A report from the National Federation of Builders (NFB) suggests that local government’s use of credit reports could be excluding SMEs from public sector work worth as much as £2bn a year.
The National Federation of Builders (NFB) is calling for guidance from the Cabinet Office and the Local Government Association about the use of CRA reports after finding that some local authorities were using these reports as the basis for a ‘pass or fail’ judgement for public contracts.
The NFB report, The use of credit reference agency reports in local government procurement, found that the use of credit reports as part of financial assessments is widespread. Of the 288 local authorities that responded to its survey, 66% said that they use credit reports as part of the procurement process.
With 40% of construction work traditionally coming from the public sector, fair access to contracts is crucial for the survival of SMEs, the NFB said.
Just over 13% of local authorities stated that they used credit reports to make pass or fail judgements. While this does not signify extensive use of CRA reports to make pass or fail judgements, the NFB is concerned that this may be a growing problem, particularly where the same company can get different scores from different credit reference agencies.
The NFB has estimated that the value of work evaluated on a pass or fail basis is around £2.1bn. The regions where the highest value of work was evaluated in this way were the southeast (£416m) and the northeast (£331m).
The NFB believes it is poor practice not rely on credit reports as the sole means of financial assessment and says that this view is supported by the Cabinet Office and the CBI.
Chief executive Julia Evans said: “The use of credit reports as the sole or principal means of assessment can lead to SME contractors being discriminated against as this approach fails to take into account variations in smaller contractors’ accounts. The NFB wants to discourage the use of credit reports in this way. Such usage wields CRA reports as an unnecessarily blunt instrument for deciding who passes and who fails in the tendering process and does little to support the very good and supportive practices of many local authorities.”
The survey of local authorities across England also found that many councils are keen to continue to work with and support SMEs and do not want the procurement process to act as a barrier to access.
Under the Public Contract Regulations 2006 which cover all works contracts above the Official Journal of the European Union (OJEU) threshold of £4,348,350, there is no scope for public bodies to use independently procured credit reports in assessing the economic and financial standing of bidders. However, although this has been made clear in legislation and through Cabinet Office procurement policy notes, work below the OJEU threshold is not subject to the same legislation and such policy is not clear.
The NFB said that it supports the validating of financial liability and understands that CRA reports may be helpful as a part of a wider financial evaluation process. However, many building firms were being excluded unfairly, it said. Failing a pass or fail test set by a local authority based on a CRA report does not mean an SME contractor is not suitable for a contract, the NFB argues.
The NFB claims that Cabinet Office has backed its report, as the government’s own guidance is that CRA reports should not be used as the sole assessment tool. The Cabinet Office said: “We see the report’s endorsement of the PAS 91:2013 standard, which has been produced with the aim of streamlining and reducing the cost of pre-qualification in construction procurement processes, as a clear means of ensuring that all potential providers, whatever their size or constitution, are treated fairly and with equal diligence during the financial appraisal process.”
Jim Bligh, head of public services at the CBI, commented: “High-quality procurement can be an important driver of growth and is essential to ensuring good public services at a time of lower public spending. There has been progress in local authorities creating opportunities for SME suppliers directly, or through supply chains – but more needs to be done. This report shows that some local authorities are using credit checks as a blunt instrument to manage their suppliers. What is needed is sharper, more targeted engagement with the market that ensures the best providers can provide.”
The NFB is pushing for the government to review public sector procurement practices and increase the use of the PAS 91 common set of pre-qualification questions to simplify the tendering process and reduce costs on all sides.
PAS 91 is a publicly available specification that sets out a common set of pre-qualification questions for construction-related tendering. It is sponsored by the Department for Business, Innovation and Skills and has been developed by the British Standards Institution (BSI) with a representative steering group of industry, client and accreditation scheme participants that included the National Federation of Builders. PAS 91 was revised in 2013 to include an optional module on building information modelling as well as the option for clients to add their own questions, provided they are not project-specific questions.