Financial assessment: how suppliers can prepare for success – Supplier specifics

Assessing and monitoring the economic and financial standing of suppliers is about understanding their financial capacity to effectively perform a contract to safeguard the delivery of public services. In this article Lucy Mccormack, Crown Commercial Service’s Small and Medium Sized Enterprise Champion, explains the current process at CCS and provides tips for suppliers on how to prepare for financial assessment.

Setting SMEs up for commercial success

The Cabinet Office has taken steps to ensure regular scrutiny of and feedback on government policy on small and medium sized businesses (SMEs) and has had a focus on removing barriers for SMEs wishing to bid for public contracts. This is important to help SMEs to grow and win more business. 

CCS recognises that some SMEs may not be familiar with or struggle to navigate the various public sector procurement requirements. Our aim is to make it easier for businesses of all sizes to bid for work. We want to help SMEs to understand and meet the requirements for commercial success. 

One aspect of public sector procurement that is necessary for SMEs to understand, but we recognise can be challenging, concerns the financial assessment stage of the process. 

What are financial viability risk assessments and why were they introduced?

The Financial Viability Risk Assessment (FVRA) is a Cabinet Office issued template used for evaluating financial risk. The FVRA provides an audit trail as to the financial related decisions that are made as part of the procurement process.

Prior to FVRAs being introduced within the Economic and Financial Standing (EFS) assessments of bidders and the adoption of the Cabinet Office’s Contract Tiering Tool by CCS in 2021, the assessment of the financial health of suppliers was less comprehensive. This made it difficult for SMEs to understand what was required to meet the financial success criteria when bidding for public sector contracts. 

For example, the process didn’t allow an opportunity for suppliers to provide mitigating commentary or additional information to explain certain metrics. The previous assessment approach used standard accounting metrics and looked at high level items on a profit and loss or balance sheet. Previously, where an SME had some indicators of financial risk but the overall health of the corporate group was good, this was not always considered as part of financial selection. Therefore, allowing suppliers to now provide supporting information and allowing for consideration of the health of the overall corporate group in order for the bidder to demonstrate a stable financial position within the FVRA is of benefit to all suppliers, in particular SMEs. 

Why is Economic and Financial Standing assessed and monitored by Crown Commercial Service for suppliers?

The EFS requirement was introduced across government as part of the procurement process to:

• better understand the financial capacity of organisations to perform a contract. 
• assess whether appropriate risk mitigations need to be and can be put in place to address any identified issues with a bidder’s financial capacity. This is crucial to safeguard the delivery of public services.

Why do buyers complete their own EFS when calling off from Crown Commercial Service commercial agreements?

CCS will always complete an EFS for suppliers tendering for a CCS commercial agreement. However customers may choose to undertake their own economic and financial stability assessment when running a further competition. This is because a bidder’s financial viability and risk assessment is only a ‘point in time’ assessment and the bidder’s economic and financial stability can change over time. In some cases it may be some time after a CCS commercial agreement goes live that a contracting authority undertakes a further competition to award a call off contract

What should contracting authorities consider when assessing the Economic and Financial Standing of a bidder?

* proportionate assessment: the EFS guidance note states that financial assessment should be related and proportionate to the contract subject matter

* equality: all suppliers will be assessed equally and without discrimination

* transparency: the assessment will be objective and carried out by staff with a financial background

* audited accounts: Under the Procurement Act 2023, a contracting authority may not set a condition of participation requiring the submission of audited annual accounts, except from bidders who are, or were, required to have the accounts audited in accordance with Part 16 of the Companies Act 2006 or an overseas equivalent.*

How does Crown Commercial Service ensure a proportionate Economic and Financial Standing assessment?

Firstly, we determine the ‘criticality’ of a potential contract or lot. The criticality will establish  the level of assessment and risk thresholds to be applied. CCS uses the Cabinet Office’s Contract Tiering Tool to measure criticality. This takes into account the potential impact of service failure, the speed and ease of switching suppliers and the contract value. Contracts or lots are then categorised as Bronze, Silver or Gold depending on the results of the Contract Tiering Tool.

How does CCS assess bidder Economic and Financial Standing?

Bronze contracts

A contract or lot calculated as bronze is typically likely to be a smaller, simpler contract for non-critical works and services.  In these cases it may be appropriate to carry out a more basic financial assessment using a third party credit score. Any bidder failing to meet a predefined score threshold would then be requested to complete a FVRA.  It is worth noting that failure to meet a third party score threshold will not exclude a bidder from the process, however it will trigger a more in-depth review of the financial health. 

Silver Contracts 

Silver Contracts are typically contracts for important but not critical works and services. In these cases a more detailed financial assessment is appropriate and risk thresholds should be set accordingly. 

Gold Contracts

Gold contracts are typically larger, longer contracts for complex or critical works and services. In these cases a very detailed financial assessment is appropriate; risk thresholds should be set at the same level as for Silver contracts or higher. Bidders of contracts or lots categorised as Silver or Gold will need to complete a silver or gold FVRA and submit this as part of their tender submission. 

How do Financial Viability Risk Assessments benefit SMEs?

Although the FVRA tool requires the bidder to enter a high quantity of financial information, which we understand can be time consuming for SMEs, it is beneficial. We’re able to make a better assessment of a bidder’s economic and financial standing. Suppliers can present their financial information with additional narrative to explain why certain metrics are creating an output. Suppliers can choose the information they provide which may include draft unpublished accounts. This gives CCS Commercial Finance a far better understanding of a bidder’s financial performance than if they relied on standard metrics alone.

Transparency is at the heart of the FVRA process. The FVRA tool includes detailed bidder instructions explaining what detail to input where. 

Once a bidder has completed their financial input, they will be asked to look at a number of ratios in terms of risk, relating to profitability, debt and liquidity. There are clear thresholds as to what is considered low, medium or high risk. The FVRA will tell suppliers what their ratio is and how they’ve performed in real time as they complete it. Suppliers can see what their performance looks like against the metrics to be assessed before they submit the FVRA. This will help suppliers to understand where the risk lies and what additional narrative they should provide to mitigate that risk.

FVRAs acknowledge the fact that corporate health doesn’t always sit within one particular entity. We look at the health of the overall corporate group where applicable. Suppliers will enter line level information for multiple entities if they belong to a group. If the bidder’s organisation has some indicators of financial risk but we can see sufficient group health behind that, the bidder will be deemed to be able to demonstrate a stable financial position.

Financial readiness – 5 tips for Suppliers on how to prepare for EFS assessment

1. read the “how to bid” attachment in your tender pack carefully to understand what you need to complete and by when 
2. understand that it might not be necessary to complete an FVRA – for Bronze contracts, CCS will assess bidders against a third party credit score before determining whether an FVRA needs to be completed
3. complete all of the FVRA and provide supporting documentation to evidence any information you input; choose published or draft accounts that best explain your entity’s performance
4. where necessary, provide additional commentary to enable CCS to have a true understanding of what is happening in your organisation –  it’s strongly advised to provide additional information if you do score red or amber against any metric
5. provide any additional information requested by CCS in a timely manner and by the deadline set by CCS in our communication with you

Find out more

For further information read the Government Commercial Function’s guidance note to assessing and monitoring the economic and financial standing of bidders and suppliers 

For further support on the FVRA process, please email info@crowncommercial.gov.uk and entitle your query “FVRA query] If you require further information when bidding on a CCS procurement please follow the instructions for clarification questions in the published Bid Pack.

To learn more about how CCS is levelling the playing field for suppliers of all sizes, download our digital brochure.

We always welcome feedback, suggestions or queries. These can be submitted to smefeedback@crowncommercial.gov.uk

*except from bidders who are, or were, required to have the accounts audited in accordance with Part 16 of the Companies Act 2006 or an overseas equivalent.