Kept in check

Using credit checks from credit reference agencies could expose contracting authorities to a potential challenge, writes Martin Vincent.

Contracting authorities are rightly concerned about a bidder's financial strength, especially in this economic climate. Many organisations undertake some sort of credit check by commissioning a report from any one of a plethora of credit reference agencies. However this approach is now flawed.

Mace & Jones have been involved in long running litigation concerning the use of credit check agencies when assessing a bidder's financial strength. The argument is that such an assessment does not satisfy the transparency test mandated by the Public Contract Regulations 2006 and subsequent case law.

Following judgements in cases such as Lianakis, Letting International, McLaughlin & Harvey and European Dynamics the state of the law is now clear. Bidders must know all criteria, sub-criteria and weightings used in assessing their bids so that they can prepare their best bid. No surprises are allowed when it comes to the marking regime. The use of a credit reference agency does not, in any way, alleviate the stringency of this test.

Therefore, to resist a challenge, the contracting authority must not only disclose the fact that it will conduct a credit check, but it must also disclose what information will be assessed, and how it will be assessed. This is the formula that is used to create the credit score. Sadly, this is the intellectual property of the credit check agency and they will be very reluctant to disclose it. If the formula cannot be disclosed, such assessment will be at risk of successful challenge by those bidders excluded as a result of the assessment.

As far as we can see, this level of transparency may very well also extend to "part B" services.

The use of credit reference agencies is fraught with another risk introduced by the terms and conditions issued by the credit reference agencies. In the event that the agency makes an error in an assessment the contracting authority is unlikely to spot it as it’s not in control of the process. This means that suppliers can be excluded due to the mistake of the credit agency, whose terms and conditions exclude and/or limit the agency’s liability. Such exclusion clauses  could well be deemed “reasonable” under the Unfair Contract Terms Act because of the deemed sophistication of the contracting authority. This can leave contracting authorities stuck with liability for a process they don’t control.

So what can you do about it? Well, dealing with this issue will see a return to finance departments running the standard accountant's range of ratios and formulae to determine financial strength; either that or accept the increased risk of successful challenge.

Martin Vincent is head of education and procurement at Mace & Jones. He can be contacted on 0161 214 0500 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..