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26 October 2018 | Comment |

Procurement implications of supplier failure

The recent highly publicised collapse of Carillion has led to much criticism of the Government for continuing to award contracts to the company even after profit warnings had been issued. But to what extent could the Government have excluded Carillion from being awarded these contracts and what next for those services which Carillion was providing?

Government contracting is, of course, subject to the Public Contracts Regulations 2015 (“PCR”) and many of the contracts awarded to Carillion would have followed a competitive procedure. The ability of the Government to choose not to award the contracts to Carillion would therefore have been constrained by the application of the PCR.

Under the PCR, contracting authorities running a competitive procedure are entitled to assess the economic and financial standing of potential contractors. This assessment is often undertaken through the use of a pre-qualification questionnaire (“PQQ”). In both England and Wales, standard PQQs have been developed and contracting authorities are encouraged to use them. The standard questions to assess a potential supplier’s financial standing are limited to a comparison of the size of the annual contract value with the supplier’s turnover and confirmation that a company has been profitable over a set period. If these indicators alone are used, the existence of a profit warning – which indicates that profits will be lower than expected rather than absent – would not generally entitle a contracting authority to exclude a potential supplier from a competition.

While this standard approach to assessment of financial standing is commonly used, the Carillion collapse illustrates that this approach may be deficient. The PCR would not prevent the use of credit ratings or other similar assessments to analyse a potential supplier’s financial standing providing that such assessment is proportionate and set out clearly in the procurement documents. Following the events of this week, the authorities may wish to carefully consider revising the standard questions included in the template PQQs to give contracting authorities more choice in the assessment of a supplier’s financial standing. In the meantime, when contracting authorities are setting PQQ requirements, they should consider the inclusion of bespoke questions to try and ensure that any financial instability is identified and appropriate action can be taken.

So what options does the Government have for the continuation of the services that were being undertaken by Carillion? The in-sourcing of the services has been widely discussed and, from a procurement law perspective at least, this is certainly an option. However, assuming that the Government intends the services to continue to be provided by a contractor, any action it takes must not contravene the PCR. This means that the Government cannot simply appoint new contractors to take Carillion’s place unless either the contracts are not subject to the PCR or the appointment is permitted by the PCR. Whilst most of the Carillion contracts are likely to be subject to the PCR, there are some provisions that may assist the Government to make direct awards to new contractors without the need for a whole new procurement process.

The PCR at regulation 72 permits a contracting authority to modify contracts in certain circumstances. This includes where a contractor succeeds another following corporate restructuring, expressly including after insolvency. If the insolvency practitioner is able to restructure all or part of the business so that it is able to continue in the form of another legal entity this may be the most straightforward route to ensuring the continuation of services.

Where no such restructuring is possible, regulation 32 permits the direct award of contracts where this is “strictly necessary” and where “for reasons of extreme urgency brought about by events unforeseeable by the contracting authority, the time limits for the open or restricted procedures cannot be complied with.” Assuming that the Government could not have foreseen Carillion’s collapse, this provision may permit the direct award of essential contracts where a break in service cannot be tolerated. However, the “strictly necessary” requirement may mean that any such award should be for as short a period as possible – which would mean the period in which a competition could be run for a longer term solution.

While it can be seen that a contracting authority faced with an insolvent contractor does have some options for maintaining continuity in its contracts, these options are somewhat limited. While the possibility of insolvency events during the term of a contract can never be altogether excluded, ensuring that the financial standing questions asked ahead of contract award are appropriately robust should help to ensure that contracting authorities can avoid finding themselves with an insolvent contractor as often as possible.

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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