Assessing economic and financial standing: the government guidance for buyers and bidders, explained

The key facts

• The guidance applies to all central government departments, their executive agencies and non departmental public bodies, and other contracting authorities may adopt it at their discretion.
• It is expected to apply to new procurements with an expected contract value exceeding the relevant threshold in the Procurement Act 2023, on a comply or explain basis, and covers services and works contracts.
• Assessment of economic and financial standing (EFS) sits within conditions of participation under the Act, and any condition must be a proportionate means of ensuring suppliers have the financial capacity to perform the contract.
• Contracts should be categorised using the Contract Tiering Tool as Gold (most critical), Silver or Bronze (least critical), and that categorisation drives the depth of assessment and the risk scales used.
• Assessment must be transparent, objective and non discriminatory, and bidders should be able to see their performance against the scales and explain why a different risk classification may be more appropriate.
• Alternative standardised ratios are available for voluntary, community and social enterprises, and no SME, public service mutual or third sector organisation should be inadvertently disadvantaged.
• Contracting authorities are prohibited from requiring audited annual accounts as a condition of participation from suppliers not otherwise required to have accounts audited under Part 16 of the Companies Act 2006 or an overseas equivalent.
• Immediately prior to award for Gold and Silver contracts, authorities should confirm whether a bidder's EFS has changed in a way that would have altered the original risk assessment.
• Mitigations include parent company guarantees, performance, conditional and on demand bonds, step in rights, insurance and escrow, all to be applied proportionately with cost reflected in the bidder's price.

What the guidance covers and when it applies

Assessing and monitoring the economic and financial standing of suppliers is, in the guidance's own framing, about understanding the financial capacity of suppliers to perform a contract in order to safeguard the delivery of public services. The note gives advice on three things: assessing bidder EFS before award, monitoring supplier EFS during the life of a contract, and mitigating the financial risks identified from that evaluation either upfront or later.

It applies to all central government departments, their executive agencies and non departmental public bodies, described in the document as in scope organisations. Other contracting authorities may choose to incorporate it in their procurements. It is expected to apply to all new procurements with an expected contract value exceeding the relevant threshold set out in the Procurement Act 2023, with in scope organisations adopting a comply or explain approach where the recommended method does not suit a particular procurement.

The guidance covers services and works contracts. Model contractual provisions dealing with ongoing EFS monitoring sit in the Financial Distress or Financial Difficulties schedules of the Model Services Contract and the Mid-Tier Contract, although neither is intended for works contracts, where industry specific contracts are recommended. The stated reason for taking any of this seriously is practical: appointing a financially challenged supplier can lead to sub optimal behaviours, partial or complete failure to deliver, additional cost in re procurement or bringing services in house, higher prices for urgent interim arrangements, and delays or risks to critical public services.

Principles, proportionality and fair treatment

The Act allows contracting authorities to set conditions of participation that a supplier must satisfy to take part in a competitive tendering procedure, including conditions relating to financial capacity. Any such condition must be a proportionate means of ensuring suppliers have that capacity, having regard to the nature, cost and complexity of the contract, and authorities must also have regard to the importance of delivering value for money.

Fair treatment is central. All bidders, whatever their size and constitution, are to be treated the same during EFS assessment unless a difference between them justifies different treatment. No SME, public service mutual or third sector organisation should be inadvertently disadvantaged by the approach or metrics applied. The guidance suggests achieving this by allowing all bidders to propose relevant mitigations where risks arise from their size or structure. Section 12 of the Act is cited directly, and it underpins the availability of alternative standardised ratios for voluntary, community and social enterprises whose accounting requirements differ from entities inside the Companies Act 2006 regime. Where alternate ratios will be used, that should be identified in advance and set out in the tender notice or associated documents.

Assessment should be transparent and objective, based on performance against a set of metrics and ratios with appropriate scales indicating lower and higher financial risk. Bidders should be able to see their performance against those scales as they complete the assessment and, where relevant, explain why a different risk classification would be more appropriate. Assessment should be conducted by staff with appropriate finance skills, drawing on specialist expertise where needed, which may include consulting the Cabinet Office Markets, Sourcing and Suppliers team about suppliers operating across government and any systemic risks.

On information sources, Regulation 6 of the Procurement Regulations 2024 requires authorities to obtain confirmation that suppliers have submitted up to date core supplier information on the central digital platform and that it has been shared, including certain financial information such as financial accounts. Anything else needed for conditions of participation must be obtained by other means, for example the Financial Viability and Risk Assessment tool. Authorities may also choose to assess EFS after confirming other conditions of participation are met, to reduce the number of assessments needed.

Tiering, evidence and clarification

Before starting a procurement, authorities should determine the criticality of the potential contract or framework lot, because criticality drives the level of assessment, the scales used and the contract management that follows. The Cabinet Office Contract Tiering Tool measures criticality using criteria including the potential impact of service failure, the speed and ease of switching suppliers, and contract value, producing a Gold, Silver or Bronze categorisation that is made known to suppliers as part of the process.

For Bronze contracts, typically smaller and simpler for non critical works and services, a more basic assessment may be appropriate, potentially using off the shelf analyses from credit score or ratings agencies. The guidance gives examples of higher risk thresholds such as 35 for a Company Watch H score or 50 for a Dun and Bradstreet failure score, and is firm that off the shelf scores should not on their own be used to conclude a bidder is higher risk without further investigation. Where they indicate higher risk, a more detailed assessment including ratio analysis should follow. Silver contracts warrant a more detailed assessment using the standard metrics and ratios, and authorities may use the short form lite version of the Financial Viability and Risk Assessment tool. Gold contracts warrant a very detailed assessment, normally including the standard metrics as a minimum, with scales set at the same level as Silver or higher, plus consideration of additional metrics or trend analysis.

On evidence, authorities are encouraged to be flexible. They are prohibited from requiring audited annual accounts as a condition of participation from suppliers not otherwise required to have audited accounts under Part 16 of the Companies Act 2006 or an overseas equivalent. Alternatives include parent company audited accounts, guarantees and bonds, bankers' statements and references, management accounts, financial projections and order book pipeline, evidence of previous contracts and their values, other evidence of capital availability, and charity annual returns. Because most companies need only file accounts nine months after year end, where the latest published statements are drawn up to a date more than twelve months before submission, authorities should consider requesting more recent management accounts. Management accounts and projections should be supported at minimum by written board representations and ideally independent assurance.

Clarification is a required step, not an optional courtesy. Clarification questions should specify the source of the concern, ask why it arises, probe how the bidder is addressing it and invite additional evidence. Acceptable explanations may include one off items, improvements since the accounting reference date, new accounting policies, alternative ratio calculations or one off use of restricted charity reserves. Where circumstances have changed, an authority may calculate pro forma ratios, for example following an announced acquisition, a large dividend or a profits warning, but it should explain how they were derived and give the bidder the right to argue in writing for a different classification first. In multi stage procedures, EFS should be monitored from selection through to award, and immediately before award for Gold and Silver contracts the authority should confirm nothing has changed that would have altered the risk assessment. If a winning bidder's EFS has deteriorated to an unacceptable degree, the contract should not be awarded to them.

Mitigations and monitoring after award

A higher risk classification does not automatically end a bid. The guidance is explicit that an authority may allow bidders to proceed despite an overall medium or high risk classification, subject to agreeing a set of risk mitigations. Where a bidder is part of a group, a parent company guarantee may be sought, and a written commitment from the parent is normally sufficient prior to award, with the guarantor's own EFS assessed. Where a key subcontractor is identified, the assessment should cover both the bidding entity and that subcontractor, and reliance on a higher risk guarantor or subcontractor makes the bidder higher risk. For joint ventures, special purpose vehicles and consortia, authorities should normally seek joint and several guarantees rather than proportionate ones.

Bonds and guarantees crystallise only after failure, so they are a remedy rather than direct support for performance. Performance bonds are usually provided at award for an agreed percentage of contract value. Conditional bonds can generally only be called following a serious breach including insolvency. On demand bonds are expensive and more onerous, and should typically be reserved for high risk or high value projects. The guidance warns that bonds can be burdensome for small and medium value contracts, that their cost will be reflected in tenders, and that requirements could effectively preclude smaller firms from bidding. Performance bonds are common in construction and would not normally support services contracts. It is generally preferable to seek a parent company bond or guarantee first where credible.

Other mitigations include step in rights, allowing an authority to take over some or all of a supplier's obligations temporarily to rectify a problem before returning control, noting that a permanent replacement supplier would require a fresh competition. Insurance requirements can be adjusted for financial risk, though authorities are not permitted to require insurance to be in place prior to contract award. Escrow arrangements can protect critical software and technology assets by holding source code with a neutral third party for release under defined conditions, and should not be required for open source software.

Whatever is agreed must be carried into the contract. Additional commitments made during procurement, for example more regular financial monitoring, should appear in the awarded contract. Terms should specify precisely what financial information is required, how often and in what format, with requirements reasonable and proportionate to criticality. Frameworks are treated the same way in principle: assess bidder EFS as for a standard contract, consider the cumulative value of possible awards, and monitor ongoing EFS. Section 46 of the Act allows conditions of participation at call off stage where the framework permits it, so authorities establishing frameworks should build that in, and should not use a framework whose EFS assessment does not match the criticality of the call off.

How eSourcing Data helps

This guidance asks for something structurally simple and operationally hard: a tiering decision made before the procurement starts, a metric set and scale chosen and published in advance, a transparent assessment bidders can see, a clarification exchange that is properly recorded, and a mitigation that survives into the contract. eSourcing Data holds those steps as a sequence rather than a set of separate documents, so the tier, the conditions of participation and the assessment approach are attached to the procurement from the outset and appear in the notice and tender documentation consistently.

The clarification and fairness requirements are where an audit trail earns its keep. Because assessment must be transparent, objective and non discriminatory, and because bidders have the right to argue for a different risk classification, an authority needs to show what was asked, what was supplied, what pro forma calculation was applied and why, and how the explanation was weighed. eSourcing Data timestamps clarification questions and responses, keeps evidence against the bidder record, and treats non public financial information as confidential material tied to that procurement, which is the standard the guidance sets.

After award, the requirement shifts from assessment to monitoring, and this is where most portfolios drift. eSourcing Data carries the agreed mitigations and reporting obligations into the contract record, so the guarantee, the additional information frequency or the extra monitoring commitment is visible to whoever manages the contract in three years, not just to the team that ran the competition. Portfolio reporting shows which Gold and Silver contracts have a current EFS review and which mitigations are in place, giving commercial leadership the assurance picture without a manual data gathering exercise.

What to do about it

1. 1Tier every contract and framework lot as Gold, Silver or Bronze using the Contract Tiering Tool before the procurement starts, and let the tier drive the depth of assessment.
2. 2Publish the metrics, ratios and risk scales in advance, including any alternative ratios for voluntary, community and social enterprises, in the tender notice or associated documents.
3. 3Specify in advance the points on the scale at which a bidder would be required to provide mitigations, and keep those values transparent, objective and proportionate.
4. 4Do not require audited accounts from bidders not legally obliged to have them, and offer a range of acceptable alternative evidence.
5. 5Run a proper clarification stage: name the concern, ask why, probe the remedy and invite evidence, and give bidders the chance to argue for a different classification before applying pro forma ratios.
6. 6For Gold and Silver contracts, re confirm the winning bidder's EFS immediately before award and reassess whether mitigations remain adequate.
7. 7Write agreed mitigations and additional financial reporting obligations into the contract, with the frequency and format specified, and set up the post award monitoring routine at the same time.