procurement The use of credit reference agency reports in local government procurement Building People, Building Companies, Building Futures

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1 Building People, Building Companies, Building Futures National Federation of Builders procurement The use of credit reference agency reports in local government procurement

2 2 Procurement foreword Around 40% of the demand for construction work has traditionally come from the public sector. In the context of public spending cuts, increased competition from large contractors and an unprecedented, prolonged period of challenging economic conditions, fair access to public sector contracts is crucial for the survival of small and medium-sized businesses (SMEs). As local authorities seek to manage squeezed council budgets following the decision to cut funding in real terms to local government by just over 27% between 2010 and 2014, the NFB is concerned about the potentially disproportionate impact of some approaches to procurement by local authorities. Our research found that many local authorities are keen to continue to work with and support SMEs and do not want the procurement process to act as a barrier to access. The NFB acknowledges that local authorities are generally good at recognising the need for SMEs in the construction sector, with SMEs representing 49% 1 of procurement spend in local government compared with 10% 2 in central government. However, as cuts in local government budgets begin to take effect, the NFB is concerned about the impact on local authority procurement departments and how this will change how they undertake financial assessments of potential contractors. Based on the local authorities we spoke to, the NFB and local authorities alike are worried about the unintended consequences of conducting inadequate financial assessments. This includes the possibility of excluding financially viable SME s from public contracts. A lower level of in-house expertise to conduct sufficient assessments may lead to local authorities using economic mechanisms such as credit reference agency (CRA) reports on a pass or fail basis that do not accurately represent an SME s financial standing. Some local authorities use CRA reports in the procurement process as a way of identifying the financial status of companies and the risk of failing to meet their contractual obligations. The use of credit reports as the sole or principal means of assessment can lead to SME contractors being discriminated against as this approach fails to take into account normal variations in smaller contractors accounts. The NFB wants to discourage the use of credit reports in this way. Such usage wields CRA reports as an unnecessarily blunt instrument for deciding who passes and who fails in the tendering process and does little to support the very good and supportive practices of many local authorities. The NFB has a long history of trying to improve local authority engagement with SMEs and to promote best procurement practice. Concerns over the use of CRA reports have been raised by our members on an increasingly regular basis since 2010 and it is our view that their use can be avoided through a stronger dialogue between industry and both local and central government. The government s position with regard to SMEs has been clear and consistent: SMEs make up 99% of the construction industry and are seen as the key driving force behind the growth that the economy desperately needs. The NFB understands that local authorities want reliable, value for money contractors and it is our belief that well-managed SMEs can deliver high quality, good value public sector work. This report seeks to raise awareness of the use of credit reports in local authority procurement and suggests alternatives to the use of CRA reports solely on a pass or fail basis. Failing a pass or fail test set by a local authority based on a CRA report does not mean an SME contractor is not suitable for a contract. A full financial assessment that provides an accurate picture of an SME contractor s accounts (with or without the use of a credit report as a part of a comprehensive assessment) removes a barrier for SMEs, offers local authorities an informed rather than a limited view and makes public procurement more equitable and transparent. In addition to analysing the responses from local authorities, we have worked in partnership with the Cabinet Office, the Local Government Association and individual local authorities to provide examples of how credit reports are used and to suggest possible alternatives. By doing this, the NFB hopes to foster better dialogue between industry and government on this issue as well as providing a useful background to NFB members and procurement professionals in the public sector and beyond. The NFB supports the validating of financial liability and understands that CRA reports may be helpful as a part of a wider financial evaluation process. However, there are concerns about the way in which some local authority procurers are using CRA reports in a simplistic way at the pre-qualification stage of the tender process. This can lead to the use of scores from credit reports to pass or fail bidders based on the credit score. Julia Evans, Chief Executive indirect_spend_smes.pdf

3 The use of credit reference agency reports in local government procurement 3 table of contents foreword 2 supporting messages and acknowledgements 3 executive summary 4 context 5 key data 6 regions 7 other analysis 12 key regional data 13 other data 15 conclusion 16 key measures to improve opportunities for SMEs 17 glossary of terms 18 notes 19 appendix case studies 20 supporting messages The Cabinet Office The CBI The Cabinet Office welcomes the NFB s research into the use of credit rating agency reports within public procurement, supporting recent guidance 1 which states that whilst such reports are useful for obtaining a snapshot view of potential providers financial standing and as part of a broader appraisal, they should not be used as the sole assessment tool. Furthermore, we see the report s endorsement of the PAS 91:2013 standard, which has been produced with the aim of streamlining and reducing the cost of prequalification in construction procurement processes, as a clear means of ensuring that all potential providers, whatever their size or constitution, are treated fairly and with equal diligence during the financial appraisal process. High-quality procurement can be an important driver of growth and is essential to ensuring good public services at a time of lower public spending. There has been progress in local authorities creating opportunities for SME suppliers directly, or through supply chains but more needs to be done. This report shows that some local authorities are using credit checks as a blunt instrument to manage their suppliers. What is needed is sharper, more targeted engagement with the market that ensures the best providers can provide. Jim Bligh, Head of Public Services, CBI [1] Procurement Policy Note - Supplier Financial Risk Issues (Information Note 02/13 dated 18 February 2013) Acknowledgements The National Federation of Builders would like to thank all the local authorities that participated in the survey. We would particularly wish to extend thanks to those authorities that continued the conversation after the survey closed, especially those who agreed to be the subject of a case study.

4 4 Procurement executive summary A 2012 pilot survey of NFB members in north east England revealed that credit reports from different credit reference agencies (CRAs) produced very different credit scores and upper contract limits, even for the same company. The effect of these differences is that the choice of CRA by local authorities in some cases would have been the deciding factor in whether a contractor passed or failed the financial assessment. This initial research stimulated a more in-depth examination of the use of credit reports by local authorities, which is the subject of this report. It is important to stress why the use of credit reports in assessing bids is of particular concern to SMEs. Accounts, or other financial data on which credit scores are based, are always likely to be more open to interpretation in the case of an SME. Credit scoring is more susceptible to fluctuations caused by the effect of one-off events on smaller balance sheets, which may no longer be of relevance by the time the business is credit scored. Information on credit reports may also be out of date as well as irrelevant if not updated regularly. However, while this is a source of concern for our members, it is not the NFB s wish to challenge the accuracy of the information produced by any CRA or the practices or algorithms they use; that is entirely a matter for them and their customers. The NFB s prime concern is with the use of credit reports in the procurement processes of public bodies. In this context, the NFB is particularly concerned that the use of credit scores for mechanistic pass or fail judgements may create an automatic bias in favour of larger firms with a national scope, and against smaller, regionally-based contractors a bias which, given the changing nature of procurement, bears increasingly little relation to the size of contract. As many of our members compete primarily for public work, with some members winning over 60% of their work in the public sector, the NFB recognised the seriousness of this issue and its potential impact on members. It is doubtful whether, under the Public Contract Regulations 2006 which cover all works contracts above the Official Journal of the European Union (OJEU) threshold of 4,348,350, there is scope for public bodies to use independently procured credit reports in assessing the economic and financial standing of bidders. However, although this has been made clear in legislation and through Cabinet Office procurement policy notes, work below the OJEU threshold is not subject to the same legislation and such policy is not clear. The NFB has sought clarity from local and central government on below threshold contracts and is keen to highlight good practice in this area. After raising our concerns with the Department for Communities and Local Government (DCLG) and the Local Government Association (LGA), the NFB wrote to all local authorities in England and Wales in autumn 2012, setting out the issues with the use of credit reports and, in the NFB s view, the potentially damaging effect of their use on SME contractors. We received a large and wide-ranging set of responses from local authorities, with 288 local authorities out of 348 (83%) providing a response to our letter. We are grateful for their contributions. The survey found that the use of credit reports as part of financial assessments is widespread, with two-thirds (66%) of respondents using credit reports as part of the procurement process. Because The Public Contracts Regulations 2006 and Office of Government Commerce (OGC) guidelines seem to have been interpreted differently by local authorities, the way in which these are used varies greatly. Just over 13% of local authorities stated that they used credit reports to make pass or fail judgements, but the figure could be higher because around 10% of local authorities stated that they used CRA reports but did not clearly state how these are used. While this does not signify extensive use of CRA reports to make pass or fail judgements, the NFB is concerned that this may be a growing problem. To counter this, as a trade association, we are calling for a clear consensus between industry, central government and local authorities on conducting financial assessments on below threshold contracts. Research conducted in compiling this report has helped the NFB to build new relationships within local and central government and has shown the strength of conviction of all parties to highlight ways of improving public procurement practices. The NFB believes it is part of good practice not to use CRA reports as the sole means of financial assessment and this view is supported by the Cabinet Office and the CBI. Any new guidelines should state that using a CRA report may not completely reflect a company s standing when conducting a financial assessment. Until a clear consensus is established that sets out the appropriate ways of conducting accurate financial assessments on below threshold contracts, the variation in the interpretation of current guidelines will continue to be a common practice among local authorities. In the responses to our survey and in meetings, most local authorities were keen to stress that they actively want to support local SMEs and would find any advice from an industry perspective helpful.

5 The use of credit reference agency reports in local government procurement 5 context What are credit reference agency reports and how are they used in local government procurement? Credit reference agency (CRA) reports are financial reports based on various factors not limited to, but usually including: Turnover Pre-tax profit Total assets Corporate structure Working capital Shareholder funds Days beyond terms County court judgements (CCJs) Number of directors Using their own algorithms, CRAs then create a score based on these factors and provide a suggested credit limit and maximum contract value. In the context of local government procurement, reports are normally obtained by local authorities as a way of determining the financial standing of a company in the pre-qualification process. CRA reports are a useful tool when used in conjunction with other financial information and as part of a clear dialogue with SME contractors. 3 used Equifax (8%) What on a pass or fail basis means and why this is a problem for NFB members CRA reports are a commonly used tool in procurement as a way of assessing the financial status of a provider. Our research set out to determine exactly how the reports were used and to what extent local authorities were using credit reports to form the basis of a pass or fail judgement. Using CRA reports on a pass or fail basis refers to the process by which local authorities use credit reports to set a minimum credit report score or turnover limit for bidders and then pass or fail contractors on this basis. Some local authorities may use credit reports in this way to minimise risk but also perhaps to save money because an assessment in this way costs less than a more comprehensive financial assessment. Local authorities that use credit reports on a pass or fail basis risk failing SME contractors that are perfectly financially sound but do not have the turnover or assets of a much larger company as credit reports often do not fully explain normal financial variations in accounts. When this approach is taken, without giving the contractor the opportunity to explain the variations, local authorities are potentially failing financially sound SMEs. Methodology We surveyed all local authorities in England and Wales about their procurement process, setting out our position and asking them five questions: 1. What is the process your authority currently uses to assess the economic and financial standing of bidders for public contracts? 2. Does this process include the use of credit reports procured from credit reference agencies? 3. If so, exactly how are these used? 4. Are these ever used on a pass-fail basis? 5. Are there any mechanisms you employ to consider the impact of the use of credit reports on SME bidders?

6 6 Procurement key data Responses from local authorities. Use of credit reports National We received 288 (83%) responses out of a possible 348 local authorities. Of the 288 responses from local authorities, 192 state that they use CRA reports as part of their procurement process (67%). Use of credit reports Breakdown of CRA report use 5% 6% 28% 28% 43% 67% 10% 13% Use of credit reports (192) Do not use CRA checks as part of the procurement process (80) Unclear if CRA reports are used or not (16 local authorities) Regional (from highest number of responses to lowest) North East 11 of 12 local authorities responded (92%) South East 58 of 66 councils responded (88%) East Midlands 34 of 40 local authorities responded (85%) Yorkshire & Humberside 17 of 22 local authorities responded (82%) South West (excluding the Isles of Scilly) 28 of 38 responded (74%) West Midlands 24 of 33 local authorities responded (73%) North West 28 of 39 local authorities responded (72%) Wales 15 of 22 local authorities responded (68%) London boroughs (including the City of London) 22 of 33 councils responded (67%) East 34 of 54 local authorities responded (63%) Use CRA reports with other information (124 local authorities) Use CRA reports on a pass or fail basis (37 local authorities) Use CRA reports, but unclear how these are used (29 local authorities) Do not use CRA checks as part of the procurement process (80 local authorities) Unclear if CRA reports are used or not (16 local authorities)

7 The use of credit reference agency reports in local government procurement 7 regions Wales Yorkshire & Humberside 27% 28% 47% 56% 5% 27% 11% Do not use CRA checks as part of the procurement process (4 local authorities) Use CRA reports on a pass or fail basis (4 local authorities) Use CRA reports with other information (7 local authorities) Key figures for Wales Of the 22 local authorities, 15 provided information, giving a 68% response rate Total use in Wales: 11 (73%) use CRA checks as part of the procurement process Do not use CRA checks as part of the procurement process (5 local authorities) Use CRA reports on a pass or fail basis (1 local authority) Unclear if CRA reports used or not (1 local authority) Use CRA reports with other information (10 local authorities) Key figures for Yorkshire & Humberside Of the 22 local authorities, 17 provided information, giving an 82% response rate Total use in Yorkshire & Humberside: 11 (61%) use CRA checks as part of the procurement process

8 8 Procurement regions North East North West 37% 18% 32% 9% 11% 57% 37% Do not use CRA checks as part of the procurement process (2 local authorities) Use CRA reports on a pass or fail basis (4 local authorities) Unclear if CRA reports are used (1 local authority) Use CRA reports with other information (4 local authorities) Key figures for the North East Do not use CRA checks as part of the procurement process (16 local authorities) Use CRA reports on a pass or fail basis (3 local authorities) Use CRA reports with other information (9 local authorities) Key figures for the North West Of the 12 local authorities, 11 provided information, giving a 92% response rate Total use in the North East: 8 (72%) use CRA checks as part of the procurement process Of the 39 local authorities, 28 provided information, giving a 72% response rate Total use in the North West: 12 (43%) use CRA checks as part of the procurement process

9 The use of credit reference agency reports in local government procurement 9 regions East Midlands West Midlands 4% 12% 17% 6% 34% 54% 65% 8% Do not use CRA checks as part of the procurement process (6 local authorities) Use CRA reports on a pass or fail basis (2 local authorities) Use CRA reports with other information (22 local authorities) Unclear if CRA reports used or not (4 local authorities) Do not use CRA checks as part of the procurement process (8 local authorities) Use CRA reports on a pass or fail basis (2 local authorities) Use CRA reports with other information (13 local authorities) Unclear if CRA reports are used or not (1 local authority) Key figures for the East Midlands Key figures for the West Midlands Of the 40 local authorities, 34 provided information, giving an 85% response rate Of the 33 local authorities, 24 provided information, giving a 73% response rate Total use in the East Midlands: 24 (71%) use CRA checks as part of the procurement process Total use in the West Midlands: 15 (63%) use CRA checks as part of the procurement process

10 10 Procurement regions East South West 3% 11% 26% 28% 62% 9% 43% 18% Do not use CRA checks as part of the procurement process (9 local authorities) Use CRA reports on a pass or fail basis (3 local authorities) Use CRA reports with other information (21 local authorities) Unclear if CRA reports are used or not (1 local authority) Do not use CRA checks as part of the procurement process (8 local authorities) Use CRA reports on a pass or fail basis (5 local authorities) Use CRA reports with other information (12 local authorities) Unclear if CRA reports are used or not (3 local authorities) Key figures for the East of England Key figures for the South West (excluding the Isles of Scilly) Of the 54 local authorities, 34 provided information, giving a 63% response rate Of the 38 local authorities, 28 provided information, giving a 74% response rate Total use in the East of England: 24 (71%) use CRA checks as part of the procurement process Total use in the South West: 17 (61%) use CRA checks as part of the procurement process

11 The use of credit reference agency reports in local government procurement 11 regions South East London boroughs (including the City of London) 3% 24% 14% 23% 9% 59% 14% 54% Do not use CRA checks as part of the procurement process (14 local authorities) Use CRA reports on a pass or fail basis (8 local authorities) Use CRA reports with other information (34 local authorities) Unclear if CRA reports used or not (2 local authorities) Do not use CRA checks as part of the procurement process (5 local authorities) Use CRA reports on a pass or fail basis (2 local authorities) Use CRA reports with other information (12 local authorities) Unclear if CRA reports used or not (3 local authorities) Key figures for the South East Key figures for London boroughs Of the 66 local authorities, 58 provided information, giving an 88% response rate Of the 33 local authorities, 22 provided information, giving a 67% response rate Total use in the South East: 42 (72%) use CRA checks as part of the procurement process Total use in London: 14 (64%) use CRA checks as part of the procurement process

12 12 Procurement other analysis The NFB believes that competition should be equitable and that SME contractors should be given a fair opportunity to compete for the work they are qualified to carry out. The NFB conducted additional analysis to evaluate how much potential work was being evaluated on a pass or fail basis this is work where a credit check was the only means of financial assessment. Of the local authorities responding to our survey, 37 stated that they assessed bidders on a pass or fail basis. This puts the potential average value of work procured on a pass or fail basis at 2.1 billion 1 The average annual value of public construction output, excluding infrastructure, that may be evaluated on a pass or fail basis for each region has been estimated at: Wales Yorkshire & Humberside North East North West East Midlands West Midlands East South West South East London borough (including the City of London) 164 million 88 million 331 million 275 million 69 million 124 million 226 million 232 million 416 million 260 million [1] This figure is an estimate based on 2012 Office for National Statistics figures for public construction spending by region, excluding infrastructure. Because figures for each local authority are not publicly available, the estimates are based on regional averages. See notes section at the end of the report for more information.

13 The use of credit reference agency reports in local government procurement 13 key regional data In what ways are credit reports used by local authorities? The survey results show that, in the majority of cases, CRA reports are used in combination with other financial information. Most local authorities (71%) do not use CRA reports on a pass or fail basis. The remaining 29% is split between authorities that use CRA reports on a pass or fail basis (13%) or authorities that were unclear on whether they used credit reports on a pass or fail basis. Our research shows that the ways in which individual local authorities assess work when using credit reports varies. Examples of the ways in which CRA reports are used but in a way that does not arbitrarily pass or fail contractors are set out opposite: A local authority uses CRA reports to verify financial information provided by contractors in a pre-qualification questionnaire (PQQ). A local authority uses CRA reports to provide missing financial information not provided by a contractor in a PQQ. A local authority uses CRA reports in combination with a detailed assessment of accounts as part of a range of measures at PQQ stage to assess a contractor s financial standing. A local authority uses CRA reports to assess which contractors appear to be high risk and then scrutinises these contractors further through a financial assessment of information provided by the bidder. A local authority uses CRA reports with other information to establish a pass/fail limit, but does not solely rely on the CRA score to form a judgment. In looking at local authority responses, the majority of approaches do not rely on a CRA report as part of a financial assessment but use it as a means of obtaining further financial information. Most local authorities that use credit reports as part of a wider assessment do not use them on every assessment but only under certain circumstances, for example on very high risk contracts.

14 14 Procurement Incidence of credit report use National average 66% use CRA reports Greatest incidence of CRA report use Wales, 73% use CRA reports South East, 72% use CRA reports Most frequent use of CRA reports on a pass or fail basis Our research found that the North East and Wales were the regions with the most frequent use of credit report usage on a pass or fail basis. Least frequent use of CRA reports on a pass or fail basis The two regions with the lowest incidence of CRA report use on a pass or fail basis are the East Midlands and the East of England. North East: 37% East Midlands: 6% Wales: 33% East: 9% UK average: 13% UK average: 13%

15 The use of credit reference agency reports in local government procurement 15 other data Reaction Other comments Forty-two of the 191 local authorities (22%) currently using CRA reports as part of the procurement process reported that they recognised the potential limitations of using CRA reports on a pass or fail basis 5. Eighteen of the 288 (6%) local authorities stated that they have already taken action to change their procurement process, perhaps because of the recommendations in our letter. Pass/Fail Thirty-one of the 288 local authorities (11%) stated that they use a pass/fail system based on credit reports on a regular basis, with a further eight local authorities using a pass/fail system based on credit reports under certain circumstances making a total of 39 (13%) local authorities using CRA reports on a pass or fail basis. In drawing general responses from the data, it is very important to note that although only 39 (13%) councils stated that they used credit reports on a pass or fail basis, this number may, in fact, be higher as 29 respondents (10%) stated that they used credit reports, but it was not clear how these were used. Although only 15% of respondents actively stressed that they have a method to consider the impact of CRA checks on SMEs, most local authorities were of the view that SMEs were not greatly affected by their use. Forty-six of the 288 local authorities (16%) actively stated examples of schemes to help SMEs. Please see the case studies for more detail.

16 16 Procurement conclusion What is the NFB calling for? To address the issues raised in this report, the NFB proposes some key policy improvements. Clarity from government on below threshold works A key objective for the NFB is to aim for clear and consistent advice to local authorities from the Cabinet Office or the Local Government Association on the use of credit reports on below threshold contracts. The NFB would like to see government discouraging the use of credit reports in this way and recommending more comprehensive methods of assessment. These may include: a full financial risk assessment by an in-house or external team, including analysis of supplier s accounts; a reference from a supplier s bank. Find alternatives to pass or fail While a pass or fail system is not used particularly widely, we would recommend that local authorities look to other means of assessment instead of considering credit reference agency reports on a pass or fail basis. We oppose the use of credit reports on a pass or fail basis and our principal aim is to find more transparent alternatives that give SMEs fair access to public contracts. As we have set out clearly in these findings, pass or fail is not a system that we encourage. However, we are not opposed to the use of credit reference agency reports as part of a broad financial assessment and understand that they are a useful tool for local authorities to verify contractors financial information and check any gaps in information provided by bidders. A review of procurement practices across public bodies The NFB is calling for the government to undertake a full review of procurement practices across bodies in receipt of public money in order to find ways of improving SME access to contract opportunities. Without a coordinated message across central and local government, the public sector procurement process will continue to be seen as a barrier to SME access to public work. This review should set out how to foster a better relationship between SME companies and public bodies, through a range of measures including those set out here. Increased collaboration between local authorities and contractors The NFB is calling for local authorities to continue to hold supplier events aimed at SMEs. Events such as meet the buyer and post-contract award sessions improve access for SME contractors and offer practical advice. The NFB regularly holds liaison events with local authorities to inform members of upcoming work and give members the opportunity to address any concerns directly and in person to local authority procurement departments. The NFB will continue to hold events such as these through its network of regional representives and encourages members to attend these events. Recommendations for NFB members 1. Contact credit rating agencies, obtain a credit report and make sure the information held is correct in order to improve the credit score. 2. Submit accounts this dramatically improves a credit score and where you have submitted abbreviated accounts, consider lodging full accounts with Companies House. 3. Contact the local authority for feedback, even if you have won the contract. 4. Use the anonymous mystery shopper complaints system through the Cabinet Office website if you have examples of poor procurement practice.

17 The use of credit reference agency reports in local government procurement 17 key measures to improve opportunities for SMEs Encourage the use of PAS 91 PQQ The NFB wants to drive up the quality of the procurement process across local and central government and make the first stage of pre-qualification more accessible to bidders through the use of the PAS 91 questionnaire for construction-related procurement. PAS 91 sets out a common set of pre-qualification questions for construction-related tendering. It is also flexible enough to allow clients, including local authorities, to add their own questions. When the aims of PAS 91 are discussed, for example reductions in cost of the PQQ process, local authorities are generally supportive. In discussions with local authorities, only two stated that they were fully implementing PAS 91. Other authorities we spoke with were keen on implementing PAS 91 but outlined the challenges presented by a standardised PQQ form, such as satisfying the requirements of multiple authorities procuring collaboratively. The NFB will continue to participate in industry and government collaboration on the implementation of PAS 91 by sitting on the steering group and encourages local government to adopt this standardised PQQ as soon as practically possible. Offer better feedback Currently, there is no legislation governing feedback for below threshold bids although the OGC (now part of the Cabinet Office s Efficiency and Reform Group) strongly recommends that contracting authorities offer tenderers the opportunity of a debrief. After reviewing feedback practices across local authorities, ideally they should offer automatic feedback to failed bidders to ensure transparency and allow contractors to improve for future opportunities. The NFB appreciates that this may not always be possible, particularly in smaller local authorities with fewer resources. The NFB would like to look at other ways in which local authorities can give feedback to failed bidders where councils are unable to give a detailed debrief. We propose a frequently asked questions section on local authority websites featuring common challenges for suppliers bidding for public sector contracts and how to overcome those challenges. This service could be used to supplement more comprehensive feedback where needed and provide a first point of reference for bidders that fail to win a contract, including those that have failed a pass or fail test where CRA reports are used. These advice pages would help contractors to raise the quality of their financial assessments and ensure local authorities receive the best possible bids. Higher standards in public procurement The NFB wants to see an improvement in public procurement standards through good practice and a high standard of education for aspiring procurement professionals. Encourage members to use the Cabinet Office mystery shopper complaints service The Cabinet Office has provided guidance 1 for SMEs seeking to win government work and has also provided an address 2 for those wishing to use the mystery shopper service. When a supplier feels that it has been unfairly treated by a local authority it can complain anonymously about poor procurement practice directly to the Cabinet Office through the mystery shopper complaints service. The NFB has verified and promoted this service and feels that it provides a useful and fast means by which suppliers can highlight poor procurement practice. The NFB is encouraging members to use this service through its own website by allowing members to make complaints through the NFB. We would like to see continued central government encouragement of the use of this service and for local government to make contractors more aware of its existence MysteryShopper@cabinet-office.gsi.gov.uk

18 18 Credit Report glossary of terms OJEU thresholds The OJEU threshold of 5 million ( 4,348,350) refers to the threshold above which all public works contracts must be put out to tender within the EU to increase competition and avoid nationalistic policies. All contracts above the threshold value must be published in the Official Journal of the European Union and are subject to the Public Contracts Regulations 2006 (PCR 2006) in the UK and the corresponding regulations in other EU member states that have also been transposed from EU Directive 2004/18/EC. Local authorities are not allowed to use a credit report to pass or fail a potential contractor on above threshold contracts and this has been made clear in PCR and more recently in guidelines from the Cabinet Office, including a procurement policy note issued in February However, for contracts below the OJEU threshold, the rules are less clear, meaning that practices vary greatly between local authorities. This report outlines these variations in practices. PAS 91 PAS 91 is a publicly available specification that sets out a standard set of pre-qualification questions for construction-related tendering. It is sponsored by the Department for Business, Innovation and Skills and has been developed by the British Standards Institution (BSI) with a representative steering group of industry, client and accreditation scheme participants that included the National Federation of Builders. PAS 91 was published in October 2010 and its use is compulsory on central government construction projects. Use at the local level is still negligible. A PAS is only valid for two years before it either has to be renewed, withdrawn or developed into a full British standard. Because there is still a need for a standard approach to pre-qualification questionnaires, PAS 91 went through a revision and the updated version was published in The updated version has taken local authority and consultant concerns into consideration, has fewer questions and includes an additional, optional, module on building information modelling. It is also flexible enough to allow clients, including local authorities, to add their own questions. Constructionline Constructionline is the UK s largest register of pre-qualified construction services. Launched in 1998, it is designed to streamline procedures by supplying the construction industry and its clients with a single national pre-qualification scheme

19 The use of credit reference agency reports in local government procurement 19 notes The figure was calculated by dividing the regional figure for the value of construction spending that was publicly available by the number of local authorities and then multiplying that figure by the number of local authorities using a pass/fail system. The figure is an estimate of work assessed in this way and not an exact figure.

20 20 Procurement appendix Case study 1: medium-sized city council Context Following correspondence by letter and , the NFB decided to conduct a telephone meeting with the procurement manager at a council in south east England. What method does the council use? In small and medium-sized contracts, the risk score criteria that this council uses in its PQQ are divided into three bands. These are: The council stated that it ensures all projects are rated for risk before tendering activity starts. Small and medium risk procurements, the majority below EU works thresholds, use CRA reports. High risk (major) procurements, the majority above EU works thresholds, are reviewed by the technical and financial planning department. Why use CRA reports in this way? The council stated that it has taken this approach because the OECD/European Commission advice 6 is that procurement processes for below threshold contracts should: or above Fail Pass, subject to parent company guarantee or bond if deemed appropriate Pass be proportionate and avoid unnecessary bureaucracy so as to avoid imposing overly complex or disproportionately bureaucratic and administrative burdens or costs on the contracting authority or the economic operator relative to the size, value and complexity of the contract being procured; make the most efficient use of public money ensuring the optimal allocation of resources to achieve the intended outcomes; be efficient and effective and therefore use processes, timescales and documents which reflect the needs and outcomes of the particular procurement. However, the NFB pointed out that this guidance also states that public procurement processes should also: ensure appropriate competition since open, fair competition should help to attract a broader range of potential bidders, including SMEs and start-up companies which may be attracted to lower value contracts in particular; What methods does the council use to help SMEs? The council no longer applies arbitrary turnover limits. On certain projects that last less than a year, the council assesses the financial risk on cash flow and liquidity rather than assets or gearing where SMEs have traditionally struggled. The council allows start-up SMEs to provide other financial information where they are not yet able to provide two years of accounts. NFB comment The use of the SIGMA and OECD/European Commission guidance stresses the need for fair competition and transparency and in no way endorses the use of CRA reports to determine the financial standing of contractors on a pass or fail basis. It is essential that the full guidance is taken into account when local authority procurement officers are using these guidelines to determine policy. Legal advice sought by the NFB suggests that the SIGMA guidelines support our position as the guidelines stress the need to respect transparency in European law. be transparent since transparency of process assists open and fair competition and also assists in safeguarding against corruption and favouritism. 6 Brief 15. Public procurement: below threshold contracts. Support for Improvement in Governance and Management (SIGMA), OECD and European Commission. September 2011.

21 The use of credit reference agency reports in local government procurement 21 appendix Case study 2: large county council Context Following correspondence by letter and , the NFB organised a meeting with the head of procurement at this large county council. The council was keen to stress that it was the council s policy to support SMEs in all industries in the county, including the building industry. The council agreed with our analysis that using CRA reports to determine whether a building company is suitable for a contract is unfair towards SMEs and used a range of measures to determine the financial standing of a contractor. The council drew its conclusions from turnover, profitability, liquidity, cash flow and net worth. The council did occasionally use CRA reports but only to provide additional analysis and information. It stated that its procurement methods had been developed over a number of years and were generally seen to be SME-friendly and transparent while delivering best value for taxpayers. SME policy In order to ensure a fair and transparent procurement process for each contract, the council undertakes a tailored market analysis before putting each contract out for tender. In this analysis, it wishes to determine: what the council wants to achieve from the contract; how the council can develop a trust-based relationship; how it can involve as many smaller, locally based contractors as possible. Within legal constraints surrounding competition, the council also set out its proposed SME-friendly, four-tier framework for below threshold contracts. Within this framework, large contractors were discouraged from placing bids across all available tiers. This was to try to avoid a sweep of contracts by large contractors and to allow smaller companies to compete in the lower value bands. The proposed four tiers that the council decided upon are: 1. Up to 75, , , ,000-2 million 4. 2 million+ In answer to the question of how SMEs could access higher tier contracts in which they were competing with much larger contractors, the local authority pointed out that smaller contractors could build up a good reputation with the council in smaller contracts allowing them to access larger contracts after a two-year review, subject to comprehensive financial checks. The council stressed that CRA reports were never used to pass or fail contractors. CRA reports were only used to verify financial information provided or to fill in gaps in information provided and that any above threshold contracts were always assessed on a project by project basis. Use of PAS 91 and e-tendering The council had taken PAS 91 into account and had adopted part of it in their contracts. The council stated that it is moving towards a standardised system and is aiming to gradually fully adopt PAS 91. The council was keen to stress its accessible e-tendering PQQ system. Use of CRA reports The council uses CRA reports to obtain missing information not provided by the contractor and to validate independent outcomes. All high value and sensitive contracts use CRA reports in this way. The council was keen to state that its own financial analysis was better than that of a CRA report and the council had found some CRA reports to show incorrect information. Collaboration between local authorities The council was a member of several collaborative procurement programmes and frameworks across other local authorities in the region, aiming to promote good procurement practice across local government. By collaborating across several local authorities, councils can work together to find a more accessible SME procurement policy across a given region, streamlining the procurement process for contractors and hopefully reducing inconsistencies and paperwork across public sector procurement bodies. NFB comment This council is a model example for other local authorities as it has adopted a fair and transparent approach to procurement that is friendly towards small businesses. The procurement manager deemed the idea of determining contracts on a pass or fail basis using CRA reports as poor practice. In the manager s view, it is better to use a collaborative approach to procurement by working with contractors and asking what the council wants to achieve each time it puts a contract out to tender. The manager suggested that by keeping investment as local as possible, the council can encourage SME engagement at a local level, whether through employing contractors directly or by encouraging their participation in the supply chain. Any procurement strategy should reflect these priorities.

22 22 Procurement appendix Case study 3: small district council Context Following correspondence by letter and , the NFB attended a meeting with the procurement manager of a small district council. The procurement manager of the small district council explained that there are around 20 major contracts each year taken on by the local authority that are below OJEU threshold. Not all of these are in the construction sector. On average, there is one above OJEU contract every three years. The procurement manager stated that most local authorities in the region do not have an in-house procurement service but use a county-wide procurement hub that uses a range of measures to assess bidders that does not include the use of credit reports on a pass or fail basis. The council took this service in-house around Since then, the district council has used credit reports on a pass or fail basis to determine the financial standing of bidders. Why use CRA reports on a pass or fail basis? The procurement manager explained that the council uses CRA reports on a pass or fail basis to save money and time, stating that: even if the district council changed its policy on using CRA reports in this way, resources and skills are not sufficient at the council to undertake necessary assessments; an audit check either through the countywide procurement hub or the use of an external accountant or hiring a professional would take too long and/or cost too much; an external accountant would be useful but would be too expensive, although having an external accountant would allow a more robust and commercial approach than the expertise available in the public sector; legal claims from unsuccessful contractors have increased since the economic downturn and that was a reason for using a pass or fail system based on a credit report. Potential Plan B The procurement manager raised the idea of bidders having a Plan B for contractors that go out of business through a, suggested, NFB database of contractors. This would consist of a temporary local NFB member replacement should the original contractor go out of business. The procurement manager suggested that if this were a well-established system, this would act in members favour, possibly allowing members who have a borderline credit score to be considered for a contract instead of being failed. The procurement manager stated that this could provide options for a smooth transition if a contractor goes out of business. A hybrid system This would provide technical advice on the quality of builders obtained from councils themselves and financial information from Constructionline. Suggestions being considered The procurement manager supports any method to improve access for local contractors and any alternative to pass or fail credit reports. The procurement manager will attempt to hold more local procurement events including continued work with the countywide procurement hub to promote upcoming events. Methods currently used by the council to help SMEs 99% of bills paid in less than 10 days. Main contractors must pay their suppliers in less than 10 days. One in three quotes has to be from local suppliers, i.e. within a ten-mile radius of the two main council offices. Other PAS 91 would be more useful if there were more guidance for assessors when preparing the PQQ. The council only tenders above 50,000. The local authority is one of the few local authorities to be almost completely unaffected by central government cuts owing to a rise in council tax revenue. The Social Value Act may not change things as many considerations, such as smaller lots, that provide opportunities for SMEs to bid were already being considered. The local authority was keen to state that it is working with housing associations on ECO (Energy Company Obligation) and Green Deal. NFB comment This council raised several points worthy of consideration, notably the legal element that using a CRA check provides a seemingly simple legal response. As the methodology of a CRA check is secret, in our view this is not a valid point. However, the fact that the number of legal challenges against the local authority from failed contractors had increased highlights the need for greater transparency and feedback between local authorities and contractors to avoid legal disputes. Another point raised by this authority was the recognition that local government professionals were not the best qualified to undertake procurement exercises. This problem has been recognised at central government level and calls have been made to establish a centralised government procurement hub to improve procurement practices. At local level, procurement hubs are widespread, to reduce costs and ensure best procurement practice. The NFB encourages the drive for better public procurement through the best possible education and training for public sector procurement professionals and clear national guidelines. Procurement hubs can offer a fair playing field for SMEs as long as they ensure they maintain a transparent dialogue with SME contractors.