The PQQ process has a straighforward intent, namely to shortlist those organisations who will be invited to tender. Hence, by definition, some organisations will FAIL to proceed, despite having spent hours genuinely attempting to answer questions, including those of an obtuse nature. It would be a huge step forward if those who design PQQ’s could agree that all the information sought actually has a purpose. Does it have a purpose in real life? In order to make this subject live we are selecting facets of a PQQ issued by a large UK Central Government Department.

Company Registration Number. Why is this required? Would it be too cynical to believe that no-one will check the registration with Companies House to ascertain if the number is valid? Or, is it the case that a tick box can be completed? What do you think?

VAT registration number.Why is this required? Our cynicism continues. Is the evaluator now going to check with HM Revenue & Customs that the company is registered for VAT and that the number is genuine? By the way, if later it is shown that they ‘made up’ the VAT number and are charging 20% (the current VAT rate) then serious matters prevail. Is the VAT number another tick box?

Health & Safety. This section of the PQQ has seven questions – all to be answered YES or NO. The introduction begins ‘In order to make the processes simpler, you are asked not to provide supporting documents for questions in Section _. Please note that the Authority will ask to see these documents should you pass through to the Invitation to Tender stage.’ What are the implications of this statement?  What does ‘make the process simpler’ actually mean? Perhaps it relieves the evaluation  team from reading documents! One of the questions is ‘Does your organisation have a risk assessment process?’ This is a very important matter and if the YES box is ticked, where, precisely, has that got anyone? Incidentally, the advice to evaluators actually says. ‘Questions 1-6 must be answered YES.’ It doesn’t say what happens if a question is answered NO.

Financial Information. Question 1 in this section requires the provision of a ‘statement of accounts or extracts there from (sic) relating to your business provided that the publication of the statement is required under the law of the State in which you are established.’ There is, in consequence, a million dollar question. What happens to the information provided, given the parlous financial position of many organisations. It is possible that the financial statements provided are at least 10 months out of date. Rarely does the public sector ask for an interim set of accounts to bring the information more up to date. We suggest that the evaluation of finances at the PQQ phase is often flawed.

Assuming you are still with us and are now questionning the PQQ process you may ask what can we learn from the law? We recommend that you start with AMARYLLIS LIMITED and HM TREASURY (sued as OGCbuyingsolutions) [2009] EWHC 1666(TCC). This case relates to a claim for circa £11m. At para. 9. it reads:

“This is a claim based on alleged breaches of Regulation 4(3) of the Public Contracts Regulations 2006. The particular procurement process involved the supply and installation of furniture for a variety of Government departments. The claimant maintains that the Defendant failed to deal with its first stage tender (referred to below as the PQQ, the pre-qualification questionnaire) in an equal, transparent, and non-discriminatory way. There are four essential strands to this argument. First, the Claimant complains about the decision to allocate no marks at all to Section F of the PQQ, dealing with previous experience and comparable contracts, particularly in circumstances where the PQQ indicated that all Sections would be marked. This is an area where the Claimant believes that it would have scored highly. Secondly, the Claimant complains that the Defendant evaluated the PQQ responses without informing the tenderers of the relative improtance it ascribed to each question/topic. Thirdly, there are complaints about the Department’s evaluation of the environmental management sections of the PQQ, Finally, the Claimant complains that it was awarded zero marks for Section A of the PQQ, on the sole basis that it was a supplier of furniture rather than the manufacturer of the furniture itself. The essential complaint here is that the Defendant had an unstated – and unfair – preference for manufacturers rather than suppliers.

We commend this case for reading and study. It is an eye opener. To our public sector colleagues we say Caveat Emptor!

Let us now return to the substantive point of this briefing note. Who scrutinises your PQQ process? Who conducts due diligence on the responses to ascertain their ‘quality’ and accuracy? Do we have a PQQ process that has descended into a mechanistic tick box mentality? A PQQ process should be designed to give respondents an equitable opportunity to warrant receiving an invitation to tender. That is what must be achieved.

If you would like to be part of a small group to test the service and be ahead of your peers and competitors, please give me, Ray Gambell, a call to discuss. I can be contacted on  01744 20698.

We can’t give too many details away at present, whilst the Lawyers are processing the IPR protection, but we know of nothing like it worldwide. We are looking for key Contract Managers who would be willing to spend no more than half a day at our offices at Rainford Hall to explore the software from the users perspective. 

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Overhead recovery is a very problematic area. A well constructed cost model should expose overheads of a fixed and variable nature. It is not surprising to find accountants playing their cards in a negotiation. We have heard responses such as “We recover overheads at 183% of direct labour.” What exactly does this mean? In one service contract negotiation we found the hourly rate for maintenance engineers to include mobile ‘phone charges, mortgages, health insurance, average travel and hotel costs and training. If these are also included in the overhead recovery, double charging is taking place.

The logic for exposing labour and material costs in very important. The supplier must recover genuine costs. Let us use this to probe what happens in the real world. We constantly find contracts that provide for open book accounting but the buying organisation has never applied it. Our research has recently directed us to a City of Austin (USA) Audit Report AU11107 “Aramark Contract Audit.” An extract from the report (dated 2011) states: “The City cannot reasonably assure the validity of the revenues received from Aramark. Despite contract requirements, annual financial audits of Aramark’s operations have not been provided to the City since 2003. Additionally, ACCD performs limited review of financial information received from Aramark.”

When we negotiate open book accounting we typically engage with the supplier’s commercial, legal, finance and operational people. An often encountered aggressive question is “To what purpose will you put open book accounting?” Be ready to respond with a structured response, based upon excellent business logic. What will you say? One final point. Be sure that if the supplier agrees to open book accounting, who in your organisation has the time and ability to conduct the review/audit?

SWW required a new customer information system and contracted with ICL for its supply. SWW would later terminate the ICL contract due to ICL’s failure to deliver the system. The court judgment runs to 41 pages and is very instructive (as judgments usually are!). There are many facets relevant to contract and vendor management, including:

# ICL represented that they would enter into back to back agreements with a subcontractor but this never happened. ICL confirmed to SWW that “CCSL (the subcontractor) would be ICL’s subcontractor for South West Water’s information project with a fully documented back to back agreement in place between ICL and CSSL.”

- In a well constructed contract there would be a Right of Audit cklause that would permit a contract manager to see the back to back agreement, thereby establishing that the agreement had been entered into.

# Throughout the transaction there was a point at issue in regard to the resources required to complete the project. ICL were on a fixed price contract and initially believed that 2000 man days would be required. This later changed to 3000 – 3500 man days. The resources required were not committed and SWW had no visibility of a deteriorating situation, making the agreed delivery date impossible to meet.

- So what could effective contract management do in these circumstances? At the time of entering into the contract a fully resourced labour programme should be agreed. This should include visibility of resource by grade, time to be expended and days/week when the resource will be used. A weekly report should be provided as part of a Management Information requirement to the buying organisation. Slippage would then be evident if the truth were to be told. It may also be noted that Parametric Modelling could be considered to estimate the time required to develop software.

# It is evident from the detail of the court judgment that relationships between ICL and CCSL were not conducive to close working. In a communication from CCSL to ICL it was said that “the root cause of our collective difficulty is that ICL signed a contract with SWW without having first agreed with our company that our contribution to the total solution was (i) technically feasible and (ii) deliverable in the time frame agreed with SWW.” Three months later, CCSL said to ICL that “substantial additional time was needed if the project was to be completed successfully and that it is vital that the customer is told the truth immediately.” And later, again from CCSL (who had changed their trading name to CI) “somebody has to tell SWW that the project cannot be delivered this year; they must start to plan for next year – I am not willing to participate in another meeting with SWW if we are expected to continue to support the ICL line that the project will be delivered.”

- From a contract management point of view relationships are vital with a prime contractor and the relationships should extend to the supply chain. In this instance there is only one subcontractor. It is a high skill level for a contract manager to detect unease, strained relationships and ‘signs’ that all is not well. We suggest that meetings at the buyer’s premises are unlikely to ascertain reality. Some review meetings should be held at the prime contractor’s site and that of the subcontractor. A true partnering agreement should encourage very early warning of issues.

# Within the case it was alleged and found that there was misrepresentation by ICL in regard to the back to back agreement. His Honour Judge Toulmin Cmg QC found that “I am satisfied that ICL did make the representation that it would enter into a back to back agreement with CI. It did so recklessly without any basis for believing that either, at the time or subsequently, it would be in a position to do so. It was a continuing representation. ICL failed to enter into a back to back agreement with CSSL. SWW relied on such representation as a contractual term. Without such assurances SWW would never have entered into the contracts with ICL.” The judge then went on to explain Section 2.1 of the Misrepresentation Act 1967.

- We urge buyers to study this Act and to ensure they undertake appropriate due diligence at key phases of the procurement process.

Nothing in this newsletter is intended to impy that SWW did not apply appropriate knowldge and skills. We have used extracts from which readers can extrapolate from this set of circumstances to their procurement actions.

It is time for procurement departments to re-examine their approach to the use of price indexation formulae. Our informal research shows that in the UK there is an extensive use of the Retail Price Index (RPI) and Consumer Price Index (CPI). These are produced by the Office for National Statistics. The main differences between the RPI and CPI relate to:

-        Commodity coverage – the CPI excludes owner occupiers housing costs and hence the RPI has wider commodity coverage than the CPI.

-        Population base – the RPI excludes very high and low income households and hence the CPI has a wider population coverage than the RPI.

-        Formulae used to combine prices at the first stage of aggregation – the CPI uses a combination of geometric means and authentic means whereas the RPI only uses authentic means.

The first official RPI was produced in January 1956 whereas the CPI was launched in 1996 and was first known as the HICP (Harmonised Index of Consumer Prices).

There is the RPIX that is the RPI excluding mortgage interest payments and the RPIY that is the RPI excluding mortgage interest payments and indirect taxes.

The discerning buyer may consider, why use either RPI or CPI as indexation formulae in an ‘industrial context’. The RPI and CPI both measure the average change in a fixed basket of goods and services over time. They are based on a comprehensive price collection that combines the price movements of around 180, 000 price quotes collected each month, for a range of over 650 representative good and services.

The Office for National Statistics promotes the view that RPI and CPI have, among other things, the use of “indexing rates in private contracts”. We challenge the logic of such an approach! The indices are too general, lacking precision when applied to specific cost drivers.

The choice of indexation requires careful consideration of what is being purchased. BEAMA (British Electrotechnical and Allied Manufacturers Association) produce a Standard Contract Price Adjustment Clause and Formulae for Electrical Machinery and Mechanical Plant and other product formulae e.g. for Turbo Generating and Allied Plant. Here are nuances to the BEAMA formulae in that they introduce a “Fixed Element” (5%) and Labour and Materials weighted each at 47.5%. A sample calculation can be found on the BEAMA website www.beama.org.uk/en/services/statistics-cpa/contract-price-adjustment.

We were very pleased to see a UK Council take a somewhat unusual stance;

“In line with the Council’s reduced funding provision, the contract is being offered on a fixed price basis for 3 years and then linked to an appropriate basket of indices to reflect the labour and equipment used in its provision rather than RPIX or CPI. This should provide a level of price certainty in the short to medium term and also link future increases to actual cost model in delivery of the service”.

A question to be considered is “who checks the implications of contractors being awarded RPI (or other indexation) but who have not given the workers a wage increase for the past two years?” The answer is, we suspect, very few organisations (if any!).

Here is a checklist you may wish to consider.

Do we include indexation in our contracts?

Why?

Have we reviewed any alternatives?

What impact does indexation have on Value for Money?

Do we have a forward strategy to deal with our approach to indexation?

Can we find an index (or indices) that accurately reflect the cost drivers of a specific purchase?

If we have indexation, who negotiates the fixed and variable elements?

If you have a contractual issue contact us and we will find you a solution.

Q. Well, you knew, didn’t you, at the time that you were making these payments that you were making it to a contractor who was financially in dire straits because they were not able to pay their debts as they arose?

A. That’s going a little further than I would, sir. I knew they had financial challenges. I wouldn’t have said that they were in dire straits, but certainly we knew they had issues.

Q. If they couldn’t pay their sub-contractors, they couldn’t pay their debts as they arose, could they?

A. Sir, it could be that they couldn’t fail but they were reluctant to pay. We didn’t know whether they were simply being dishonest, if you wish, rather than simply unable to pay. We didn’t know which was which.

Q. You took no steps to discover what their true financial position was did you?

A. The only steps we could take were looking at their accounts, which we did and we tracked but in terms of published accounts there is such a historic record that they are not very useful on a position that’s changing quite frequently.

Q. The published accounts which you looked at were in 2000?

A. Yes, exactly.

Q. You knew when you looked at those that there was a real risk of deterioration since then didn’t you?

A. No, sir.

The judgment continues and we strongly recommend it be accessed. There are salutory lessons within it.