Suppliers Who Fail To Deliver – A Public Procurement Dilemma

The EU and national procurement regulations and defined processes are designed to achieve several objectives. They aim to achieve the best value supply for the taxpayer, to open up and stimulate public sector supply markets and to protect the citizen against fraud and corruption. They also often aim to contribute towards other social goals.

In order to do that, we have agreed processes or procedures, backed up by legislation, that strive to achieve fairness in the process by which suppliers are selected. We would not suggest for a moment that these should be abandoned, but they do bring problems from time to time.

One issue which is not new but comes to the forefront every so often is how to evaluate fairly and make the best supplier selection decisions when we have inexperienced suppliers bidding in a particular market. By “inexperienced” we do not necessarily mean a start-up; the organisation may just be “inexperienced” in the sense that it has not carried out much or any work in the particular area of the contract in question. The particular issue comes when that supplier offers a combination of a credible sounding proposal, and a price that is competitive enough to make it likely that the organisation will win the tender.

Nothing wrong with that in itself, but what we have then seen happen on a number of occasions is the supplier winning the contract, and then failing to deliver to the contracting authority’s satisfaction. Or the supplier finds that whilst they can meet the terms of the contract requirement, it is uneconomic for them to do so. The root cause of this is their lack of experience which leads them to put in a bid that is fundamentally unachievable – either in terms of delivery, or in delivering in a manner that is financially sustainable.

In either case, the buyer and the seller then have a problem. In the private sector (where this does happen as well), there might be a re-negotiation, and in some cases the buyer may even agree to pay more or to help the supplier in some way to improve performance and/or profitability. Or, in the worst case, the buyer will switch suppliers, which can usually be done reasonably quickly.

Matters are not as straightforward in the public sector. We suspect in these situations an agreement to pay more or to relax the terms of the contract does happen occasionally (and is done quietly!) But doing so is almost certainly outside the spirit and letter of the regulatory framework. If a supplier lost out in the competitive process, then finds out that the winning bidder has been allowed to increase prices, or relax service requirements or specification, it is likely that they would have cause for challenge or a claim against the authority.

But in terms of the other option, it is also harder for the buyer to walk away and engage an alternative provider. There may need to be another entire procurement process, which as we know can take some time. And if the first contract has gone wrong, work may be needed to make sure the same problem does not occur the next time around.

The most appropriate response in the public sector (and probably the most common) is, therefore, to work with the provider to try and address the problems without getting into the territory of invalidating the initial supplier selection decision. So, can the buyer and supplier work together to identify inefficiencies in the overall supply process that, if addressed, would help the supplier’s performance or profitability? Is the buyer somehow making life difficult for the supplier without realising it? Might the requirements or specification be relaxed just enough to help the supplier without threatening the legitimacy of the process? These are the type of questions a buyer should be asking in this situation.

That is the most appropriate approach, but it requires a capable and robust contract management regime, with staff who are capable and understand what can be done and needs to be done. For instance, we discussed recently some aspects of negotiation in the public sector; this is a very good example of when those negotiation skills will be needed in the contract management phase rather than the upfront contracting period.

However, wouldn’t it be preferable if we simply did not get into this situation in the first place? If we avoided awarding contracts to organisations who stand a high probability of struggling to deliver? Of course, that would be better, but it is not easy to achieve without showing too much favouritism to bidders purely based on experience.

How can contracting authorities avoid getting into this position in the first place? There are various steps that can be taken, but the difficult balancing act that must be undertaken is this. We do not want to discourage new, young and innovative suppliers, who may have different ways of carrying out the work to how it has been done in the past. We want to maximise effective competition, too. Yet we don’t want to give the contract to someone who then can’t deliver what is needed at the price that has been agreed.

The process of selecting suppliers starts in an indirect sense with the development of the specification. Be too prescriptive, and you may rule out many potentially interesting and interested suppliers. But be too vague or loose, and you may end up buying something that does not really meet your needs. This is another whole set of topics that we will return to, no doubt.

Then we come to the PQQ (pre-qualification) stage if indeed such a stage is one included in the particular selection process. Here, again, it is a balance between being too “tight” and allowing only bidders with precisely matched experience to qualify, which restricts competition. On the other hand, being too flexible will allow potential suppliers through who may have little relevant experience.

There is a particular issue here if this is actually a new product or service that is being bought. Then, we have to look for experience that is relevant and associated in some way to what we now want, rather than precisely what we are looking for.

When we move onto the tendering stage, suppliers are proposing how they will meet the needs of the buyer. Here, it is vital to ask the right questions in order to gain a thorough understanding of how they are going to achieve that. If it is a complex services contract for instance, we need enough detail to be able to test thoroughly their understanding of what is needed. And the key word here is confidence. We need to have not just a credible description of what will be provided, and how, but the bidder needs to give us the confidence that they can deliver.

Including that point in the evaluation process and description is one small but useful step – “proposals will be scored on how well the proposal meets our needs and on the confidence that the bidder can deliver their proposal”.

Financial realism is another key issue. We have seen some recent examples (we will have more on this in part 3) where providers have found that delivering the contract is not financially sustainable. This is not necessarily a case of what EU regulations might call “abnormally low bids” but it may just be the bidder under-estimated some costs, or was too optimistic about income, and did not quite get their financial modelling right.

So again, getting a detailed understanding of how the costs are built up, and perhaps asking questions in the tender around the risk profile is sensible. “Show that your financial model is still sustainable if volumes declined by 20%” might be an appropriate question at times. The use of some sort of “open book” methodology so the buyer can have an ongoing view of the supplier’s cost structure throughout the contract period can also help here, although again that is another major topic in its own right.

To sum up, without closing off competition, we need to take steps to get as much confidence and assurance as possible through the bidding process that the potential provider really can achieve what is needed, and that they are not simply “good at writing bids”. There is no foolproof way of achieving this, but keeping that goal in mind through the development and execution of the buying and tendering process is a good start at least.