Small Business introduction to Prequalification

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1 Major Projects Ready Small Business introduction to Prequalification Introduction The concept and process of prequalification can be quite daunting for a small business. The information provided in this document outlines the basics and highlights the challenges for small business when seeking to prequalify to provide their products and services. This document outlines key areas for small business to concentrate on as part the prequalification process. The best advice is firstly to understand your customer. The more knowledge you have of your customers the better you can focus on the areas of importance to your potential customer s needs. This document should be read in conjunction with the DMITRE Small Business Major Projects Ready (MPR) Guide to Supply Chain Engagement and the MPR Readiness Indicator available at Prequalification Business to Business Prequalification is the process a buyer will use to verify a supplier s capabilities. The prequalification process outlines a series of questions to identify a business s capabilities, qualifications, accreditations and their ability to finance production through a purchase order or tender process. The prequalification process establishes a set of required standards, as part of the business to business relationship/partnership. The challenges of prequalification From a supplier s perspective may include: Understanding the prequalification documents Time & cost involved to undertake the prequalification process Prequalifying your sub-contractors Developing and maintaining a quality system, WHS & environmental management system Establishing risk management and assessment systems Ability to finance projects based on contract value and business turnover Industrial relations/workforce development INFORMED / CONNECTED / COMPETITIVE / SUSTAINABLE

2 Understanding prequalification documentation The ability to interpret the methodology behind the prequalification documents will assist you in reducing the time and money involved in completing the documentation. Prequalification documents will generally require the inclusion of industry specific accreditations/requirements. Suppliers may also require verification of statements made in the prequalification documents and undertake an audit of your business operations. If seeking work in a new area, it is important to understand what the expected accreditations are for that area. The more complex the requirements, the more time and money it will consume. The complexity of the requirements generally reflects the level of work to be undertaken by the company completing the prequalification. For example, the level of detail required for the supply of complex custom engineered parts will be very different from the level of detail to supply off-the- shelf mass produced components. Time involved The time involved to prequalify will vary depending on the different prequalification documents used by many companies. The process can be quite simple and may require only basic business information. At the other end of the spectrum, some prequalification documents will require your company to outline a detailed process of how you are going to manufacture the item to be procured. The prequalification documentation and audit process is important and adequate time should be assigned to this task. Cost to Business The cost of undertaking prequalification is difficult to estimate as there will be direct costs and there will be hidden costs. The cost of meeting prequalification requirements will be determined by the level of existing quality, WHS and environmental systems the company already has in place. The better implemented and documented these systems are the less time is needed in preparing prequalification and associated documents. Meeting prequalification requirements may also require implementing new business processes, management structure and obtaining new equipment. The associated cost can sometimes be a deterrent to progressing with the prequalification process. Prequalifying your Sub-Contractors In becoming prequalified it may be necessary for your sub-contractors to also be prequalified. Prequalifying your sub-contractors can have detrimental effects on your supply chain, as the contractors that you currently use, and have established relationships with, may not be to a standard required to prequalify for the prime contractor. The development of new business relationships can be time consuming and affect your cost competitiveness and delivery times as you build these new supplier relationships. Developing and maintaining a Quality System Developing a quality system can be costly and time consuming, but the advantages of a system whether that is an ISO 9000 system or a QHSE system (quality, health, safety & environmental) will add credibility to your business management and production processes. The determination of what system to deploy in your business will generally be based on turnover. The QHSE system is more cost effective than the ISO system, due to the lower required level of compliance. That said, especially with SME s, it is important to demonstrate that there is a quality standard in place that is auditable. Developing and maintaining a WHS System (Work, Health & Safety) Evidence of a WHS system is often mandatory in some industry sectors especially with mining and construction. The WHS certification demonstrates your culture and commitment to safety and health in the workplace. To have a WHS system that is recordable and transparent generally leads to successful prequalification with the target customer. The significance of a good WHS system, say AS4801 as a minimum, is in the recording of information and the level of LTI (lost time injuries) within the business. This is one of the most important systems you can implement in your business, not only for the health and wellbeing of your employees, but it demonstrates the culture in your business that attracts like-minded businesses to engage and develop a business relationship.

3 Developing and maintaining an Environmental System Having an Environmental Management System has become a normal business practise. The environmental policies within your business demonstrate your concerns for the environment and your ability to manage your waste. The importance of these to prequalification requirements will vary depending on the sector in which you work. Ability to finance projects based on contract value and business turnover This is one area where the prequalification review process is quite lengthy, and requires sharing of confidential financial information. The review will determine what level of spend will be placed with the supplier. The rule of thumb is that the purchaser will analyse the supplier s turnover as part of the prequalification process and limit the access to work to not exceed 40% of the supplier s overall turnover. The reason for this approach is to not put the supplier at risk if the work increases or is removed by the buyer. This process affects how the supplier structures their pricing and the level of commitment the supplier wants to take in developing the business relationship. Risk Management and Assessment Systems The ability to manage risk in a business environment is an important process for any business relationship. Risk Management process involves the following steps: 1. Identify risks by category e.g. contractual, performance, human resources, systems and processes, with a description of the risk, including its proximity (short, medium or long term) and whether the risk is time-bound. 2. Determine the impact of the risk e.g. delay to the start of work in an already short timescale, or detriment to the success of the service. 3. Estimate the likelihood of the risk occurring normally scored on a five point low-high scale. 4. Calculate the degree of impact and severity of the risk normally scored on a five point low-high scale: on entering the likelihood and impact scores, the severity score is calculated automatically and colour coded according to the level of risk (using red-amber-green traffic light reporting ). 5. Identify mitigation measures/actions to manage and reduce the risk including preventative, contingency and recovery actions. 6. Indicate that the mitigation action has been added to the work breakdown structure. 7. Allocate ownership of risk, in terms of the identity of the responsible manager.

4 Industrial Relations/ Workforce Development The reporting of the company s industrial relations (IR) agreement with their employees looks at how the workforce is treated within the organisation. This will include the company s health and safety record, the remuneration structure, what training the company provides its employees and what processes the company has in place for succession planning. The IR agreement should also include the mitigation of employee disputes and what processes are in place to record this. The health and safety culture within the business will be paramount as part of the prequalification evaluation process. The outcomes of the supplier s IR agreement should align with the buyers IR policy and agreements that the supplier is seeking prequalification from. Review process The prequalification approval process may include a staged auditing process and this is determined by what the supplier is supplying. For example there may be production processes that will need to be signed off during the manufacture of first off components to confirm that the manufacturing process meets the prequalification requirements outlined by the buyer. These are some prequalification points to be mindful of: Properly executed Mutual Non-Disclosure Agreements Acknowledgement of the receipt of the buyer s guide to suppliers, contractors and consultants Quality systems assessment Technical assessment Environmental, Health and Safety (EHS) and employment practises compliance Financial viability assessment The road to prequalification acceptance is varied depending on the products and services the supplier is going to provide. There is some information that is consistent between companies and information that is specific to the individual needs of the buyer. The prequalification process does not guarantee a tender or purchase order in anyway and should be viewed as a method of engagement and the development of a business relationship. It is the first step in gaining access to winning more work. Further information The Department for Manufacturing, Innovation, Trade, Resources and Energy (DMITRE) has developed a range of digital media presentations, work books and tools which are available to download from the DMITRE Small Business website: The Major Projects Ready A Guide to Supply Chain Engagement provides an easy to read overview of the key issues facing small business s wishing to participate in major projects and supply chains. It can be used as a stand-alone document or incorporated into a facilitated workshop environment.

5 Department for Manufacturing, Innovation, Trade, Resources and Energy Level 9, The Conservatory Grenfell Street, Adelaide SA 5000 GPO Box 1264, Adelaide SA 5001 T F E dmitresbs@sa.gov.au DISCLAIMER The Government of South Australia gives no warranty and makes no representation, whether express or implied, as to the accuracy of information contained within this publication or the suitability of the information for any purpose. Any use of the information contained in this publication (whether authorised or not) is at the users sole risk and the Government of South Australia disclaims responsibility for any loss or damage incurred as a result of such use. The information is provided solely on the basis that users of the information will make their own assessment of the accuracy of the information and users are advised to verify all information contained within this document. Content correct at time of printing. COPYRIGHT Produced by the South Australian Department for Manufacturing, Innovation, Trade, Resources and Energy January 2014