Investigation into the procurement process for R&D ... report...Beever and Struthers Investigation...

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


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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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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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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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


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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


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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Compliance with DGHP’s Procurement Policy



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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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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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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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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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).



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.


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Compliance with DGHP Policies



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.


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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.


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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.


16

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.

http://www.scotland.gov.uk/Topics/Built-Environment/Housing/investment/guidancenotes/olderguidance/csgn200302

http://www.scotland.gov.uk/Topics/Built-Environment/Housing/investment/guidancenotes/olderguidance/csgn200302


17


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 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 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.


18



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.


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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.


20


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.


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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.


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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.


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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.


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Comment if any weaknesses identified in the financial assessment process could have led to R&D


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.


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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”.


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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.


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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.


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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.


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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.

Investigation into the procurement process for R&D ... report...Beever and Struthers Investigation...

Documents

Transcript of Investigation into the procurement process for R&D ... report...Beever and Struthers Investigation...