The issue of appropriate company turnover (for economic and financial capacity requirements) to be specified by contracting authorities arises from time to time. It is raised by contracting authorities enquiring about the appropriate amount for their contract or, occasionally, by potential tenderers who feel they are excluded by an unnecessarily high requirement. A discussion was started on the eProcurement Network website and it has been decided to extend it to the wider procurement group of etenders users. Re-produced below are the current contributions to the discussion - we would welcome any additional comments or thoughts on the subject matter.
NPPPU, 7 May 2009
(1) Amounts for annual turnover can range from 50% to 250% of the value of a contract. Each project will have different requirements depending on its particular features. The general provision is that the financial capacity requirements should be proportionate and not unnecessarily restrictive. An appropriate level would depend on factors such as the amount of company resources required to perform the contract. A contract requiring significant capital resources would typically need higher turnover than, say, a service contract for intellectual services. It is important that suitable tenderers, particularly small and medium size enterprises, are not excluded by company turnover requirements disproportionate to the needs of the contract. It should be borne in mind, of course, that evidence of economic / financial capacity other than turnover can be sought and accepted, e.g.bank statements, extracts from balance sheets etc. and contracting authorities should be flexible in assessing evidence of economic and financial capacity.
Feedback, which might provide useful input to drawing up guidance, is invited from those who have experience or views on this issue.
(2) The NPPPU has consulted with our counterparts across Europe and we have received the following response from colleagues in Italy (the central purchasing body, Consip) which might help to inform the discussion:
"In 2003 Antitrust Authority established the general rule for turnover requirements in our procurement tenders. According to the rule, we (but I think the rule also applies to other contracting authorities) are recommended to require turnover not higher than the contract value on annual basis. More precisely, the turnover requirement is computed on the basis of the cumulative turnover of the last 2 years. For example, if the contract value is €600.000 for 3 years (€200.000 per year) we should require up to €200.000 of the last 2 years. Therefore, one firm with turnover €50.000 in 2007 and €150.000 (cumulative €200.000) in 2008 is allowed to participate.
Recommendation aims at avoiding unjustified too high requirements that may limit participation of firms potentially able to perform the contract.
The rules applies to the “specific turnover”, i.e., to the fraction of the firm’s turnover that can be attributed to the specific supply/service of the contract to be awarded.
In our daily work we of course comply with this rule, but case by case, we tailor turnover requirements to the type/characteristics of the procurement contract."
(3) NUI Maynooth: I think that this area is one for debate and whereas a general figure of no more that three to four times the value of the contract would seem to be the norm for non-essential services or supplies, a case does exist for higher levels for strategic (quadrant 4) cases. I think it is vital that the turnover level be realistically pitched to allow the market to compete (especially SME and smaller / new entrants to the market), whilst maintaining the option to raise it for strategically important procurements. In this way, the CA can attract new bidders while still realising its strategic goals.
(4) This input comes from a colleague in France (the French finance ministry):
This minimum turnover theme led to a lot of litigations from bad losers so contracting authorities were willing here also to have guidelines but the official answer could only be "related and proportional to the subject-matter of the contract" means that there is no possible pre-established correct rate.
Nevertheless study of case-law enables to practice a kind of rule of thumb :
- if you set a minimum required annual turnover not superior to twice the annual estimated amount of the contract , with a generic motivation of the kind "security level to insure that the supplier will be able to deliver without delays or risks", you are probably correct and it will bear upon the plaintiff to demonstrate why your requirement is unreasonable;
- if you set a minimum turnover more than twice the estimated amount you must be able to demonstrate special circumstances to justify that .
(5) James Farrell, D/Foreign Affairs: Financial capacity is important (especially in works contracts), and in my view contracting authorities must take whatever reasonable steps they can to satisfy themselves on this score before committing to a particular contractor. This is particularly true in the current economic climate. The last thing you want is a contractor going bust mid-project with all the grief that this entails in terms of project delay, arguments with the liquidator, re-tendering, lost expenditure, C&AG queries etc.
In some cases involving relatively routine contracts I have seen contracting authorities requesting three years' previous annual accounts, which seems over the top. That level of detail might be reasonable in the context of a major project where the contracting authority has the expertise to analyse the accounts, but not otherwise.
SMEs and startups would make the point that evidence of turnover is historic and might not necessarily mean that a tenderer currently has or does not have financial capacity to undertake the contract in question. This is a fair enough point - a company might have excellent turnover figures for 2007-08 but might now be on the verge of bankruptcy.
Perhaps an alternative approach might be to use the services of a financial information company to confirm the financial capacity of the selected tenderer. A number of companies now provide assessments of financial capacity based on an analysis of accounts, charges and other information filed with the CRO and elsewhwere. Some give "red" "amber" and "green" ratings based on this information which in some cases includes checks on matters such as registered judgments and outstanding litigation. These reports cost about €50-€100 and, while not foolproof, this approach is probably better than relying on past turnover alone. The fact that you intend to use this approach should, of course, be disclosed in the rft.
Sometimes (especially in service contracts)the assessment of financial capacity will involve consideration of the tenderers' level of insurance (Employers' Liability, Product Liability, or Professional Indemnity) which should be to a level sufficient to cover the risk of any damage to the contracting authority arising from negligent performance of the contract. This might be considerably more than the face value of the contract. Guidance on appropriate levels of insurance for contractors would also be useful.
(6) Ronan McHugh, HSE has supplied a copy of an article about a court case and the High Court guidelines arising in relation to turnover. This document can be viewed in the Discussion Documents section of the eProcurement Network website or on request from eproc@finance.gov.ie
(7) Our colleagues in the Austrian central procurement body adopts the following practice:
We have the common practice in BBG ( Federal procurement agency ), that the bidder has to show clearly in his balance sheet of the last business year, that his annual turnover is higher than 3 times the yearly contract value. Means he is potential enough to manage an extra business and does not depend too much on this contract.