I. Introduction
It’s the dreaded scenario: A bidder is selected after a lengthy and robust procurement process, but during the contract’s execution the contractor fails to deliver what it promised. Despite a host of procedural safeguards—competitive bidding, review of qualifications, contract management and supervision – the contractor’s non-performance means that the procurement has failed to achieve its purpose of ensuring the proper delivery of goods and services. In this scenario, the government would likely be able to exercise its contractual remedies against the defaulting contractor, but contractual remedies may not be enough to protect the government from future performance issues.
Enter the concept of past performance. Procurement experts have long recognized that a contractor’s ability to deliver goods and services can be predicted, in part, by the contractor’s past performance. One way to protect against unreliable contractors is to require bidders and offerors to demonstrate that they have a satisfactory performance record. Taken further, bidders with a history of serious performance issues—like a contractual default—could risk being excluded from participating in future procurements altogether.
As procurement experts around the world continue to acknowledge the significant impacts that poor performing contractors can have on procurement outcomes, many jurisdictions are using exclusions and “debarments” (also referred to as disqualification, suspension, or blacklisting) to protect their public funds from poor performers, in addition to wrongdoers. As an example of this trend, the European Union recognized for the first time, in its 2014 Procurement Directive, that contracting authorities should “be able to exclude candidates or tenderers whose performance in earlier public contracts has shown major deficiencies with regard to substantive requirements.
The increasing efforts by many jurisdictions to find ways to address poor performers is also forcing procurement experts to reassess the purpose and impact of using exclusions in procurement. The use of exclusions rose in prominence over the last decade primarily as an anti-corruption tool, and discussions about exclusions are often tinged with an anti-corruption focus.
But exclusions based on poor performance do not necessarily fit within the “deterrence” and “punishment” paradigms that often justify exclusions based on malfeasance. Performance failures are often highly contextual. Failing to perform a high-value complex construction contract may not necessarily imply that the contractor would be unable to perform a low-value supply contract, or that a previous contractor for construction works would be unable to deliver services.
This article provides a comparative analysis of several jurisdictions that consider a contractor’s poor performance as a basis for either disqualification or debarment. As noted below, although many jurisdictions include poor performance as a basis for exclusion, the available guidance, prevalence, and experiences of using this basis varies widely. To the extent possible, the article analyzes what constitutes sufficiently poor performance to justify exclusion in each jurisdiction and the types of factors that should ultimately be considered when determining if a potential contractor should be disqualified or publicly debarred for poor performance.
In review of the legal procurement frameworks for 24 jurisdictions, 15 of which allow for the exclusion of a contractor based on some level of poor performance. This Part also provides a more detailed overview of how poor performance is addressed in six of these jurisdictions: New Zealand, the Philippines, South Africa, Tanzania, the United States, and the United Kingdom. Part IV draws on the experiences of these reviewed jurisdictions and provides a non-exhaustive list of considerations for how to address poor performance; specifically, (i) elevate to the policy level the objective of doing business only with reliable contractors; (ii) define, to the extent possible, the various degrees of non-performance or poor performance that the system considers to be unacceptable; and (iii) empower procurement officials to obtain and consider past performance information.
II. Policy Rationales Behind Exclusion in a Procurement System
The objectives of public procurement are numerous and, at times, contradictory. Professor Steven Schooner articulated a list of “nine goals frequently identified for government procurement systems” in a seminal 2002 article and readily acknowledged that his list was neither exhaustive nor internally consistent. It can therefore be challenging to articulate the purpose of any given procurement tool, and exclusions are no exception. Professor Schooner defines exclusions as “administrative remedies” designed to “disqualify contractors or individuals” from obtaining public contracts. Professor Sarah Schoenmaekers similarly defines “exclusions” as “administrative remedies utilized by governments to disqualify contractors from obtaining public contracts or extensions to existing contracts. Professor Sope Williams-Elegbe notes, however, that this definition does not “take into account the fact that debarment in some jurisdictions is of a judicial and not administrative nature, being imposed by the courts as part of the sentence for corporate crime. Professor Williams-Elegbe thus defines exclusions as “any kind of public exclusionary measure” and includes measures that both “deny a contractor access to public contracts for a specified period” and “the one-off exclusion or disqualification of a contractor from a particular procurement process, without any implications beyond that process.
This article adopts Professor Williams-Elegbe’s definition and uses the term “exclusions” to refer to both the government-wide disqualification of a contractor for a specific period of time (which this article refers to as “debarment”) and the disqualification of a bidder or potential contractor that is limited to an individual procurement process (which this article refers to as “disqualification”). Of course, a debarment in many jurisdictions has the added consequence of a public notification. In these situations, the debarred contractor’s name is posted on a public debarment list indicating that this entity or individual is not eligible to do business with the government. The public nature of such a posting increases the debarment’s reputational consequences and often places the contractor in a difficult position with respect to its other business partners. Contract-specific disqualifications, on the other hand, are rarely disclosed publicly.
According to Caroline Nicholas, exclusion systems generally fall into one of two categories; the system’s main focus will either be to protect the government buyer or to punish the wrongdoer:
In the suspension and debarment context, and while all systems are designed to deter wrongdoing as well as to impose consequences, there is generally one of two discrete approaches. On the one hand, the primary objective may be to protect the government customer from individuals and organizations with which it should not do business or to which it should not entrust public funds, whether the risk arises in terms of performance, reputation or both. On the other, the system’s main focus may be on the punishment of suppliers that do engage in integrity violations.
Systems are often termed “discretionary”, or “mandatory” or “punitive”, largely reflecting these differences in approach.
Other potential objectives of an exclusion system include maintaining the public’s trust in, and promoting the legitimacy of, government and ensuring the integrity of the procurement process.16 Deterrence is also a commonly-cited objective of exclusions. Professor Schoenmaekers notes that “the threat of debarment as well as the impact of negative publicity can deter contractors from committing wrongdoing” and argues that deterrence could be seen as “a tool to bring about cultural change in company behaviour and to increase cost-efficiency. But at least in the United States, deterrence is a concept firmly rooted in criminal law. The U.S. Supreme Court, in addressing what governmental actions may constitute “punishment,” has stated that actions are not punishment if they are related to a legitimate governmental objective, while at the same time noting that “[r]etribution and deterrence are not legitimate nonpunitive governmental objectives.
Of course, few jurisdictions expressly articulate their purposes for excluding firms and individuals from their procurement processes, although Professor Williams-Elegbe rightly notes that a system’s “purpose may be gleaned from various aspects of the measure. Tanzania, the World Bank, and the United States are three of the few jurisdictions that expressly state the goals of their exclusion systems. Tanzania provides that its “debarment process” is designed to ensure compliance with its procurement rules and regulations, deter firms and individuals from engaging in misconduct, and “punish” those firms and individuals that have engaged in misconduct or “breach[ed] [their] procurement contracts. The World Bank, on the other hand, uses sanctions “to deter but not to punish” and with the aim of “creat[ing] both negative incentives to discourage the sanctioned party and others from engaging in future [misconduct] and positive incentives to encourage prevention, remediation and rehabilitation. Similarly, the United States’ procurement system makes clear that a firm or individual should be excluded “only in the public interest for the Government’s protection and not for purposes of punishment.
Whatever the intended purpose of an exclusion, the effect is generally the removal of the contractor from the procurement system either for a specific procurement process or for a period of time. Identifying whether an exclusion is “punitive” or “protective” thus depends, in part, on why the exclusion was imposed. Several commentators have questioned the protective effect of an exclusion based solely on a contractor’s past acts without giving the contractor an opportunity to first remediate or “self-clean. Indeed, the U.S. Supreme Court has held that, at least in the context of contempt proceedings, an “unconditional penalty is criminal in nature because it is ‘solely and exclusively punitive in character,’” while a conditional penalty “is civil because it is specifically designed to compel the doing of some act. Hence, an exclusion system would be primarily protective in nature if it allows contractors to avoid exclusion (or reduce their period of exclusion) by demonstrating that they have sufficiently remediated the misconduct and no longer present a risk to the government.26
III. Poor Performance as a Basis for Exclusion: Examining Current Regimes
Whatever the theoretical underpinnings may be for excluding contractors, using poor performance as a basis for exclusion is undeniably prevalent across many procurement systems. The authors conducted a desk review of the procurement laws and exclusion provisions of 24 jurisdictions, including the European Commission and the five multilateral development banks (“MDBs”) that are party to the 2010 Agreement for the Mutual Enforcement of Debarment Decisions. Of those 24 jurisdictions, 15 allow for the exclusion of a contractor based on some level of poor performance. At least 10 of those jurisdictions have a public debarment list. This review demonstrates the prevalence of poor performance as a basis to exclude contractors from receiving procurement contracts.
Most of the jurisdictions reviewed describe the ground for exclusion in terms of the contractor’s “failure” to perform its obligations under the contract. But there does not appear to be a consistent standard defining the level of non-performance that would justify an exclusion. The provisions of several jurisdictions could be interpreted as allowing for exclusion based on even minor failures, delays, or deviations, although it may be possible to interpret these provisions in the context of available commercial contract principles. Both commercial and civil law traditions contain doctrines requiring the non-breaching party to act reasonably in deciding whether to suspend its own performance or terminate the contract in response to the breach. In the common law tradition, the concept of “substantial performance” was created to prevent the non-breaching party from withholding its own performance in its entirety when faced with minor or trivial breaches. The Principles of European Contract Law similarly provide that a party may terminate a contract only if the other party’s non-performance was “fundamental” to the contract. What is unclear is the extent to which these principles may be considered in any exclusion decision based on a contractor’s failure to perform.
Other jurisdictions provide more explicit limitations on when a contractor’s non-performance would lead to exclusion. Two jurisdictions—Cameroon and the Philippines – explicitly require a termination of the contract due to the contract’s non-performance before excluding the contractor. Six other jurisdictions appear to require that the contractor’s failure to perform be sufficiently serious or material to warrant exclusion. China’s Law on Tenders and Bids, which applies to large construction and public works tendering, provides that a winning bidder will be excluded for two to five years if the bidder “fails to fulfill his obligations according to the contract signed with the bid invitee and the circumstances are serious. In New Zealand, Rule 41 of the Government Rules of Sourcing provides that an agency may disqualify a supplier from bidding for a contract if the bidder had “a serious performance issue in a previous contract. The United States’ debarment regulations similarly provide that a contractor may be debarred for violating “the terms of a Government contract or subcontract so serious[ly] as to justify debarment,” including “[w]illful failure to perform” and “[a] history of failure to perform.
The exclusion provisions of the European Commission and the United Kingdom (which transposed the 2014 EU Procurement Directive) require a showing of “significant” or “persistent” deficiencies in the contractor’s performance of the contract’s “main obligations” or “substantive requirements. Zimbabwe similarly requires a showing that the contractor failed “without good cause to carry out a material provision” of the contract.39 All three of these jurisdictions will also not exclude a contractor unless the contracting authority had previously terminated the contract for default or applied other contractual remedies, such as liquidated damages.
IV. Punishment versus Protection: What Makes the Most Sense?
The jurisdictions detailed above all generally use exclusions to mitigate risks and ensure the integrity of their procurement systems. But these jurisdictions each take slightly different approaches to addressing poor performing contractors. Certain jurisdictions—like New Zealand and the United Kingdom—provide discretion to procurement officials to disqualify, on a contract-by-contract basis, contractors with an unsatisfactory performance record, and provides those contractors with an opportunity to demonstrate that they are presently reliable notwithstanding prior performance issues.111 Other jurisdictions—like the Philippines and Tanzania—take a more punitive approach and publicly debar poorly-performing contractors without giving them an opportunity to remediate.
The jurisdictions reviewed demonstrate that there are numerous ways to address poor performance in a procurement system, each with its own benefits and drawbacks. In the authors’ views, an ideal system would seek to, among other things: (i) elevate to the policy level the objective of doing business only with reliable contractors; (ii) define, to the extent possible, the various degrees of non-performance or poor performance the system considers to be unacceptable; and (iii) empower procurement officials by providing them with the tools necessary to obtain and consider past performance information.
Whatever the approach, it is important to consider a procurement system’s stated objectives, and the costly consequences that exclusions often bring to errant contractors, before embarking on a complicated effort to evaluate past performance. As commentators have argued, a contractor’s exclusion from procurements could be potentially devastating to the entity and may put the contractor out of business. The consequences of an exclusion are even more significant when the debarment of a firm or individual is publicly listed. Although public debarment is often viewed as an adequate and effective measure against firms and individuals found to have engaged in fraud, corruption, or other misconduct, it is not immediately evident that the same measures are warranted when it comes to poor performance. There may instead be other appropriate alternatives to public debarment, especially in a “protective” regime.
a. Elevate the objective of doing business only with reliable contractors.
To appropriately empower procurement officials to address performance issues, procurement systems should consider explicitly articulating, at the policy level, that a key element of obtaining value for money is by doing business with reliable contractors only. Jurisdictions are increasingly recognizing the importance of designing procurement systems with the goal of obtaining best value. Announcing, through the legal framework’s main policy document, that the government will not do business with unreliable contractors sends a clear message to all and empowers contracting authorities to consider past performance when making procurement decisions. Such a policy statement would also force contracting authorities to consider how to best deal with contractors found to be unreliable, whether through some form of sanction or punishment, or through more protective measures designed to protect public funds and manage performance risk.
b. Define, to the extent possible, the various degrees of non-performance or poor performance that are unacceptable.
In addition to elevating the principle of doing business only with reliable contractors, it is also important that a procurement system defines what level of “poor” performance would be unacceptable and would warrant exclusion. As discussed above, there does not appear to be a consistent standard across jurisdictions. Certain jurisdictions, like the Philippines and the United States, provide detailed guidance on what actions would justify an exclusion for poor performance.117 Other jurisdictions, like South Africa, do not explicitly define the scope of the contractor’s “fail[ure] to perform” that would lead to exclusion.
The varying definitions of what constitutes “poor” performance is likely due to the many different contexts, technical capacities, legal regimes, and experiences of procurement officials from around the world. While definitions of misconduct like “corruption” and “fraud” derive from criminal law and almost always signal a contractor’s malevolent intent, the quality of a contractor’s performance is highly dependent on the contract’s terms and the government’s specific needs, and an unsatisfactory outcome could be due to many different reasons beyond a willful refusal to perform, such as a lack of resources (human or financial), financial difficulties, multiple ongoing contracts, or the government’s own actions.
Presumably because of the many possible reasons for an unsatisfactory result, several jurisdictions require the exercise of certain contractual remedies against a contractor before excluding it from future procurements. Indeed, exercising these contractual remedies, such as a termination for default or liquidated damages, is itself a useful tool to mitigate risk and prevent non-performance. A government’s use of contractual remedies often results in serious consequences, not just for the contractor but also for the government. For example, a termination for default usually means that the government agency will lose time and money engaging in reprocurement efforts and may get involved in lengthy and disruptive litigation.122 But in addition to terminations, government agencies often have access to other available contractual remedies, like liquidated or delay damages, partial or full recalling of performance security, advance payment securities, and the filing of claims. Exercising contractual remedies consistently and diligently can assist in deterring poor performance and can provide more objective indicators for when exclusions might be appropriate.
c. Empower contracting officials to obtain and consider past performance information in evaluating bids and awarding contracts.
Finally, and most importantly, the procurement framework should empower contracting authorities to obtain and consider past performance information. At its core, a bidder’s history of performing similar contracts is used as a proxy for the likelihood that the bidder, if selected, will successfully perform the current contract. As noted by Steven Kelman, former Administrator for the U.S. Office of Federal Procurement Policy, “Commercial buyers have long recognized that a contractor’s track record is a good predictor of future performance and routinely consider it when awarding contracts. Even in the commercial marketplace, it makes sense to consider an entity’s past performance as a way to reduce risk and ensure best value.
Many jurisdictions already consider a bidder’s past performance solely as a minimum qualification standard—i.e., a risk avoidance mechanism designed to “screen out” bidders who are likely to default based on previous instances of non-performance. In the United States, this takes the form of a “responsibility” determination, which “is used to filter out undesirable or incompetent contractors. The European Union’s 2014 Procurement Directive similarly provides that “[c]ontracting authorities may require . . . that economic operators have a sufficient level of experience demonstrated by suitable references from contracts performed in the past. And the UNCITRAL Model Law on Public Procurement provides that procuring entities may require that bidders “have the necessary professional, technical and environmental qualifications, . . . managerial capability, reliability, experience and personnel to perform the procurement contract.
At the same time, it is not uncommon for a procurement system to limit the analysis of a bidder’s past performance to a straightforward confirmation of the number of contracts the bidder has completed and the similarity of those contracts with the present procurement. Under the World Bank’s procurement rules, past performance is normally assessed by borrowers as part of a bidder’s technical capabilities. For example, bidders in international competitive procurements are generally required to demonstrate their technical experience by showing that they have completed a minimum number of contracts of a similar value, nature, and complexity as the contract in question. In procurements for works contracts, bidders are also required to disclose any history of non-performance of previous contracts that may have occurred in the last five years (or other period specified in the tender documents).
Other procurement systems, like the United Kingdom, New Zealand, and the United States, provide a greater mandate to procurement officials to seek information on past performance, determine its acceptability, and evaluate any associated risks. These procurement systems also provide bidders with an opportunity to respond to any instances of poor past performance by challenging the determinations, providing clarifications, outlining any actions they may have since taken to address the issue, or explaining why past performance problems are unlikely to recur. The United States takes its past performance assessments a step further and provides for a qualitative and comparative assessment of offerors’ past performance history in negotiated procurements.
Jurisdictions could consider adopting similar practices as a tool to achieve value for money and ensure delivery of quality goods, works, and services. At the same time, the authors recognize that ensuring the successful, fair, and transparent evaluation of a subjective criterion like past performance would first require the development of: (i) adequate capacity and professionalism of contracting officials, and (ii) a sufficiently robust procurement governance environment. Among the various aspects of the procurement process, the evaluation of past performance entails subjectivity and exercise of good professional judgment, which are gained through experience and training. In many countries, “the public officials responsible for procurement need to be adequately trained and empowered to exercise discretion and professional judgement as necessary to ensure the successful outcome of the project, while ensuring that all such decisions are transparent, fully documented and justified. The European Commission recognized in its recommendations to its member states on the professionalization of the procurement workforce that “[t]he most efficient use of public funds needs to be ensured and public buyers need to be in a position to procure according to the highest standards of professionalism. Enhancing and supporting professionalism among public procurement practitioners can help foster the impact of public procurement in the whole economy. The OECD further maintains that “[a]n efficient public procurement system is founded on the availability of a professional, value-driven and integrity-conscious management function within contracting authorities and entities that delivers
A jurisdiction’s procurement governance system is also a critical factor in evaluating the potential success of implementing a more nuanced evaluation of past performance information by procuring agencies. Public procurement is one of the government activities most vulnerable to corruption, which explains the reluctance of many jurisdictions to allow for discretion in procurement decisions. A public service system subject to limited regulation and a lack of transparency is more likely to suffer from higher incidences of fraud and corruption, and providing procurement authorities with greater discretion to consider subjective factors would likely increase integrity and performance risks. Thus, while it might make the most sense, in an ideal situation, to take a more nuanced disqualification approach over public debarment to address poor performers, the mandatory debarment of non-performers may be appropriate in environments that lack sufficient procurement capacities and governance systems.
V. Conclusion
Excluding poorly performing contractors from participating in future procurement’s can be an effective way to mitigate risk, protect public funds, and obtain value for money. Many procurement systems already exclude contractors for poor performance. But the available guidance as to the level of non-performance justifying an exclusion varies across jurisdictions. The authors’ review of several different procurement systems reveals that there are many different approaches to addressing poor performers, with certain approaches taking a more “protective” focus while others are designed to be more “punitive. In the authors’ views, any approach to addressing poor performance should, in an ideal environment, clearly articulate obtaining reliable contractors as one of the procurement system’s policy objectives, provide sufficient guidance as to when non-performance justifies exclusionary measures, and empower procurement authorities to obtain and consider past performance information. Of course, an effective approach should also adequately consider the overarching procurement objectives and understand the existing procurement environment. Procurement experts should continue to examine commonalities and distinctions in the many uses of exclusions against poor performers to further identify best practices and assist procurement systems in obtaining value for money.
