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Guest Legal Blog: Are regulations making procurement easier for SME’s?

Suzanne Hardie_Morton Fraser

Suzanne Hardie is a partner at independent law firm, Morton Fraser and advises on procurement matters. Here she looks at how procurement regulations are seeking to make the process easier for SMEs.

  1. How effective are the most recent procurement regulations in levelling the playing field for SMEs?

Greater access for SMEs to public contracts was one of the policy aims sitting behind the 2014 EU Directive on Public Procurement, which has now been implemented into national legislation. The CBI’s second report on Procurement Reform (published before the latest round of legislative changes) stated that half of UK Central Government’s £40bn spend was placed with just 39 suppliers, so it is not surprising that this issue received the attention of legislatures. The main barriers to SME involvement have traditionally been seen as a lack of transparency, complexity of procurement process and the size of advertised contracts.

So, how much progress has been made since the latest round of legislative changes came into force?  Before considering the effectiveness of those changes, it is useful to remind ourselves of what they were:-

  • Under the new Regulations, Contracting Authorities now have to actively consider splitting larger contracts (those above the EU threshold) into smaller lots and have to justify their decisions if they choose not to do so. It is also open to Contracting Authorities to limit the number of lots that a single contractor can be appointed to, provided they do so in an objective and non-discriminatory way.
  • Contracting Authorities have to evaluate bids based on the tenderer’s “capacity and ability” to perform the contract, which means that excessive requirements, not linked to the type or value of the contract, are not permissible. In particular:-
    • minimum turnover requirements for bidder qualification cannot be more than twice the contract value, unless there is a justifiable reason for doing so. The previous thinking on this was for 3 times the contract value, so there has been a reduction there in favour of SMEs.
    • minimum PI levels required for bidder qualification need to be objectively justifiable based on the type and value of the contract.
  • The new Regulations introduced the amended qualification process, which brought in the standardised European Single Procurement Document (ESPD) and the ability for bidders to self-certify the information provided. Now only the winning bidder is required to provide the documentation supporting their statements in the ESPD. The European Commission estimated that the change in the qualification procedure would reduce the administrative burden on companies by over 80%.  Scotland has introduced the new Scottish ESPD but it has not yet been implemented in any meaningful way in England, NI or Wales.
  • More generally there has been a drive to further improve transparency through better record keeping and auditing of procurement processes.

As we have only been working with the new regime for a short while, Contracting Authorities, as well as bidders, are still very much in the learning process and there will, inevitably be a period of time before full compliance is achieved across the sector.  The European Commission is focussing on buyer training as a means to ensure compliance.

Some of the changes are more easily implemented than others.  Contracting Authorities had already been working with guidance on minimum turnover and PI requirements and the new Regulations are more of a codification of existing rules than a step change in that regard.

Other changes may take a little longer to be fully embedded.  A quick review of the tender portals will, for example, show that bidders are not always given reasons for a contract not being split into lots, or if they are, the reasons are not particularly specific.  It is also rare to see a limit being placed on the number of lots that a single contractor can be awarded.  The reason for this could be that there is a perceived conflict in being able to demonstrate best value whilst at the same time splitting a contract so as to lose the economy of scale, or saying that a certain lot has not been awarded to the bidder who submitted the most economically advantageous tender because of a cap on the number of lots that it can be awarded.

There is little doubt, however, that the standardised approach to the qualification process through the ESPD is starting to reap benefits for bidders, from both a time and a cost perspective.  This is likely to be the biggest win for SMEs from the most recent changes in legislation.

 

2. Is there anything more that can be done in a regulatory way to enhance the opportunity for SMEs to engage in public procurements?

It is likely that legislatures would want to give Contracting Authorities a period of time to adjust to the new Regulations, before making further changes.  That said, the EU Commission is keen to make sure that buyers fully understand the new rules and use them in a way to create innovation in the economy, which can be done through greater use of SMEs.  The EU Commission published a consultation on “Guidance on Public Procurement of Innovation” seeking to help buyers feel more confident in specifying more innovative ways of delivering contracts, without fear of challenge.  The consultation closes this month (January) and we can expect published Guidance to follow on from that.

At the moment Contracting Authorities are being “encouraged” to design their procurement processes with SMEs in mind, but they are afforded a fairly wide discretion in how they do that.  Based on their current powers under the EU Directive, there are additional measures that Member States already have in their kit bag, should they feel that the current regime is not achieving the policy aim of increasing SME involvement.

As an example, the Directive allows Member States some discretion on the implementation of the lotting rule, so that Government could at some point make it mandatory that contracts of a certain size or type be split.  Government could also choose to extend these current rules so as to apply to lower value contracts, through separate national legislation.

Speed of payment in the supply chain has also raised concerns for SMEs, especially in the construction industry.  The Directive makes clear that Member States should be free to provide mechanisms for direct payments to be made to sub-contractors (who are more likely to be SMEs).  As an example of how this can be achieved, the Scottish Government has now instructed all Scottish organisations covered by the Public Finance Manual to use Project Bank Accounts in high value construction contracts to allow direct payments to sub-contractors.  If this proves to be successful then we may see a further roll out to other industries or to lower value contracts, but this would have to be weighed against the cost of administration.  There is also statutory in guidance in England & Wales about prompt payment of undisputed invoices within 30 days, with a stated aim of paying 80% of invoices within 5 working days.

The Scottish Government has also introduced the Scottish ESPD as well as standardised statements for use alongside the ESPD which Contracting Authorities must use for routine requirements in the qualification process.  This further standardises the process for bidders and will ensure that the policy aims of making the ESPD a reusable document are better achieved.  It may be that this is something considered by other jurisdictions.

We do have to recognise that any attempt to legislate in favour of a certain groups of providers such as SMEs, almost by definition, prejudices other providers in the sector.  Government therefore has to use its powers with caution so as not to make the process anti-competitive, when the aim of the game is to run an open, transparent and fair process for all.  That said, the measures that have been introduced do help to at least make sure that SMEs are given a fair opportunity to compete in the first place.

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15 replies »

  1. one area that is concerning for SME’s and public procurement are requirement around data and GDPR regulations. In some instances the public body has requested ISO27001 or be able to”demonstrate” compliance without clarification on what evidence is required.
    The costs of fully implementing ISO 27001 can be prohibitive for SME’s.
    This is another barrier for SME’s.

    • The Regulations require that where Contracting Authorities cite a specific standard, they must allow Economic Operators to demonstrate that their own internal processes and procedures have the equivalent effect: they cannot in general mandate that participants are formally accredited to the specific standard cited (accordingly such requirements must be stated in the Contract Notice in the form “[specific standard] or equivalent”: if they’re not – which is sometimes the case – then seek clarification as CAs do make mistakes !). As an example of how to address equivalence, ISO 9001 essentially comprises 8 principles hence one would need to demonstrate that one’s ‘bespoke’ QA processes & procedures address each of those and their cumulative effect (i.e the overall objective of the Standard). It is up to EOs to decide what evidence is relevant and CAs to explain their decision…..

  2. Thanks for your comments – some interesting points raised. Suzanne has the following to add:

    We are in the early stages of the new system. As such, buyer education and practice is in its infancy in some quarters. Legislatures will continue to monitor the effectiveness of the measures.

    If you feel that selection criteria is unfairly specified (such as the insurance requirements) given the nature and value of a contract, then you are within your rights to question the authority on their decision and have them justify the reason for it.

    • Hi Fiona/Suzanne Thanks again for your feedback. I can now see that the Clarification system is there to help bidders clarify elements of the tender that may be uncertain, unclear or possibly a potential error, and can be used for gaining further insight. But we are usually worried that if we were to challenge or request clarification regarding eg: levels of PI, it would sound petty, reflect poorly on us and maybe prejudice our chances of selection. Is this cause for concern, or are we being unnecessarily worried?

      • Julian,

        Many companies worry about this. However, from my time in the Public Service, I can say that I never experienced colleagues reacting in the negative way you allude to. In fact, because any such prejudice would bring with it the risk of a charge of misfeasance in public office – apart from the opprobrium of colleagues whose careers would also be put at risk by association – there is a great disincentive on individuals to react thus. Furthermore, staff know that they will get no thanks from colleagues who need the contract to be placed expeditiously if they effectively prolong the procedure by inviting procurement challenges because the procedure has not been carried out in accordance with the Regulations. For this reason, staff will invariably welcome relevant Clarification Questions framed in a polite but business-like manner.

  3. Another thought, on the topic of PI insurance.

    How is the appropriate level of PI insurance for a project assessed? We find that the requirement can vary widely on contracts of very similar scope and value, for example some authorities ask for £500k, others for as much as £10 miilion.

    Surely, with a span of that magnitude, both figures can’t be considered as “appropriate” values? To a small operator, increasing the cost of PI Insurance can be a very expensive outlay, so it important that the levels of cover requested are commensurate with the size of contract and kind of work involved, not just a random approach from tenderers who may be assuming “more” in some way equates to “better”?

    • Julian,

      “How is the appropriate level of PI insurance for a project assessed? “. There is no reason why you cannot ask such a question (i.e. seeking Clarification) of a Contracting Authority as and when the issue arises. However, as each CA is at liberty to assess the risks associated with a procurement as it sees fit, it is not surprising that requirements differ. However, in my experience, many ‘outlandish’ figures are the result of human error e.g. re-using the requirements from previous procurements (which may have been of a totally different character and scale) and forgetting to amend them as necessary before issue: this is often the implication of the response I have received on seeking Clarification of an apparently anomalous requirement, together with the issue of an amendment to the Procurement Document concerned.
      Digby Barker

      • Hi Digby Thanks for your comments – makes good sense to me, and I think well worth querying any outlandish figures in future. Being new-ish to tenders and framework (but relatively successful in recent times) it is good to know that appropriate use of the Clarification system is the way to go.

  4. I rather agree with the previous comments – the new arrangements do not seem to be helpful to SME’s, in particular smaller operators like ourselves. For example, we have worked hard to get on to the relevant frameworks for our sector, having passed all the financial and technical questions relating to that, only to find additional, new or alternative conditions imposed by tenderering authorities using those frameworks. So, in essence, we are having to do much of the work twice.

    Main contractors may well have their own, different, engagement criteria, requiring additional conditions to be met if we have won a project designed direct with the authority (having previously met their rules of engagement) only to later find it is routed through the main contractor.

    Frankly, it’s a pain, it takes valuable resource away from the very elements authorities want to contract to small. niche suppliers with highly specialised skills for, and it detracts from our ability to provide the precise thing being sought – specialist advice – that larger organisations don’t have. Smaller SME’s, in particular, are significantly disadvantaged by this.

    Feedback on any of the points raised in the comments section here (by myself and others) would be welcome!

    • Julian,
      Where Frameworks have been established via the Public contracts Regulations Contracting Authorities (CA) are not free – generally speaking – to introduce new or additional criteria as a ‘candidate filter’ or condition of awarding a specific contract (a ‘call-off’ Contract). They must follow the procedure for placing such Contracts which was detailed in the Procurement Documents issued in connection with the competition for places on the Framework. So, the first step is to be aware of exactly what these details are stated to be and decide whether they are acceptable to you before entering the Framework Competition. Then if the CA seems to be introducing new or additional criteria in connection with awarding a call-off Contract you should raise the issue with them initially via a Clarification Question ad persuing the matter further as necessary in line with your commercial judgement.

      • “They must follow the procedure for placing such Contracts which was detailed in the Procurement Documents issued in connection with the competition for places on the Framework.”

        Thanks, this is really interesting, and exactly what I meant, ie: we won a place on a Framework under a set of conditions we deemed to be acceptable at the time, only to find new conditions or requirements appended at the mini-competition stage. In future, I will refer back to the original framework for guidance and seek clarification through the CQ procedure..

      • Julian,

        In view of your response I should perhaps expand on my caveat “generally speaking”: the Regulations do allow “where necessary” for the call-off contract award criteria specified in the Framework procurement documents to be supplemented by “more precisely formulated terms”. I interpret this to mean that some (necessary) sub-criteria/requirements (i.e. in relation to one or more of the original award criteria/requirements) can be introduced at the mini-competition stage. Note also that if the Framework that has been established is a Framework Contract per se – and not a Framework Agreement – mini-competitions should not be held. You can contact me via LinkedIn if you would like to talk about any of this on a ‘no strings’ basis.

        Digby

  5. I find this very misleading. As Architects we have seen open Local Authority opportunities dwindle to nothing since the heyday of the OJEC and OJEU notices. Most public sector work is taken via Frameworks which favour big operators. The frameworks have transferred bidding costs onto the bidders and only large operators can afford it. To reduce bid costs and encourage Contractors to take on maximum risk, Public sector clients have sought to maximise the scale and scope of projects. Complex and bespoke projects are forced into “turnkey” building contracts. For instance a main building contractor might have a dozen consultants in his employ. Procurement processes for work below the Service value threshold permit authorities to pre-determine the outcome with the shortlist of bidders and narrow selection criteria. Small operators like us may be cheaper and more responsive but we don’t have the same breadth of experience as bigger operators. There are fewer opportunities and little chance of success.

  6. The effective ban on the use of PQQs where the EU-inspired Regulations do not apply (e.g. below Threshold) is particularly unhelpful to SMEs as this means they must commit time & resources to preparing and submitting tenders before they know whether they are going to pass the selection criteria.

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