the event that the contractor goes insolvent;
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contingency plans in the event the contractor cannot perform any part of the contract;
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a right enabling the procuring authority to enter into a direct contract with any sub-contractors in the event that the lead/prime contractor goes into insolvency/cannot perform the contract; insurance and/or bank guarantees where the financial position of the contractor is weaker.
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