Procurement Financial Viability Risk Assessments (FVRA) – what you need to know

What does FVRA stand for?

For 20 years Jeffrey P. Bezos chose to operate Amazon on thin profit margins to constantly reinvest profits back into Amazon to expand into new business fields.

A Guardian article claimed that Amazon had received £425 million in UK Government contracts in the past 2 years. ​

Amazon are living proof that there are many advantages to reinvesting business profits. But following the UK Governments introduction of Financial Viability Risk Assessments (FVRA) into UK public procurement processes, would Amazon's approach result in  disqualification from a public procurement process? 

​Companies such as Amazon who fund a business expansion with reinvested profits, avoid taking on excess debt and the corresponding interest payments that can threaten the future of the company. 
 
By using reinvested profits rather than external equity, business owners can avoid diluting their ownership and control rights.

When a small business considers external investors, if they can demonstrate that they have reinvested their profits back into the company, this provides strong confidence in the ongoing success of the company. 

But how is this approach viewed by public procurement. Would Amazon's approach see you disqualified. Read on to find out. 

What are the procurement rules regarding supplier financial risk assessments? 
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Cabinet Office guidance on how public sector buyers should conduct supplier financial risk assessments for economic and financial standing in public procurement processes was first published in 2013. 

The guidance states that no Small and Medium Enterprises (SMEs), public service mutual or third sector organisation should be inadvertently disadvantaged by the financial assessment process.

And financial standing should only be considered as part of the overall selection criteria and may not, on its own, reflect potential providers’ ability to deliver the contract. 

The guidance also states;

​“Contracting Authorities should not impose arbitrary minimum requirements which may have the unintended effect of barring new business from bidding and that in the spirit of encouraging supplier growth, the supplier evaluation process should not rule out a potential provider unless there is clear evidence that the supplier’s financial position places public money or services at unacceptable risk…. If a potential provider is not selected, there must be clear and demonstrable evidence of financial risks, capacity or capability issues over and above a simple turnover or ratio measure”.    ​

What changes have the UK Government introduced?
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In 2021 the Cabinet Office introduced a Contract Tiering Tool that looks at the potential impact of service failure, the speed and ease of switching suppliers and the contract value.

The Contract Tiering Tool is intended to be used by Contracting Authorities to categorise a contract as either:

‘Gold’ (most critical),
‘Silver’ and/or
‘Bronze’ (least critical).

​​This categorisation will then inform both the level of financial analysis of bidders during the procurement process and the financial thresholds utilised by the buyer for this analysis.

​What are Contracting Authorities being asked to do differently? 

Contracting Authorities are encouraged to use the Contract Tiering Tool  to determine which Financial Viability Risk Assessment (FVRA) Gold, Silver and/or Bronze they should include in their procurement process.  

The responsibility to use the FVRA correctly and fully comply with the Public Contract Regulations 2015 falls entirely on the Contracting Authority. 

They must ensure any economic and financial evaluation is transparent, objective and proportionate to the requirement under procurement, e.g. related to the subject matter, and appropriate to the contract.

The Cabinet Office suggest Contracting Authorities use sector analysis in advance of the procurement commencing to ensure any stipulated threshold tests provide a good reflection of the health of the sector and that a disproportionate level of good quality bidders are not excluded from the process.

​They remind Contracting Authority buyers that thresholds at which a bidder may be eliminated from a procurement should be specified in advance. And such thresholds may be linked to the risk rating on a single financial metric or ratio or to a combination of risk ratings across multiple financial metrics or ratios.
 
Cabinet Office guidance further states that where bidders could fail to meet the required thresholds, bidders should be given the opportunity to provide further information and explanation before elimination is considered.

​And that a Contracting Authority may allow bidders to proceed despite being classified overall as medium or high risk subject to agreeing a set of risk mitigations acceptable to the Contracting Authority.
 
Such mitigations may include but should not be limited to:
 
● enhanced contract management and financial monitoring procedures, which may include additional obligations or Financial Distress Events;
● parent company guarantees – Where the bidder is part of a wider group its parent company can be asked to provide a guarantee.
● restrictions on the bidder’s business and/or its ability to make distributions or lend money to other group members if it wins the contract; or
● provision of a collateralised cash deposit, guarantee or performance bond.
 
Contracting Authorities are also advised that they should not use a lack of a credit rating, a minimum credit rating or its accompaniment by a negative outlook on the bidder’s rating as a reason to eliminate a bidder; other financial ratios should also be considered such as:
 
 ● financial statements or extracts from the financial statements, where appropriate (i.e. where publication of financial statements is required by law); or
● a statement of the bidder’s overall turnover and, where appropriate, of turnover in the area covered by the contract for a maximum of the last 3 financial years available; or
● appropriate statements from banks or, where appropriate, evidence of relevant professional risk indemnity insurance – however it is not appropriate to demand that this is already in place it is acceptable to say that before the award of the contract evidence will be provided.

In Summary
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The procurement regulations have not changed from those issued by the UK Government in 2013.

​A Contracting Authority following the public procurement rules should only disqualify a bidder (based on their economic and financial assessment) if requests for alternative supporting evidence and explanations are not complied with. 

The introduction of the FVRA will most likely create more complexity and cost for bidders who are required to complete it.

​For suppliers who are new to the public procurement processes the FVRA may create a barrier to entry. This is unlikely to be the case for existing public sector suppliers who frequently apply for contracts and have a large team to support. 

The widespread use of FVRA is good news for accountancy and legal firms. No doubt they will benefit from the additional burdens FVRA places on Contracting Authorities.  

About the author 
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Naomi Clews

Naomi Clews is a UK based public sector procurement expert who specialises in helping private sector organisations to navigate the public procurement process. Find out more here.