Investigation into the procurement process for R&D
Construction Limited
August 2014
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Executive Summary
Method
Work was undertaken by discussions with:
, Chief Executive.
Director of Investment & Regeneration.
, Director of Finance.
, Head of Procurement (whose job title during the procurement exercise was
Procurement & Project Manager).
And a review of documentation including:
DGHP Procurement Policy 21st March 2006 (marked as draft)
DGHP Procurement Policy 26th November 2008
Tendering and Procurement Procedures Guide for DGHP Staff (undated)
Communities Scotland’s procurement note: CSGN 2004/06, September 2004
Scottish Executive’s Procurement Guide for Use by Social Landlords July 2006
Scottish Executive’s Construction Works Procurement Guidance, 2005
Report on Tenders for Regeneration & Development Contract 6th February 2009
Standing Orders and Financial Regulations 11th June 2008
Objectives
Our objectives were to:
1. Undertake a review of the procurement process undertaken to appoint R&D Construction Ltd and
form a view as to whether the Procurement Policy (at that time) was complied with at all stages. In
particular:
a. The process to reduce the total number of submissions to the final 3.
b. The process to assess the final 3 on cost and quality in order to achieve a balance of quality and
price. Confirm the decision that R&D Construction Ltd was the preferred supplier is consistent
with the underlying assessments and Procurement Policy guidance.
c. That a financial assessment of the viability of R&D Construction Ltd was undertaken prior to
formal appointment.
Identify if any non-compliance in the execution of the procurement process could have led to R&D
Construction Ltd being incorrectly selected as the preferred supplier.
2. Obtain and review the financial assessment of R&D Construction Ltd:
a. Confirm the checks undertaken were in accordance with any specific procedural requirements.
b. Confirm the checks undertaken are in accordance with good practice.
c. Confirm that the conclusion that R&D Construction Ltd was sufficiently, financially robust is
consistent with the results of the checks undertaken.
d. Re-perform the checks undertaken to confirm that they were accurately performed.
Comment if any weaknesses identified in the financial assessment process could have led to R&D
Construction Ltd being incorrectly selected as the preferred supplier.
3. Comment on any weaknesses in the procurement process itself, which may have led to R&D
Construction Ltd being incorrectly selected as the preferred supplier. Confirm whether these have
now been addressed within the latest Procurement Policy, or if any further amendments to the
process are required to prevent this issue reoccurring.
4. Establish a timeline for the procurement process, from start to end, including up to the signing of the
contract with R&D Construction Ltd.
a. Identify if the financial viability issues could have been identified earlier in the process by DGHP.
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Executive Summary (continued)
Introduction
Internal Audit has been asked to prepare a report for the Company and the Scottish Housing Regulator,
assessing whether DGHP’s choice of contractor for a regeneration contract in 2009 was made in line
with its own internal regulations. This request follows concerns from a
, which were reported in the Herald Scotland newspaper, and to the Regulator.
DGHP began a formal procurement exercise in 2008 for a regeneration contract to build 502 houses in
Dumfries and Stranraer. The contract was to start in Spring 2009 and run for 3 years. The contract,
which was to support Dumfries and Galloway Council’s Masterplan for the County, required demolition
of the existing buildings and construction of a mixed tenure development, with 60% social housing and
40% private ownership. The contractor was to be financially and operationally responsible for the build
and sale of the private ownership homes. The contract was paid for in roughly equal parts by a
Housing Association Grant, the Council and DGHP.
Following the procurement exercise, the contract was awarded to R&D Construction Ltd. The
contractor was at that time, the largest building contractor in Dumfries and Galloway and had previously
worked with the Company, having been awarded previous development contracts totalling £10million,
which had been satisfactorily completed.
Administrators were appointed to both R&D Construction Ltd and its parent company, Robison and
Davidson (Holdings) Ltd, in April 2011, when work on the project was approximately 70% complete.
Caveats
This report is intended to assess the Company’s compliance with its own policies and procedures, and
with best practice, in awarding the procurement of the development contract; not to re-examine and
validate the decision itself.
The following management representations have been relied on in the course of this review:
The Tendering and Procurement Procedures Guide referred to as being in force in 2008/9 was
undated and was identified by management as being applicable to this timeframe.
The original records of Panel members’ scoring of contractors at PQQ and tender stages were not
available; we have therefore relied on the summary data provided by management. We believe
the records retained represent a reasonable audit trail, given that the procurement exercise took
place 6 years before the review date.
Abbreviations used in this document
I&R Investment and Regeneration (Committee)
ITT Invitation to Tender
PQQ Pre-Qualification Questionnaire
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Executive Summary (continued)
Conclusion
Internal Audit did not identify any non-compliance with the Company’s procurement process which
would be likely to have led to an inappropriate decision being made about the selection of the
contractor. In our opinion, the choice of R&D Construction Ltd was the logical outcome from the
procurement process undertaken.
1a. The process of reducing potential contractors to 3 was essentially performed outside of the
Company’s control, as only 3 of the 8 suppliers invited to tender returned a tender document.
Internal Audit therefore concludes that the Company has not failed to comply with its Policy and
Procedures in respect of shortlisting. In our opinion:
Processes to seek and assess potential suppliers for the contract were appropriate and were in
line with the Company’s internal procedures.
Sufficient contractors returned a tender to enable the Company to reasonably assess the quality
and price range available in the market, and to identify the Most Economically Advantageous
Tender in accordance with OJEU.
1b. The process used to select the winning bid for the development contract was in line with the
Company’s Procurement Policy. The contract was awarded to the bidder whose tender had scored
the highest combined quality and price measures.
Comparison of the processes followed by DGHP to guidance issued by the Scottish Executive in
2006 indicate that the information considered by the Company to assess financial viability of the
potential suppliers was in line with government requirements at the time.
Overall conclusion, Internal Audit did not identify any non-compliance with the Company’s
procurement process which would be likely to have led to an inappropriate decision being made
about the selection of the contractor. In our opinion, the choice of R&D Construction Ltd was the
logical outcome from the procurement process undertaken.
2a. The financial assessment checks undertaken at PQQ stage were in accordance with DGHP’s
specific procedural requirements.
There was no procedural requirement for DGHP to undertake any further financial assessment
beyond this stage. However, the finance department actually went further than the procedures
required and analysed the financial accounts of R&D Construction Ltd and its holding company for
the three years to 31 December 2006.and the presentation to the Board on 16 February 2009
indicated that a number of additional financial assessment checks had been carried out.
Accounts to 31 December 2007 had been filed at Companies House on 23 October 2008 and
ordered by DGHP on 30 January 2009 but, whilst we understand from the Director of Finance that
these accounts were reviewed, any further checks on this later information were not documented
by DGHP.
Consequently we conclude that DGHP followed its laid down procedures. We have verbal
confirmation that DGHP took into account the most up-to-date available financial information during
any subsequent financial assessment of R&D Construction Ltd.
The accounts to 31 December 2007 indicate an improving financial position for R&D Construction
Ltd with increased turnover, profitability and net assets and a reduction in its overdraft.
We can, therefore, confirm that if the 31 December 2007 accounts were incorporated into the
Financial assessment of R&D Construction Limited, that financial assessments would not have
been worsened.
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Executive Summary (continued)
2b. DGHP did comply with its financial procurement procedures.
The procedures are devised to highlight any company completing a PQQ which is in imminent
danger of financial failure with a view to eliminating them from the tender process.
We understand that DGHP did undertake a more comprehensive assessment of the financial
status of R&D Construction Ltd and its parent than required by its policy before awarding the
tender. These were not part of the proscribed procedures set out in its Procurement Policy and not
all of the additional checks were not fully documented.
Consequently while the documented checks were in accordance with good practice we are not
able to confirm whether the further checks incorporating the accounts to 31 December 2007 were
undertaken in accordance with good practice as these were not evidenced.
2c. The contract was awarded to R&D Construction Ltd 19 May 2009.
Following the initial financial assessment of R&D Construction Ltd at PQQ stage, the procedural
framework of DGHP does not include the requirement to undertake any further financial
assessment.
However we can conclude that based on the documented review of financial information to 31
December 2006 and the confirmation from DGHP’s Director of Finance that the full review included
financial information to 31 December 2007 the conclusion reached by DGHP that R&D
Construction Ltd was sufficiently financially robust appears reasonable on the basis of the
information they had reviewed.
2d. The checks undertaken were accurately performed but a number of the items included under the
financial assessment at the tender stage and highlighted in the presentation to Board on 16
February 2009 were potentially incomplete:
The presentation states “All 3 tenderers have been financially assessed…at tender stage”. We
are informed that one of the 3 tenderers was not financially assessed at tender stage
as it was considered to be financially sound and its tender price was
higher than R&D Construction Ltd’s.
The presentation states “Review 3 years audited accounts”. The documented assessment
reviews the financial information to 31 December 2006 although accounts to 31 December 2007
were available at Companies House at this time. These accounts were ordered by DGHP on 30
January 2008 and we are informed by DGHP’s Director of Finance that the financial
assessment was extended to include these later accounts although this further review was not
documented.
The presentation states “Check key accounting ratios and trends”. There was insufficient
financial information available to 31 December 2006 to undertake any trend analysis as these
only included R&D Construction Ltd’s first 4 months of trading as a separate entity. We are
advised by the Director of Finance that the financial assessment was subsequently extended to
include accounts to 31 December 2007 although this was not formally documented at the time.
The presentation states “Consider business funding model”. The gearing ratio was calculated
and the level of overdraft noted but there is little else to indicate that the funding model of either
company had been considered in any detail.
Additional checks could be carried out by:
Assessing at PQQ stage if the contractors show signs of possible financial difficulty, though this
is beyond the then existing good practice guidance from the Scottish Executive.
Requiring a further detailed financial assessment immediately prior to awarding the tender. We
note at 2(a) that this would not have impacted on the decision to appoint R&D Construction Ltd.
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Executive Summary (continued)
3. In our opinion, the 2014 Procurement Policy has corrected the weaknesses which were highlighted
in previous versions of the document during Internal Audit’s testing at section 1 of this report.
4. In our opinion, appropriate formal and informal controls were in place to enable DGHP to monitor
the contractor’s financial viability through the contract period.
Detailed Findings
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 1
1. Undertake a review of the procurement process undertaken to appoint R&D Construction Ltd and
form a view as to whether the Procurement Policy (at that time) was complied with at all stages. In
particular:
1a. The process to reduce the total number of submissions to the final 3.
1b. The process to assess the final 3 on cost and quality in order to achieve a balance of quality
and price. Confirm the decision that R&D Construction Ltd was the preferred supplier is
consistent with the underlying assessments and Procurement Policy guidance.
1c. That a financial assessment of the viability of R&D Construction Ltd was undertaken prior to
formal appointment.
Identify if any non-compliance in the execution of the procurement process could have led to R&D
Construction Ltd being incorrectly selected as the preferred supplier.
1a. Shortlisting
Process followed
OJEU
Scottish Statutory Instrument 2006 No.1 The Public Contracts (Scotland) Regulations 2006 adopted the
European Union’s directive, identifying RSLs as a body governed by public law for purposes of
procurement activity. The contract was over the threshold for procurement in accordance with OJEU
requirements, and was accordingly sourced in accordance with OJEU.
A Prior Information Notice (PIN) was issued on 26th February 2008; and the formal Contract Notice on
5th June 2008.
Advertisement
The contract was advertised in local, national and construction industry press, and on the OJEU site
itself.
PQQ – return and assessment
PQQs were requested by contractors via a link on the OJEU website, and manually sent out by DGHP.
By the closing date of 11th July 2008, 9 PQQs were returned in respect of the 3 lots originally advertised
by DGHP. Of these, 7 applied for Lot 1 – Dumfries, 2 for Lot 2 – Stranraer and 5 for Lot 3 – Dumfries
and Stranraer.
The Company wrote to all 9 contractors on 5th August 2008, advising that since only 2 applications were
received for Lot 2 it had decided to proceed to tender for Lot 3 only. Contractors were asked to confirm
whether they wished to apply for Lot 3; all confirmed that they did. This approach is in line with OJEU
requirements, which stipulate that a minimum of 5 contractors should be invited to tender.
Scoring of the PQQ was performed by a panel consisting of 3 officers (the Procurement & Project
Manager, the Development Manager and a Construction Consultant retained to provide expert advice
on the procurement of this contract). It resulted in the 9 contractors being ranked in order of
preference.
The Panel considered:
Background information
Financial/insurance details
Business probity
Quality of service
Health and safety
Equal opportunities
References
Presentation
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Objective 1 (continued)
1a. Shortlisting (continued)
PQQ – return and assessment
A summary of scores for PQQs was provided to Internal Audit by the Director of Investment &
Regeneration. Review of this data showed that the average score was 64.35/100. 8 of the 9
contractors scored 60 or above. Internal Audit review of the data confirmed it was numerically
accurate. It was not possible to check the detail on the summary to the original scoring documents
prepared by the Panel, as this had not been retained. Internal Audit deem the audit trail available at the
audit date, 6 years after the scoring exercise, to be reasonable.
The Director of Finance provided Internal Audit with a document entitled Regeneration Contract –
Financial Checks summarising the CheckScore results for the companies which had returned PQQs.
The original CheckScore reports had not been retained; as commented above, this is deemed
reasonable given the timescales.
ITTs sent
Invitations to Tender were sent to the 8 contractors whose PQQs had scored highest, on 10th October
2008, by the Purchasing & Project Manager. The ninth contractor had scored only 42.03/100 on the
PQQ stage and was felt by the panel to be so far behind the rest of the candidates as to make it an
inappropriate use of both the contractor’s and the Company’s time to invite them to tender. Internal
Audit deem this decision to be appropriate.
Only 3 contractors chose to return tender bids. Reasons for this are discussed at section 1b.
Compliance with DGHP’s Procurement Policy
The timeframe between the initial contract advertisement and the contract being awarded spanned 15
months, and the Company’s Procurement Policy was revised partway through this.
The Policy dated 21st March 2006 applied to the procurement process up until the ITT stage; it was
revised after ITTs were sent out and before tenders were due to be returned by contractors.
Key criteria in the document, relating to the process of obtaining tenders and shortlisting, include:
Requirement Development contract
procurement Internal Audit conclusion
Infrastructure – The Company
will “identify a “Responsible
Officer” and set up an ‘in-house’
project team for each
construction or major works
project. The “responsible
officers” will be one of the
following: Chief Executive,
Director of Operations, Director
of Finance, Head of Asset
Management & Investment
Programme, Head of Repairs,
Head of Housing Management,
IT Manager, or Human
Resources Manager. The
Responsible Officer will normally
be the primary budget holder in
relation to the supply being
procured”.
The Head of Procurement
advised that the Head of
Regeneration and Development
was the Responsible Officer for
the project. She was supported
by a project team comprising a
specialist construction
consultant, the Purchasing &
Project Manager, and 4 design
teams, one for each site. Each
design team included an
architect, a quantity surveyor
and a clerk of works.
Compliant.
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Objective 1 (continued)
1a. Shortlisting (continued)
Compliance with DGHP’s Procurement Policy
Requirement Development contract
procurement Internal Audit conclusion
Content of ITT – ITTs must
include: Letter of Invitation;
Instruction to Tenderers; Project
Brief; Contract Brief; Principles
of Assessment; Conditions of
Contract; Timescales.
The Invitation to Tender
template for the development
contract addressed the areas
specified in the Policy.
Compliant.
Tender format – Tenders should
be required in a format and a
level of detail which permit direct
comparison to be made between
prospective suppliers
The Invitation to Tender required
contractors to submit a standard
set of information in a standard
format.
Compliant.
Risk management – Risk
management should be applied
to projects, dependent on the
size and complexity of the
project
The Director of Investment &
Regeneration advised that the
risks inherent in the
development project were
discussed amongst the project
team and highlighted to the I&R
Committee in a presentation on
16th February 2009. This was
confirmed by Internal Audit by
review of the presentation
document. A formal risk map
was not prepared. The Director
noted that formal risk
management was at that time,
relatively new to the Company
and that the current approach is
greatly different to that in place
at the time.
Risk management activity was
undertaken and was evidenced,
though this was performed in a
relatively informal manner.
In our opinion, the process
complied with the Company’s
stated requirements at the time;
the adequacy of requirements
for risk management activities
going forward is addressed at
section 3 of this report.
OJEU – “Where EU
procurement rules apply,
contracts will be procured in
accordance with procedure
notes issued by Communities
Scotland. The current guidance
is detailed in Communities
Scotland’s procurement note:
Ref. No. CSGN 2004/06, date of
issue September 2004”. Where
contracts are over the EU
procurement threshold,
applications are not restricted to
contractors on the Company’s
Approved Supplier List.
Review of the processes and
discussions with the Director of
Investment & Regeneration and
the Head of Procurement
confirmed that the Company had
followed an OJEU-compliant
procurement approach.
Specifics of OJEU compliance
are outlined below under
Compliance with OJEU.
Compliant.
Internal Audit did not identify any failure to comply with the Company’s Policy and Procedures.
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Objective 1 (continued)
1a. Shortlisting (continued)
Compliance with OJEU
A Procurement Guide for Registered Social Landlords, published by the Scottish Executive in July
2006, was used by Internal Audit as a benchmark for best practice in respect of obtaining and
shortlisting tenders.
Internal Audit identified the following steps which were taken to ensure that the procurement exercise
was OJEU-compliant:
A Prior Information Notice (PIN) reference 2008/S41-056735 was issued on 26th February 2008.
This document was issued electronically on the OJEU site, therefore compliance with the
requirement to use specific proformas for notices can be inferred.
A Contract Notice was issued on 5th June 2008. This was more than 52 days after the PIN, and
within a year of that document; these timescales were in line with requirements. As above, this
document was issued electronically therefore the correct format was used.
The Contract Notice specifies that the criteria used to select contractors would be the criteria stated
in the contract documents; the decision would not be based solely on price.
The closing date for responses to the Contract Notice was 11th July 2008. This is in line with the 37
day timescale required by OJEU.
Revision of the Lots offered on 5th August 2008, as the poor response rate to Lot 2 – Stranraer
would mean that the Company would be unable to invite 5 contractors to tender; the minimum
number per OJEU requirements.
ITTs were sent out on 10th October 2008 and returns required by 5th December 2008. This is in line
with the requirement to give suppliers at least 40 days to respond to invitations to tender.
Pre-qualification checks on financial standing were carried out and were in line with the procurement
guidance issued by the Scottish Executive.
A contract award notice was published via OJEU on 2nd September 2009.
No evidence of failure to comply with OJEU requirements was identified by Internal Audit.
Conclusion
The process of reducing the potential contractors to 3 was essentially performed outside of the
Company’s control, as only 3 of the 8 suppliers invited to tender returned a tender document. Internal
Audit therefore concludes that the Company has not failed to comply with its Policy and Procedures in
respect of shortlisting. In our opinion:
Processes to seek and assess potential suppliers for the contract were appropriate and were in line
with the Company’s internal procedures.
Sufficient contractors returned a tender to enable the Company to reasonably assess the quality and
price range available in the market, and to identify the Most Economically Advantageous Tender in
accordance with OJEU.
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Objective 1 (continued)
1b. Assessment of shortlisted contractors
Process followed
Tenders returned
By the deadline for tenders on 5th December 2008, only 3 of the 8 contractors invited to bid for the
contract had returned tenders. The Director of Investment & Regeneration explained that the
contractors who had failed to bid had been contacted to ask why. Reasons given were:
Short timescales to bid (one contractor).
The risks associated with the contractor’s responsibility to fund and sell the 200 private ownership
homes included in the contract (4 contractors).
Assessment of tenders
The assessment of tenders was carried out by a Panel of 6 assessors:
Representing DGHP
, Director of Investment & Regeneration
, Head of Regeneration
, Head of Procurement
Representing the Council , Head of Strategic Housing
Representing the Scottish Government (associated with the grant funders)
The Panel met on 8th December 2008, and received 90 minute presentations from each of the 3
prospective contractors. Presentations were scored separately by each Panel member, using a
standard template with pre-set weighted criteria. Members’ scores were then summarised into a single
Quality Score.
A Price Score was derived by the Procurement & Project Manager following the best practice guidance
described above.
Quality scoring resulted in R&D Construction Ltd and being judged joint top, with
lagging considerably behind. R&D Construction Ltd had scored top with 5 of the 6 panellists, and
with the sixth.
Price scoring showed R&D Construction Ltd to be the preferred supplier, with second and
third.
The final priority order of contractors from the assessment exercise was:
1. R&D Construction Ltd.
2. .
3.
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Objective 1 (continued)
1b. Assessment of shortlisted contractors
Assessment of tenders
The Procurement & Project Manager prepared a Report on Tenders dated 6th February 2009 for the
Head of Regeneration & Development. This was used to advise the later report to the I&R Committee.
This Report shows the results of the scoring to be as follows:
R&D
Quality Score (from a potential 100) 78 78 47.5
Quality Weighting 40%
Quality Total (Score x weighting) 31.2 31.2 19
Pricing Score 58.79 48.82 42.39
Pricing Weighting 60%
Price Total (Score x weighting) 35.27 29.29 25.44
Overall Score (sum of Quality and
Pricing Totals) 66.47 60.49 44.44
To confirm the accuracy of the final score results, Internal Audit checked that:
individual panellists’ scores, as reported in the Report on Tenders, agreed to the Quality Score
transferred to the summary sheet in that document.
the calculation used to arrive at the Pricing Score was in line with the best practice guidance issued
by the Scottish Executive in its document Construction Works Procurement Guidance.
the Quality Score and Pricing Score had been adjusted by the appropriate weightings.
the Overall Score was the sum of the weighted Quality and Pricing Totals.
It was not possible for us to verify the individual panellists’ scores to their original scoring sheets as
these could not be located during the audit; given the lapse of almost 6 years since the exercise, we do
not feel this to be unreasonable.
Internal Audit review of the scoring criteria for the presentation by contractors to the Panel identified
some minor differences between the criteria listed in the ITT and those which were applied. It was
confirmed by review of correspondence that the changes had been notified to contractors before the
closing date for the tender return.
Decision
A paper was taken to the Company’s I&R Committee on 16th February 2009. This outlined the
procurement process to date and the bids received. It recommended the acceptance of R&D
Construction Ltd’s bid. The recommendation was accepted by the Committee.
This was in line with the Company’s Standing Orders and Financial Regulations dated 11th June 2008,
which delegated responsibility for approval of investment and regeneration-related tenders to the I&R
Committee.
The decision was recommended to the DGHP Board at its meeting on 25th February 2009. The
minutes note that the Board agreed to accept the tender from Robison and Davidson.
The contract became legally binding on the Company on 19th May 2009 with the issue of a Tender
Acceptance Letter.
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Objective 1 (continued)
1b. Assessment of shortlisted contractors
Compliance with DGHP Policies
A revised Procurement Policy came into force on 26th November 2008. At this point, the contract was
out to tender (ITTs were sent on 10th October 2008 and tenders submitted on 5
th December 2008).
Requirement Development contract
procurement Internal Audit conclusion
Board involvement The
Procurement Policy states that
“The Board may decide, or
officers may recommend, that it
is appropriate in certain
circumstances, for Board or
Committee members to be
involved in selection exercises.
The base line for member
involvement in competitive
tendering projects will be at a
value of £10m”.
No formal Board involvement.
The Chief Executive advised
that the requirement was added
to the 2008 policy at the request
of a Board Member, as a result
of the Board not being included
in the contract specification for
this development contract.
The Policy amendment came in
after ITTs were sent out and
before tenders were returned. It
required Board involvement but
was not explicit about how and
when this would be obtained.
The 2014 Policy, which is
considered in more detail at
Section 3 of this report, states
that Board Members should be
involved throughout
procurement exercises for
contracts worth more than
£10m. It explicitly requires their
involvement in Assessment
Panels.
In Internal Audit’s opinion, the
requirement included in the 2008
Policy was not complied with in
this instance; however, we
believe that the omission is a
reasonable one due to timing,
given that the new Policy was
approved less than 2 weeks
prior to the Tender Assessment
Panel.
Internal Audit stress-tested the
scoring of the tender
assessments. We assumed that
an additional panel member was
added from the Board, and that
this member’s scores mirrored
those least favourable to R&D
from the Panel (i.e. took the
highest scores awarded to
, and the lowest
to R&D). The results still left
R&D 4.67 percentage points
ahead of the other bidders. For
this reason we do not believe
that the inclusion of an additional
Panel member, from the Board,
would be likely to have changed
the procurement decision.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 1 (continued)
1b. Assessment of shortlisted contractors
Compliance with DGHP Policies
Requirement Development contract
procurement Internal Audit conclusion
Reporting – A report should be
sent to the Board or appropriate
sub-committee detailing the
outcome. The report must
comment on the reasons where
2 or more companies have not
submitted returns having
accepted the ITT.
A report was taken to the I&R
Committee on 16th February
2009. This included:
The reasons for 5 of the
contractors invited to tender
declining to do so.
An outline of the
procurement process used,
and the outcome, with a
recommendation that the
Committee accepts the
tender from R&D
Construction Ltd.
Compliant.
Audit trail – The Procurement
Policy states that clear audit
trails must be maintained to
evidence the basis for decisions.
Audit trail was retained of the
procurement process, the
assessments and the decisions
made.
Compliant.
Decision process – The
Procurement Policy requires
that, where both price and
quality are to form part of a
development contract decision,
price will normally be the higher
weighted; the precise weighting
between the 2 will be decided on
a project by project basis.
The tenders were assessed on a
basis of 60% price, 40% quality.
Our detailed testing on the
decision process is shown
above.
Compliant.
Approval – The Company’s
Standing Orders and Financial
Regulations June 2008 required
I&R Committee approval of
tender acceptance.
Minutes of the I&R Committee
for 16th February 2009
documented Committee
approval of the acceptance of
R&D Construction Ltd’s tender.
Compliant.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 1 (continued)
1b. Assessment of shortlisted contractors
Compliance with OJEU and best practice
A Procurement Guide for Registered Social Landlords, published by the Scottish Executive in July
2006, and the Construction Works Procurement Guidance, issued by the Scottish Executive in 2005,
were used by Internal Audit as a benchmark for best practice in respect of assessing tenders.
Internal Audit identified the following steps which were taken to ensure that the procurement exercise
was OJEU-compliant:
Tenders were assessed on a Most Economically Advantageous Tender basis, considering quality as
well as price.
Criteria used to assess quality were weighted according to their perceived importance to the quality
decision.
Price scoring was performed in line with the mechanism outlined in the Construction Works
Procurement Guidance.
The Head of Procurement advised that the ITT was sent to each bidder, simultaneously, using the
RICS e-tendering website. He stated that all subsequent communications, for example responses to
queries from individual bidders, were copied to all parties via the website.
A Contract Award Notice was placed on the OJEU website within 48 days of the formal contract
being signed on 5th August 2009.
No instances of non-compliance with OJEU requirements, or best practice guidance from the time,
were identified by the Internal Audit review.
Conclusion
In our opinion, the process used to select the winning bid for the development contract was in line with
the Company’s Procurement Policy. The contract was awarded to the bidder whose tender had scored
the highest combined quality and price measures.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 1 (continued)
1c. Financial viability assessment
Procurement Policy 2008/9
Procurement Policy dated 26th November 2008
Internal Audit’s review of the Procurement Policy highlighted that it did not specify the Company’s
requirements for assessing the financial viability of prospective contractors.
The Scottish Executive’s Procurement Guide for Use by Social Landlords (July 2006) outlines
requirements for assessing financial viability which it says may include:
Accounts.
Turnover data for the preceding 3 years.
Bankers’ statements.
Evidence of solvency.
No history of criminal convictions.
Process followed
The process followed is detailed at section 2 of this report. In our opinion, the information required in
the PQQ is compliant with the guidance issued by the Scottish Executive.
Conclusion
Comparison of the processes followed by DGHP to guidance issued by the Scottish Executive in 2006
indicate that the information considered by the Company to assess financial viability of the potential
suppliers was in line with government requirements at the time.
1. Summary of Conclusions
a) The process of reducing potential contractors to 3 was essentially performed outside of the
Company’s control, as only 3 of the 8 suppliers invited to tender returned a tender document.
Internal Audit therefore concludes that the Company has not failed to comply with its Policy and
Procedures in respect of shortlisting. In our opinion:
Processes to seek and assess potential suppliers for the contract were appropriate and were
in line with the Company’s internal procedures.
Sufficient contractors returned a tender to enable the Company to reasonably assess the
quality and price range available in the market, and to identify the Most Economically
Advantageous Tender in accordance with OJEU.
b) The process used to select the winning bid for the development contract was in line with the
Company’s Procurement Policy. The contract was awarded to the bidder whose tender had
scored the highest combined quality and price measures.
c) Comparison of the processes followed by DGHP to guidance issued by the Scottish Executive
in 2006 indicate that the information considered by the Company to assess financial viability of
the potential suppliers was in line with government requirements at the time.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 2
2. Obtain and review the financial assessment of R&D Construction Ltd:
2a. Confirm the checks undertaken were in accordance with any specific procedural requirements.
Procedural requirement: Credit and financial checks
The Tendering and Procurement procedures guide for DGHP staff states:
Selecting contractors, consultants or suppliers
For all competitive tendering you must ask the finance department to undertake a credit and financial
check on all organisations that have completed a pre-qualification questionnaire. Any organisation that
fails the check MUST be removed from the selection process.
We can confirm that this procedure was undertaken by DGHP.
DGHP’s criteria for a financial pass/fail assessment at the pre-qualification (“PQQ”) stage were:
Company in any form of insolvency protection (CVA, administration etc).
No accounts provided.
Accounts are unaudited or qualified (unless the qualification is clearly irrelevant).
Issues from Schedule 7 of the 2001 Housing Act (conflict of interest etc)
http://www.scotland.gov.uk/Topics/Built-
Environment/Housing/investment/guidancenotes/olderguidance/csgn200302
Insufficient or missing insurance.
Checksure rating of High Risk or above.
Checksure recommendation of bond, parent company guarantee or director’s guarantee that could
not be fulfilled.
We have been provided with a summary from DGHP (client ref: 4D) which indicates that a Checksure
financial report was obtained for each of the 11 companies who returned a PQQ.
Observations from Checksure reports
Of the 11 companies checked, R&D Construction Ltd was given the lowest score at 47/100, with one
further company scored at 49/100. The remaining 9 companies achieved scores ranging from 59/100
to 88/100.
The 2 scores under 50/100 were classified as “Above Average Risk”, by Checksure i.e. within
permissible limits.
Checksure’s report in respect of R&D Construction Ltd states that “assurance in the form of guarantees
may be necessary...”, and DGHP did subsequently obtain such from R&D Construction Ltd’s parent
company.
Satisfactory application of the criteria
Based on the criteria for the financial pass/fail assessment at the PQQ stage, DGHP was correct to
pass R&D Construction Ltd as it satisfied all the criteria listed.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 2 (continued)
Procedural requirement: Selection of contractors to be invited to tender
The Tendering and Procurement procedures guide for DGHP staff states:
If a pre-qualifying stage is involved:
The team should look at each of the pre-qualifying questionnaires and score against an agreed
criteria and matrix.
Following the collation of scores you should have a list … in priority score order. From this list you
should agree a cut-off point and agree a list of contractors that would be invited to tender….
We can confirm that this procedure was undertaken by DGHP.
We have been provided with a document entitled “PQQ scoring Regen contract” (client ref 4H). This
document lists all of the 11 companies who returned a PQQ as listed on document 4D, with the
exception of 2: who subsequently amalgamated with ; and
who withdrew their interest.
The list includes the score attributed to each company by 3 separate team members, from which an
average score was calculated.
The list places in first place (80.66), in second (76.38) and R&D Construction Ltd in
third (66.4).
5 of the remaining 6 companies scored between 65.5 and 60.2.
8 of the 9 were invited to tender, of which 3 completed and submitted a tender, these being:
.
R&D Construction Ltd.
No additional financial assessment was required or performed at this stage
Procedural requirement: Acceptance of tenders
Acceptance of tenders:
35. The Responsible Officer … will, as soon as possible after receipt (of the tender), make a report as
appropriate to the Board and/or committee directly responsible for the activity providing clear advice on
the tender outcome, whether in their judgement the successful tender represents value for money….
We can confirm that this procedure was undertaken by DGHP.
We can confirm that a “Report on Tender” document dated 6 February 2009 was produced by the
procurement and program manager.
The report confirmed that R&D Construction Ltd had been placed top with a score of 66.47/100, with
scoring 60.49/100 and 44.44/100.
The final scoring was calculated as to 60% on price (R&D Construction Ltd scored top) and 40% on a
presentation to senior DGHP staff (R&D Construction Ltd scored joint top).
The report was presented to I&R Committee for Board approval by the Director of Investment &
Regeneration and the Director of Finance on the 16 February 2009, at which time the report stated the
financial assessment process had included the following:
1. All 3 tenderers have been financially assessed both at PQQ stage and further at tender stage.
2. Review 3 years audited accounts.
3. Check key accounting ratios and trends.
4. Review credit scoring.
5. Consider business funding model.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 2 (continued)
Procedural requirement: Acceptance of tenders
We comment on each of these procedures as follows:
1. All 3 tenderers have been financially assessed both at PQQ stage and further at tender stage
An initial financial assessment was undertaken on all 11 companies returning a PQQ to highlight
those in imminent danger of financial failure.
A further financial assessment was undertaken on R&D Construction Ltd and at tender
stage. We are not aware of a further financial assessment being carried out on (one of
the 3 tenderers).
2. Assessment at PQQ stage and further at tender stage
An initial Checksure financial report was obtained dated 29 October 2008 (PQQ stage) and a further
Checksure financial report was obtained 30 January 2009 (tender stage).
3. Review 3 years audited accounts
The initial review entitled “Regen Contract – Financial Assessment” included accounting information
to 31 December 2006 for both R&D Construction Ltd and its holding company.
It should be noted that up to 31 August 2006 the trading activity of R&D Construction Ltd was
accounted for as part of Robinson and Davidson (Holdings) Ltd. From 1 September 2006 R&D
Construction Ltd became a new legal entity when it acquired trading assets and liabilities from
Robison and Davidson (Holdings) Limited.
Consequently, at this stage the review summarised the first 4 months of R&D Construction Ltd’s
trading and the 3 years accounts to 31 December 2006 for Robison and Davidson (Holdings) Ltd.
This financial assessment document appears to have been later updated to include a draft profit and
loss account for Robison and Davidson (Holdings) Ltd to 31 December 2007. We do not know at
what date this was updated.
The accounts for R&D Construction Ltd and Robison and Davidson (Holdings) Ltd for the year to 31
December 2007 were filed at Companies House on 23 October 2008.
No reference is made on the original financial summary or the updated financial assessment to the
filed accounts of either company for the year to 31 December 2007, although both companies’
accounts would have been available from Companies House for almost 3 months prior to the Board
report of 16 February 2009. We are aware that DGHP did order a copy of R&D Construction Ltd’s
filed accounts to 31 December 2007 on 30 January 2009 and we are advised by the Director of
Finance that these accounts were reviewed in February 2009 (tender stage) and he subsequently
advised the Director of Investment and Regeneration that the award of the contract to R&D
Construction Ltd was still appropriate.
4. Check key accounting ratios and trends
For R&D Construction Ltd the key ratios at 31 December 2006 were checked. We have not been
provided with any documentation indicating DGHP performed any analysis past this date..
For Robison & Davidson (Holdings) Ltd the key ratios for the 3 years to 31 December 2006 were
checked. DGHP performed a trend analysis on the company’s balance sheet for the 3 years to 31
December 2006 and a trend analysis on its profit and loss account for the 4 years to 31 December
2007, albeit using a draft profit and loss account for the year to 31 December 2007.
5. Review credit scoring
For R&D Construction Ltd the credit score was reviewed on 29 October 2008, 30 October 2008 and
30 January 2009.
For Robison and Davidson (Holdings) Ltd the credit score was reviewed on 3 November 2008.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 2 (continued)
Procedural requirement: Acceptance of tenders
6. Consider business funding model
The initial review entitled “Regen Contract – Financial Assessment” includes the following comment
when referring to the 4 months accounts to 31 December 2006:
“Bank overdraft £13.3m – this is not described as a loan, and is shown in current creditors
Ratio analysis
Gearing 27.59”
On the same report within the section entitled “Robison and Davidson (Holding) Ltd” are the
following comments when referring to the accounts for the year to 31 December 2006:
“Cash on hand £689k – 2005 – nil. Bank overdraft £13.326m (as in Construction) – 2005 - £8.099m.
Cashflow shows:
Overall, net cash outflow £4.538m, of which £3.4m came from operating activities and £1.1m
from interest, tax and fixed asset (plant) acquisition.
Biggest part of £3.4m outflow is increase in stocks, £7.441m. Probably overstocking as
completions declined in second half and / or building up stock in anticipation of site starts in
early 2007.
Ratio analysis
Gearing: - 4.36 (31.12.06) – Debt funding model
Gearing – ex pension: 5.09 (31.12.06) – More useful indicator given forthcoming changes”
Specific comments in the report to committee dated 16 February 2009 in relation to R&D
Construction Ltd included:
R&D Construction Ltd - New subsidiary of Robison and Davidson Holdings (2006).
We have considered group accounts and subsidiary accounts.
Track record of DGHP successful contracts with 85 homes.
R&D Construction Ltd well established in the area for the last 30 years.
Financial checks are all satisfactory but would recommend parent company guarantee.
We note that in respect of R&D Construction Ltd only financial information up to 31 December 2006
was verifiable as being considered on the analysis document. Accounts to 31 December 2007 for
R&D Construction Ltd were filed on 23 October 2008 and a copy was ordered from Companies
House by DGHP on 30 January 2009. We are also advised by the Director of Finance that these
accounts were reviewed in February 2009.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 2 (continued)
Overall conclusion
The financial assessment checks undertaken at PQQ stage were in accordance with DGHP’s specific
procedural requirements.
There was no procedural requirement for DGHP to undertake any further financial assessment beyond
this stage. However, the finance department actually went further than the procedures required and
analysed the financial accounts of R&D Construction Ltd and its holding company for the three years to
31 December 2006 and the presentation to the Board on 16 February 2009 indicated that a number of
additional financial assessment checks had been carried out.
Accounts to 31 December 2007 had been filed at Companies House on 23 October 2008 and ordered
by DGHP on 30 January but, whilst we understand from the Director of Finance that these accounts
were reviewed, any further checks on this later information was not documented by DGHP.
Consequently we conclude that DGHP followed its laid down procedures, but we have verbal
confirmation, there is no documentary evidence to substantiate that DGHP took into account the most
up-to-date available financial information during any subsequent financial assessment of R&D
Construction Ltd.
The accounts to 31 December 2007 indicate an improving financial position for R&D Construction Ltd
with increased turnover, profitability and net assets and a reduction in its overdraft.
We can, therefore, confirm that if the 31 December 2007 accounts were incorporated into the financial
assessment of R&D Construction Limited, that financial assessments would not have been worsened.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 2 (continued)
2b. Confirm the checks undertaken are in accordance with good practice.
The financial checks undertaken by DGHP can be summarised as follows:
At PQQ stage assess the financial viability of the business based on the most up to date available
information.
A broad financial review at the tender stage (additional to the checks stipulated in the procurement
procedures guide).
Housing Internal Audit Forum (“HAIF”) has produced “Procurement – Internal Audit Programme Guide”
in which it lists a number of key controls and processes which all housing associations should have in
place.
The key requirement is for the Housing Associations to have a Procurement Policy in place which is
regularly reviewed and which reflects best practice and recent legislation.
DGHP’s Procurement Policy document is dated 26 November 2008 with a review date of August 2011
and appears to address all the requirements outlined by HAIF:
A procurement strategy/policy is agreed by the Board, linked to the business objectives and is
regularly reviewed.
Procurement procedures are in place and reflect current legislation and regulatory requirements.
There is a procedure in place for making a business case prior to proceeding to procure supplies
works and services for the organisation.
A business case is agreed by the organisation prior to any procurement being undertaken.
There are clearly laid out procedures for the specification, selection of tenderers, handling of tender
documents and selection of contractors.
The organisation has in place Standing Orders / Financial Regulations, which include the financial
processes to follow when making purchases of supplies, works and services, and risk management
arrangements forming together an internal control framework.
We consider that good practice should include as a minimum the following checks to be undertaken on
the company considered for the capital tender:
Full assessment of all financial information publically available at tender review stage.
Full assessment of draft/management accounts available from the company at tender review stage.
If the company is part of a group, the financial assessment should include a review of the
parent/holding company and any other group companies included within a group cross guarantee
provided to its funders.
Confirmation from the company’s funders of continuing support into the foreseeable future.
Overall conclusion
DGHP did comply with its financial procurement procedures.
The procedures are devised to highlight any company completing a PQQ which is in imminent danger
of financial failure with a view to eliminating them from the tender process.
We understand that DGHP did undertake a more comprehensive assessment of the financial status of
R&D Construction Ltd and its parent than required by its policy before awarding the tender. These were
not part of the proscribed procedures set out in its Procurement Policy and not all of the checks were
not fully documented.
Consequently while the documented checks were in accordance with good practice we are not able to
confirm whether the further checks incorporating the accounts to 31 December 2007 were undertaken
in accordance with good practice as these were not evidenced.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 2 (continued)
2c. Confirm that the conclusion that R&D Construction Ltd was sufficiently financially robust is
consistent with the results of the checks undertaken.
R&D Construction Ltd’s PQQ was returned with the required financial information, the accounts were
not qualified and so the company passed the financial assessment at this stage.
A financial assessment entitled “Regen Contract – Financial Assessment” was undertaken on both R&D
Construction Ltd and its holding company Robison and Davidson (Holdings) Ltd which summarised the
accounts of R&D Construction Ltd for the 4 months to 31 December 2006 and the accounts of Robison
and Davidson (Holdings) Ltd for the 3 years to 31 December 2006.
We have checked the information summarised on this document and can confirm that it is an accurate
representation of the source information.
The credit reports obtained from Checksure in October 2008 and January 2009 classified R&D
Construction Ltd as “Above Average Risk”, which is within acceptable levels used by DGHP.
DGHP was correct in awarding R&D Construction Ltd a pass at the PQQ stage based on the
financial information available at that time.
Following receipt of the tender document, R&D Construction Ltd was given the highest score through a
combination of the lowest tender price (60% weighting) and a presentation given to DGHP (40%
weighting).
Prior to awarding the contract to R&D Construction Ltd, DGHP ordered the latest available accounts to
31 December 2007 and undertook a number of additional financial checks although these additional
checks were not documented.
Overall conclusion
The contract was awarded to R&D Construction Ltd 19 May 2009.
Following the initial financial assessment of R&D Construction Ltd at PQQ stage, the procedural
framework of DGHP does not include the requirement to undertake any further financial assessment.
However we can conclude that based on the documented review of financial information to 31
December 2006 and the confirmation from DGHP’s Director of Finance that the full review included
financial information to 31 December 2007 the conclusion reached by DGHP that R&D Construction Ltd
was sufficiently financially robust appears reasonable on the basis of the information they had
reviewed.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 2 (continued)
2d. Re-perform the checks undertaken to confirm that they were accurately performed.
The financial checks undertaken by DGHP can be summarised as follows:
At PQQ stage assessed the financial viability of the business based on the most up to date available
information.
At tender stage performed a more detailed financial assessment (additional to checks stipulated in
procurement procedures guide).
A financial check was performed on each of the companies that completed and returned a PQQ (as
detailed in 2(a) above).
This was undertaken correctly. We have re-performed this check and agree that R&D
Construction Ltd passed the test.
There are no further requirements in DGHP’s Procurement Policy for it to perform additional financial
checks, although the finance department of DGHP did actually produce a financial summary of R&D
Construction Ltd and for the period to 31 December 2006 prior to awarding the tender.
We have reviewed this document and can confirm that the information collated within the
document relating to R&D Construction Ltd correctly represents information within the
Company’s accounts.
However, DGHP had no specific criteria in place to assess the company’s financial viability at this
stage. Consequently we are unable to re-perform any such check.
Overall conclusion
The checks undertaken were accurately performed but a number of the items included under the
financial assessment at the tender stage and highlighted in the presentation to Board on 16 February
2009 were potentially incomplete:
The presentation states “All 3 tenderers have been financially assessed…at tender stage”. We are
informed that one of the 3 tenderers was not financially assessed at tender stage as it
was considered to be financially sound and its tender price was c£11.9m higher than R&D
Construction Ltd’s.
The presentation states “Review 3 years audited accounts”. The documented assessment reviews
the financial information to 31 December 2006 although accounts to 31 December 2007 were
available at Companies House at this time. These accounts were ordered by DGHP on 30 January
2008 and we are informed by DGHP’s Director of Finance that the financial assessment was
extended to include these later accounts although this further review was not documented.
The presentation states “Check key accounting ratios and trends”. There was insufficient financial
information available to 31 December 2006 to undertake any trend analysis as these only included
R&D Construction Ltd’s first 4 months of trading as a separate entity. We are advised by the Director
of Finance that the financial assessment was subsequently extended to include accounts to 31
December 2007 although this was not formally documented at the time.
The presentation states “Consider business funding model”. The gearing ratio was calculated and
the level of overdraft noted but there is little else to indicate that the funding model of either company
had been considered in any detail.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 2 (continued)
Comment if any weaknesses identified in the financial assessment process could have led to R&D
Construction Ltd being incorrectly selected as the preferred supplier.
DGHP’s financial assessment process contains a number of financial checks undertaken at PQQ stage
designed to assess whether a company is in imminent danger of financial failure, i.e. a credit score
indicating a “high” risk of failure, qualified accounts or currently in administration.
A pass at this stage will enable the company to progress to the tender stage with no requirement for
DGHP to undertake any further financial assessment.
There were no formal processes / criteria at the PQQ stage designed to assess a company that is
not in imminent danger of financial failure but is showing signs of possible financial difficulty.
This would go beyond what was recognised good practice at that time from guidance issued by the
Scottish Executive.
There are no criteria within the Policy for further financial assessment subsequent to the PQQ stage but
prior to award of the contract. This is a weakness at the tender decision/pre-contract award stage:
Lack of a formal process to ensure a full financial assessment is undertaken on the company being
awarded the tender immediately prior to the tender being awarded. This would ensure, as a
minimum, that the latest filed accounts are reviewed together with the company’s latest management
accounts/draft accounts, a full and thorough review of the company’s funding model is undertaken
and continuing support from its funders is in place for the foreseeable future.
In this case the documentation provided indicates that the finance department assessed the financial
robustness of R&D Construction Ltd from accounts to 31 December 2006.
However, we are aware that DGHP ordered the accounts of R&D Construction Ltd for the year to 31
December 2007 on 30 January 2009 although any further financial checks undertaken on these
accounts were not documented by DGHP. We are advised by the Director of Finance that these
accounts were reviewed in February 2009 (tender stage) and he subsequently advised the Director of
Investment and Regeneration that the award of the contract to R&D Construction Ltd was still
appropriate.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 3
3. Comment on any weaknesses in the procurement process itself, which may have led to R&D
Construction Ltd being incorrectly selected as the preferred supplier. Confirm whether these have
now been addressed within the latest Procurement Policy, or if any further amendments to the
process are required to prevent this issue reoccurring.
Procurement Process 2008/9
Review of the process followed in procurement of the development contract identified the following
weaknesses in the policies which were in place at the time:
The 2008 Policy did not give explicit requirements about how to assess the financial viability of
prospective contractors. In our opinion, this did not prevent effective assessment from taking place.
Neither the 2006 nor the 2008 Policy specified the criteria which would lead to an automatic rejection
of a prospective contractor, such as an unacceptably low credit reference or a director with an
inappropriate record.
The 2008 Policy introduced the requirement to involve Board Members in procurement exercises,
but did not specify the form this involvement should take.
The 2008 Policy required risk management activities to be undertaken but did not specify the format
these should take.
Procurement Policy 2014
Internal Audit reviewed the current Procurement Policy to assess whether the weaknesses highlighted
in our testing at Section 1, and summarised above, were still in place in the revised document.
Financial viability assessment
Annex 6 of the 2014 Policy documents the processes which will be undertaken to assess the financial
viability of a contractor. The guidance includes the following:
The scale of assessment should be commensurate with the size and complexity of the procurement
contract being considered, and an assessment of the risk to which it exposes the Company.
Assessment should take place at an appropriate point in each procurement process, minimising the
cost of the exercise for both DGHP and the supplier.
Assessment may be carried out by either the Finance team, or by using an external source where
the assessment is felt to be higher risk or outside the expertise of staff in house.
Information to be obtained is specified, tailored according to the perceived risk of the procurement
exercise to the Company.
Key financial ratios to be considered in the assessment are specified. This includes profitability,
liquidity, gearing and financial stability.
Where a contractor is part of a group structure, the Policy requires an assessment of inter-company
lending and guarantees.
Criteria to reject contractor
Annex 2 of the 2014 Policy is a standard pre-qualification questionnaire. Form B of this Annex is
entitled Grounds for Mandatory Rejection. This itemises certain prior convictions on the part of the
contractor, any of its directors, or other persons controlling its activities, which will disqualify the
contractor from being considered for contracts.
Form C of the Annex outlines Grounds for Discretionary Rejection. These include bankruptcy,
insolvency, failure to pay taxes and lacking appropriate licences or professional memberships.
Board involvement
Part 2, Section 2.4 of the 2014 Policy states that “in the case of contracts in excess of £10m, the Board
would need to be involved throughout the process”.
Part 3, Section 2.2.3 states that “If the goods/services to be procured will be in excess of £10m then 2
Board Members need to be on the (PQQ or Tender assessment) Panel”.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 3 (continued)
Procurement Policy 2014 (continued)
Risk management
The 2014 Policy states that risks should be identified at the start of a procurement project. It notes that
the Company’s strategy is to minimise all forms of risk, including financial, operational, strategic,
commercial and legal. The project manager is responsible for documenting all project risks in a risk
register at the outset of the procurement exercise. Part 2, Annex 3 of the Policy specifies a format for
the risk register, which includes consequences of the risk crystallising, mitigation strategies and
responsibility, and an assessment of unmitigated and mitigated impact and likelihood.
Conclusion
In our opinion, the 2014 Procurement Policy has corrected the weaknesses which were highlighted in
previous versions of the document during Internal Audit’s testing at section 1 of this report.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 4
4. Establish a timeline for the procurement process, from start to end, including up to the signing of the
contract with R&D Construction Ltd.
4a. Identify if the financial viability issues could have been identified earlier in the process by
DGHP.
Timeline
Date Action
26/02/2008 Prior Information Notice issued (PIN) in the Official Journal of the European
Union. 2008/S41-056735
28/04/2008 Open Day for prospective contractors held in Dumfries.
05/06/2008 Contract Notice issued in the Official Journal of the European Union.
11/07/2008 PQQ deadline. 11 prospective contractors responded.
05/08/2008
PQQs had returned only 2 applications in respect of the original Lot 2 (Stranraer)
so the Purchasing and Project Manager wrote to all contractors saying that only
Lot 3 would now be tendered (Dumfries and Stranraer) and asking if they would
still wish to be considered.
10/10/2008 ITT sent to top 8 contractors.
29/10/2008 Checksure report on R&D Construction Group Limited. Score 47/100, above
average risk.
03/11/2008 Checksure report on Robison & Davidson (Holdings) Ltd. Score 53/100, average
risk.
24/11/2008 Revised presentation scoring mechanism circulated to contractors who were
invited to tender.
26/11/2008 New version of DGHP’s Procurement Policy approved by the Board.
05/12/2008 3 tender documents returned and opened.
08/12/2008 Interviews to assess quality and price of submissions; assessment of tenders.
30/01/2009 Checksure report on R&D Construction Group Limited (automatic update). Score
42/100, above average risk.
06/02/2009 A summary of tenders produced by the Procurement & Program Manager for the
Head of Regeneration and Development.
16/02/2009 R&D Construction Ltd recommended to the I&R Committee, minutes show the
recommendation was accepted by the Committee.
19/05/2009 R&D Construction Ltd started work on site.
19/05/2009 Tender acceptance letter from DGHP to R&D, signed by the Director of
Investment & Regeneration.
05/08/2009 Formal Building Contract, signed by the Director of Investment & Regeneration.
05/08/2009 Formal Development Agreement, signed by the Director of Investment &
Regeneration.
05/08/2009 Parent Company Guarantee.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
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Objective 4 (continued)
Timeline (continued)
Date Action
02/09/2009 Contract Award Notice published via OJEU.
02/09/2009 Checksure report on R&D Construction Group Limited – automatic update.
Score 12/100, very high risk.
02/11/2009 Checksure report on R&D Construction Group Limited – automatic update.
Score 12/100, very high risk.
07/04/2011 Company administration reported.
18/04/2011 Contractor and holding company filed for administration.
4a. Identification of financial viability issues
Internal Audit discussed controls to identify a worsening of a contractor’s financial position with the
Director of Finance. He advised that, in the case of a large contract such as this, the Company would
set up automatic notifications from CheckSure, the independent financial checks site used for financial
assessments of third parties. He noted that in practice this would only flag up issues where:
The most recent set of audited accounts indicated liquidity or other going concern issues.
Financing or refinancing arrangements had been entered into which gave a third party specific rights
over the contractor’s assets.
Directorships or registered business addresses had changed.
Where CheckSure newly showed a Director as having ‘adverse information’ associated with one or
more of his other directorships.
The Director of Investment & Regeneration stated that R&D Construction Ltd was a locally-based
company which was well-established within the local community. As such, DGHP had good, informal
routes into information about the contractor’s situation from contacts at other businesses in the area. In
addition, DGHP had a design team operating within each of the 4 sub-projects relating to the contract,
and staff on the design team were in daily contact with the contractor’s staff, on site and by telephone.
He advised that he was unaware of indications of R&D Construction Ltd’s financial difficulties much
before the contractor entered administration in April 2011; but that rumours had begun to circulate the
week before this happened, and when attempts to contact the contractor’s Directors to discuss the
rumours had failed, DGHP took steps to ensure the integrity of the construction sites and contents
thereof. The administration was reported the next week.
Checksure
Internal Audit reviewed CheckSure reports held in respect of R&D Construction Ltd. At 29th October
2008, CheckSure scored the contractor as 47/100, which it classed at above average risk. By 30th
January 2009, CheckSure was reporting the contractor’s score as 42/100; this did not affect the risk
assessment.
The Tender Acceptance Letter was signed by DGHP on 19th May 2009. The Director of Investment &
Regeneration advised that, in Scottish law, this is the point at which the contract became legally
binding. The issue of the formal Building Contract on 5th August 2009 confirmed an existing, legally
binding agreement.
A CheckSure report dated 2nd
September 2009 showed the R&D Construction Ltd score to have fallen
to 12/100; the contractor was now classified as very high risk. This was after the point at which DGHP
could choose to not enter into the contract.
Beever and Struthers Investigation into the procurement process for R&D Construction Ltd – August 2014
29
Objective 4 (continued)
Conclusion
4a. In our opinion, appropriate formal and informal controls were in place to enable DGHP to monitor
the contractor’s financial viability through the contract period.