To SME or not to SME?

Politicians at national and local level are keen to see SMEs enjoy greater success in bidding for public sector contracts. Anja Beriro looks at the tensions faced by local authorities when considering which bidders to invite into their procurement processes.

So the Cabinet Office wants them to do it, elected members are often very keen on it, but the procurement rules aren’t very helpful. Focussing, as they do, on qualifying would-be bidders by financial robustness and technical capacity, these will, unsurprisingly, favour larger and more established players in the market. In light of this, how does a contracting authority ensure that small and medium sized enterprises (SMEs) are treated equally when being invited to tender for work without infringing the Public Contract Regulations 2006?

The Cabinet Office’s “mystery shopper” report highlights ways in which contracting authorities can ensure that SMEs have a fair chance against bigger companies.

Criteria under the Regulations

Firstly, it is important to consider what the Regulations allow in a Pre-Qualification Questionnaire (PQQ). One permissible criterion at PQQ stage is “technical or professional capability”. In practice, the contracting authority will often include questions in relation to equal opportunities, environmental issues and health and safety compliance within this heading. Given the political importance of these matters, this is understandable. But the Cabinet Office has raised concerns that such questions fall outside of the Regulations, and may disproportionately preclude SMEs. Regulation 25 is clear about what a contracting authority can look at within this criterion. It should only be taking information about previous similar contracts, the technical ability of the staff and relevant quality control assurances in account.

One way around this is to focus on “eligibility” under regulation 23. This will ensure that any bidder in the PQQ stage of a procurement process complies with the law, without filtering out SMEs to the same extent. Of course, more exacting requirements in relation to environmental issues etc can be included in the contract being awarded and elected members assured that any contract awarded by the authority will be carried out in accordance with the relevant policies on these key matters. When looking at eligibility a distinction needs to be drawn between the mandatory and discretionary grounds for disqualification and the contracting authority must be clear on which discretionary grounds compliance is essential.

Also, many SMEs point out that the level of financial robustness that needs to be demonstrated under regulation 24 (including required insurance levels) is too great for them to comply with. Even if the SME is robust enough to perform the contract, they may not have the dedicated staff to collate and prepare the expected level of financial information. Nor do they have the same levels of insurance as the larger contractors. Contracting authorities may wish to consider how much detail is required for the particular contract and also whether, in line with Regulation 24(5), alternative information provided by the bidder is suitable.

Moreover, the requirements of the particular contract should be considered. It may be that, for certain contracts, PQQs can be less exacting. SMEs may often be qualified to perform all but the largest contracts, but are sometimes excluded from a wide range of opportunities if the same PQQ criteria are applied across the board by a contracting authority. Ensuring that the PQQ is tailored to the opportunity in question is likely to result in fewer SMEs being filtered out unnecessarily.

Cabinet Office best practice

Another source of best practice is the advice given by the Cabinet Office under the Mystery Shopper scheme. Last year the Cabinet Office rolled out a model PQQ that all central government departments, including their agencies and non-departmental public bodies are now required to use. The core questions set out in the model PQQ are designed to cover the three criteria in the Regulations without being unnecessarily demanding. It is worth noting that the Cabinet Office clearly feels that this model PQQ should be used by other contracting authorities as well.

Splitting the contract

It is also worth considering whether the works, goods or services that the contracting authority want to contract for can be separated into lots. It is often the case that the contracting authority takes the very sensible step of procuring a number of separate but related goods and services at the same time to minimise the costs of the tender exercise. These types of procurement lend themselves to being split into lots, in other words each lot within the tender is for a more specific type of work, goods or service and therefore more attractive to a smaller organisation which is either more specialised or has fewer resources. In this case the contracting authority must take this into account when assessing the PQQ criteria as it is obviously unfair to expect the same levels of financial standing or technical ability as would be required for providing all the services in the tender.

Conclusion

The Cabinet Office’s message appears to be: keep it simple, factual, objective and only ask what is necessary based on the Regulations. This may require more bespoke drafting of PQQs, but could also open the market up to greater competition and innovation through more inclusion of SMEs.

Projects and procurement specialist Anja Beriro joined Browne Jacobson in November as a solicitor from Sheffield City Council.