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Commercial Management

Lecture 2 Bidding and Bid Evaluation: Clients Processes & Procedures


for every contract there is the optimum bidder who is not only capable of fulfilling the Clients requirements in terms of time, quality and risk but also in respect of cost is also willing and able to submit a bid lower than any competitor. A fundamental goal of any competitive bidding system is to reveal the identity of this optimum bidder and determine the bid price. Drew, 1993 too many clients are undiscriminating and still equate price with cost, selecting designers and constructors almost exclusively on the basis of tendered price. This tendency is widely seen as one of the greatest barriers to improvement. The public sector, because of its need to interpret accountability in a rather narrow sense, is often viewed as a major culprit in this respect. Egan, 1998 The principal aim of the tendering process is to select the goods and/or services which offer best value for money in performing the outputs required. Therefore, it is not appropriate to accept the lowest price without full evaluation of the total offer. Purchase price is only one consideration when selecting a supplier. As the value and/or complexity of products or services increase, it becomes more important to consider whole of life costs. Moreover, meeting user requirements, quality and service are critical and can be as or more important than price. Victoria Treasury and Finance Department, Australia

Bidding and Bid Evaluation: Clients Processes & Procedures

Learning Objectives
When you have completed this part you should be able to: Procurement Explain client purchasing objectives and purchasing decision-making. Evaluate client procurement policy and procurement assessment criteria. Identify appropriate tendering processes and bidding procedures. Appraise UK public sector bidding and bidding within the European Economic area. Determine good tendering practice. Bid evaluation Establish the customers buying centre Identify the criteria by which clients evaluate bids Evaluate the relative importance of these factors

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1.1 Introduction
This section deals with bidding and bid evaluation from the perspective of a client, with the aim of identifying their motivation for adopting a specific procurement policy and recognizing good procurement practice. It is divided into 11 sections: procurement objectives; purchasing decision-making; procurement policy; procurement assessment criteria; bid classifications; motivation for purchasing by tender; tendering processes; UK public sector bidding; bidding in the European economic area; good tendering practice and bid evaluation. You are encouraged to visit the web pages given in the text. According to Baily et al. (1998), purchasing is an activity of considerable strategic importance to successful organizations, with its role and contribution having increased significantly in the last few years. They summarise the main reasons for this shift in importance as: The introduction of leading edge concepts, for example, best practice benchmarking, total quality management and supply chain concepts etc.; Technological complexity resulting in specialisation requiring organization to purchase goods from those with specialist expertise; The introduction of government and EC policies; Increasing recognition of the finite nature of resources; Increasing proportion of revenue spent externally; Fewer but larger suppliers; and Increasing environmental awareness. Impetus has also come from central government. For example, under the banner Modern Government, Modern Procurement two separate but complementary reviews have been commissioned on the subject of government procurement: Government Procurement and the Private Finance Initiative and a Review of Civil Procurement. See: http:/www.hm-treasury.gov.uk/pub/ This section is concerned with procurement primarily by the submission of competitive bids. Many sources referred to are from the perspective of the construction industry. This is due to the long history of procuring construction works via competitive tender and to the large value of work so procured. For example, the procurement of construction works has been subject to several reviews; the latest being the DETR sponsored Rethinking Construction (Egan,

Bidding and Bid Evaluation: Clients Processes & Procedures 1998). Egans findings, however, have implications for procurement general and are not restricted solely to the construction industry.

1.1.1

Definitions

Procurement: the systematic process of deciding what, when and how much to purchase; the act of purchasing it; and the process of ensuring that what is required is received on time in the quantity and quality specified. (Burt, 1984) Tendering: the process of requesting suppliers to bid or present their offer containing unequivocal prices, terms and conditions that, upon acceptance by the client, will form the basis of a contract. (Tweedley, 1995) Bid: offer to do work etc. for a stated price. (Oxford Modern English Dictionary)

1.2

Procurement objectives

The purpose of procurement, according to the UK governments Procurement Policy Unit, is to meet the user's requirement. The requirement, including any specific level of quality or standard of service must, however, be tested critically for need, cost-effectiveness and affordability under whatever arrangements are in place for financial approval and separation of functions. (PPU, 2000) These requirements should, wherever possible, be expressed in terms of output and performance to avoid any suggestion of favouritism and to provide scope for innovative solutions. Requirements should be specified by reference to recognized standards, where relevant, making provision for equivalents to be offered where appropriate. (Where the EC rules apply they specify a hierarchy of standards to which purchasers must refer.) (Government Construction Clients Panel (GCCP), 1999) An often-cited definition of procurement objectives is: to purchase the right quality of material, at the right time, in the right quantity, from the right source, at the right price. Baily et al. (1998) comment that this rather hackneyed statement is criticised by some as being rather superficial and simplistic, although the definition does provide a practical framework.

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1.2.1

Quality/Product

Masterman (1992) asserts that clients, with their advisers, need to select the overall level of quality. That is the choice between rare, unusual, high performance materials, great precision and sophistication and hand crafted excellence on the one hand and straightforward, basic competence on the other. He defines quality as being fit for the purpose as perceived by the client to suit his particular needs. Further quality issues may also require that the product: Is defect free on delivery/completion Has a reasonably efficient running cost Has satisfactory durability Is aesthetically pleasing Has undergone value analysis/engineering Is innovative that is, it incorporates original design quality Is subject to satisfactory guarantees and after sale service

1.2.2

Time/programme

Client time issues include the following: Timely delivery/completion Certainty of completion date and other time related estimates Early commencement of work/fabrication/manufacture Design proposals to be submitted expeditiously Rapid rectification of defects

1.2.3

Cost

Client cost issues include: Certainty of cost estimates

Bidding and Bid Evaluation: Clients Processes & Procedures Value for money Ease of accountability Competition lowest possible tender Obtaining cost certainty or reduction in risk of cost overrun Realistic maintenance and running costs

1.2.4

General issues

Other factors that may influence a Clients choice of procurement route include: The desire to be actively involved and informed during the life of a project A clear allocation of responsibilities/single-point responsibility Flexibility to change design during production The need for positive and constructive advice from consultants Fully motivated and co-operative project team no conflict.

1.2.5

An alternative approach

Baily et al. state that a good objective should be measurable in some way, however, they illustrate the potential problems associated with procurement with the example: who is to say what price is right? They suggest the following broad purchasing objectives: To supply the organization with a steady flow of materials and services to meet its needs. To ensure continuity of supply by maintaining effective relationships with existing sources and by developing other sources of supply either as alternatives or to meet emerging or planned needs. To buy efficiently and wisely, obtaining by an ethical means the best value for every pound spent. To manage inventory so as to give the best possible service to users at lowest cost. To maintain sound co-operative relationships with other departments, providing information and advice as necessary to ensure the effective operation of the organization as a whole.

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To develop staff, policies, procedures and organization to ensure the achievement of the foregoing objectives. In addition we might add some more specific objectives such as: To select the best suppliers in the market. To help generate the effective development of new products. To protect the company's cost structure. To maintain the correct quality/value balance. To monitor supply market trends. To negotiate effectively in order to work with suppliers who will seek mutual benefit through economically superior performance.

1.2.6

Emerging procurement themes

Competition The governments Procurement Policy Guidelines (PPU, 2000) states that goods and services should be acquired by competition unless there are compelling reasons to the contrary. Further, it suggests that competition promotes economy, efficiency and effectiveness in public expenditure. It will also contribute to the competitiveness of suppliers, contractors and service-providers. The guidelines also recommend that whether or not there is any legal requirement for it, advertising proposed contracts could be a useful means of ensuring that the potential of the market is fully tested. However, competition based solely on tender prices has its detractors. A recent review of the UK construction industry, which has a long history of appointing contractors by competitive tendering, concludes too many clients are undiscriminating and still equate price with cost, selecting designers and constructors almost exclusively on the basis of tendered price. This tendency is widely seen as one of the greatest barriers to improvement. The public sector, because of its need to interpret accountability in a rather narrow sense, is often viewed as a major culprit in this respect. (Egan, 1998) Best value/value for money In response to criticism of competition based solely on price, the Procurement Policy Guidelines (PPU, 2000) stipulate that all public procurement of goods and services, including works, is to be based on value for money, having due regard to propriety and regularity. The guidelines define value for money as the optimum

Bidding and Bid Evaluation: Clients Processes & Procedures combination of whole-life cost and quality (or fitness for purpose) to meet the user's requirement. The attainment of value for money for the taxpayer is considered crucial to the wider objective of using resources effectively in the delivery of -public services. The guidelines, therefore, considered it essential that purchasers develop clear strategies for continuing improvement in the acquisition of goods and services. Further, whether in conventional procurement, market testing, private finance or some other form of public-private partnership, value for money will involve an appropriate allocation of risk. The guidelines assert that sound practice for the pursuit of value for money will contribute to the competitiveness of suppliers, contractors and service-providers (collectively "suppliers") in both domestic and overseas markets. Assisting the competitiveness of suppliers will also assist purchasers to obtain future value for money and security of supply in a competitive market. In particular, purchasers should: Keep bidding costs to the minimum necessary for effective competition; and Remove barriers to participation by small firms and the self-employed without discriminating against larger firms. Further the use of purchasing power to pursue other aims is inconsistent with value for money policy. For example, purchasers should seek only such information from potential bidders as is necessary: For establishing that, for reasons of propriety, it would not be inappropriate to enter into contracts with them; or For evaluating their economic and financial standing and potential capacity to deliver value for money in meeting the requirement. Value analysis/engineering Kelly and Male (1993) define value management as the process by which the client transmits a clear statement of the value requirements of that project to the project designers. Once established, the Clients value system can be used to audit: The Clients use of a facility or product in relation to its corporate strategy; The project brief; The emerging design; The production method.

Commercial Management They consider the factors that distinguish value management from an accounting vision of an audit are: A positive and pro-active approach through the use of a multi- disciplinary team-oriented creative process to generate alternatives to the existing solution; The use of a structured systems method; The relationship of function with value. Further, they believe that value management should not be seen as a conflictoriented design review, cost reduction or standardization exercise. Maximum value is achieved from a required level of quality at least cost, the highest level of quality for a given cost, or from an optimum compromise between the two. Value management is therefore the management of a process to obtain maximum value on a scale determined by the client. Kelly and Male provide the following definition of value management: A service which maximizes the functional value of a project by managing its development from concept to completion and commissioning through the audit (examination) of all decisions against a value system determined by the client. Legal obligations All clients, especially government departments and other public bodies, are responsible for ensuring they comply appropriately with their legal obligations. The legal framework for public procurement includes: EC and other international obligations, as implemented in UK legislation or by virtue of direct effect; Specific domestic legislation, for example, on corrupt gifts or unfair contract terms; Contract and commercial law in general; and Domestic case law, for example the Blackpool case in which the Court of Appeal held that there was an implied contract governing the process for awarding a contract. (PPU, 2000)

Bidding and Bid Evaluation: Clients Processes & Procedures

1.3

Purchasing decision-making

1.3.1

Make or buy decision making

According to Baily et al. (1998) make-or-buy decisions are decisions about the source of materials, goods, or services. The choice to be made is to produce the materials and goods and provide the service internally, or to purchase from a source external to the organization.

1.3.2

Subcontracting

Various organizations subcontract aspects of their activity, and subcontracting is often seen as a means of augmenting limited resources and skills while enabling the contractor to concentrate on their main area of expertise. A main contractor in project engineering normally assigns part of the contract work to subcontractors, who are legally responsible to the contractor rather than the client. Elsewhere the term 'subcontracting' is used similarly; referring to work that could have been performed internally but is bought out because of a shortage of capacity or lack of suitable facilities. What is procured through subcontracting is not standard merchandise or articles but the ability to do a job; capacity, expertise, time. (Baily et al. 1998) Frequently the short-term objective in the use of subcontracting, in the form outside processing, is because of shortage of capacity to meet orders. This requires the development of a policy, which ensures an overall cost-effective use of manufacturing resources in the long term. Short-term capacity bottlenecks will still require tactical subcontracting but in the long term a well considered manufacturing strategy will be developed if Svenson's advice is to be followed. Svenson (1968) correctly foresaw an increase in the use of subcontracting. Reasons he gave for his conclusion, proved correct by events, were: Rapid technological innovation. Faster adoption of these changes in products and processes. Increasing specialization by business enterprises worldwide. The specialized subcontractor is better positioned to secure and maintain a grip at the leading edge of technological change and innovation. (Baily et al. 1998)

1.3.3

Buying commodities

The primary commodities are natural products rather than manufactured products. This influences the prices at which they are sold even though they are usually

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Commercial Management traded in processed or partly manufactured form rather than just as harvested or mined. (Baily et al. 1998)

1.3.4

Capital goods

According to Baily et al., the procurement of capital goods, such as buildings, plant and machinery, and computers, differs in several ways from the purchase of non-capital goods. Unlike merchandise, production materials or office supplies, capital goods are not bought for current needs, to be used up in a short time, but are bought for long-term requirements, to be used for the production of goods or services. Capital goods have, generally, working lives greater than one year. Capital expenditure is treated differently, for taxation purposes, and in accounting. Special tax allowances or cash grants may be available for investment in new equipment or for factories in certain areas of the country. Consequently, tax considerations, usually ignored in non-capital purchases, can be significant in capital purchase decisions; they can affect timing, they can make a big difference to the expected return, and they can be crucial in deciding whether to go ahead with the purchase. Usually the initial price of capital projects is high, necessitating that organizations prioritise and possibly reject rival proposals. Even if initial price is not high compared with current expenditure, capital goods tend to be highly specific so that the cost of a wrong decision could be much higher than for current expenditure items. If stocks are built up to meet increasing sales, which fail to occur, stocks can be run down by selling back to suppliers or by deferring further purchases; but if specialized plant is procured to cope with the sales increase, it will not be so easy to dispose of it. Most capital expenditure is postponable. For example, organizations can often defer the replacement of old plant until prospects get better or the financial situation improves. As a result, the order books of capital equipment suppliers alternate between feast and famine. When their customers experience a minor recession, they suffer a major recession; the business cycle hits them in amplified form, with some time lag.

1.3.5

Purchasing for resale

While having much in common with other types of buying, purchasing merchandise for resale, suggest Baily et al., also has some major differences. Buyers in major retail organizations such as Marks & Spencer, Tesco etc, are likely to be far more involved with their supply chains and customers than in other business sectors. Decisions have to be made in terms of what to buy, quantities, terms, and mode and timing of payment. Further, there may covering training of retailer's staff by the seller, sale or return, deals, etc. Because retailers, wholesalers or other members of prices, delivery be negotiations sales promotion the distributive

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Bidding and Bid Evaluation: Clients Processes & Procedures sector sell on what they purchase, the decision on 'what to buy' must be taken with a strong feeling for what will sell. Accordingly, there is a much greater overlap between the marketing/selling activities and buying than any other sector.

1.3.6

Buying services

The acquisition of services, as maintained by Baily et al., is an important part of purchasing and supply work, so much so that many organizations spend a greater amount with service providers than with suppliers of goods. Service supply has further gained in importance as more and more organizations 'contract out' aspects of their work. This contracting out may arise from a wish to concentrate more closely on the core business, and hence focus on the specialist skills, which give, rise to competitive advantage. Alternatively, and particularly in public sector concerns, the pressure to contract out services arises from the need not only to be efficient, but to demonstrate that open and competitive buying methods are employed. The widespread public sector practice of market testing' to ensure that work performed by organizations is undertaken at least as efficiently as would be the case if contractors or other providers were employed has given rise to a considerable increase in the external sourcing of services. Compulsory competitive tendering by local authorities in the UK has resulted in a greater emphasis on the acquisition of services from external providers; services formerly supplied by 'inhouse' supply. Baily et al. define services as any kind of supply where the main component is a task of some kind, rather than the provision of some tangible good or material. A service is a performance of some act of value, which, unlike the situation where goods are sold, does not result in the customer's ownership of anything.

1.3.7

Outsourcing

Outsourcing is, according to Baily et al., the contracting out of non-core activities. Non-core activities should not be equated with being unimportant, for example the Government has outsourced much of the computing activity required by various civil service departments and agencies. Outsourcing requires the organization to determine exactly what is its core activity. An alternative definition of outsourcing is provided by White and James (1993): ' a contractual relationship between an external vendor and an enterprise in which the vendor assumes responsibility for one or more business functions of the enterprise'. Outsourcing decisions, according to Baily et al. are strategic in nature; concerned with the external provision of functional activity. They impact upon the nature and scope of the organization. As such they are not taken at the operational level, but involve top management, and the consideration of a great variety of variables such as:

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Commercial Management Do we have candidate functions for outsourcing? How do we select? How do we assess ourselves? Who are the potential providers? How do we assess them? What sort of relationship will we form? How will we manage it? How do we ensure efficiency? Outsourced functions usually result in relationships where the vendor is providing services on a continuous basis. The determination of an appropriate relationship within which this continuous service is to be provided is likely to require a very great investment of time and effort at the planning stage. Additionally, of course, as with all relationships, there will be evolutionary change; change which will itself need to be managed. (Baily, et al. 1998)

1.3.8

Buying internationally

Globalisation of trade has meant that foreign sourcing can no longer be regarded as exceptional activity in commercial purchasing. There are few organizations today that do not acquire at least a proportion of their requirements from foreign sources, while for many organizations foreign sourcing is mainstream sourcing. However, Baily et al. suggest that purchasing from a foreign source is not different in any fundamental way from purchasing from a domestic source. The same value for money objectives are pursued, and much the same range of methods and systems are employed in this pursuit. Exactly the same problems need to be thought about and overcome, though, of course, additional problems need to be dealt with. These additional problems include geographical location, different languages, cultures, legal systems, standards and currency exchange problems, extended lines of communication and delivery periods.

1.4 Procurement policy


There are many different procurement systems and several ways of classifying them. The following is based on Bennet and Grice (1990).

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Bidding and Bid Evaluation: Clients Processes & Procedures

1.4.1

In-house project executive

Turner (1997) states that not surprisingly research has confirmed that organizations that have regular procurement requirements have people within the organization that posses project management skills together with experience of and authority within the Clients organization. For a project of any size and/or complexity a nominated in-house project executive (sometimes also called a 'project sponsor') should: Be available full-time Be the single-point contact for the organization At the very least be able to answer all incoming questions fully and promptly Understand and organize the internal decision-making processes required for the project Have the power to speak and act for the organization Act in support of any external project leadership appointment.

1.4.2

Project management

Project management, according to Franks (1998), is concerned with the overall planning and coordination of a project from inception to completion, aimed at meeting the Clients requirements and ensuring completion on time, within cost and to required quality standards. Whilst the detailed project management responsibilities may be transferred to an external body, there are potential gains to be made by adopting a consistent set of project management tools rather than reinventing a new set for every project. Consistency between departments in this area also allows simpler transfer of learning points and comparison of performance between projects and departments. (GCCP, 1999)

1.4.3

Consultant advisers

If the client does not have an in-house executive with the time and/ or skills to run the project this must be recognized, along with the reasons for it. Even if the client is an experienced buyer, the process of procurement may still often remain complex but to an inexperienced, novice customer procurement will probably appear very complicated and even become stressful. A principal adviser should

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Commercial Management bring knowledge and comfort, so making the experience for the client as equable as possible. Many types of organization could provide a principal adviser: consultancies designers, engineers, project managers - or contracting companies with design and management skills. The quality of the person or organization appointed as principal adviser will probably be crucial to the success of a project. If clients are inexperienced then the adviser must gain their confidence. In this way an adviser must ensure that his client understands sufficient of his advice, if timely decisions are to be made. The qualities required of a hired principal adviser include being able to: Understand clearly, or be able to learn quickly, about a business, its aims and its priorities Gain the trust of a client in spending his money. The role of a principal adviser will include being able to act as the 'Clients representative' in: Complementing skills available within the client organization Supplying impartial advice on the need (or not as the case may be) to build and how to go about building. (Turner, 1997) Importance of Clients brief 'Brief making' is defined by Turner (1997) as the radical, searching process that a client and his advisers, particularly the in-house executive and/or the principal adviser, must go through, to explore and to conclude on the nature of the Clients business in order to decide on an appropriate solution. Inexperienced clients, by their nature, will need advisers that can draw out from them, during 'brief making', the nature of the Clients business and why, how and when the proposed project is necessary for that business. Care in brief making is sound counsel because later changes to detailed design or, worse still, changes during the production stage are generally unsound practice. (Turner, 1997)

1.4.4

Design combined with production

In the following text the term production refers to the processes of assembling, building, constructing, fabricating, implementing and manufacturing, etc.

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Bidding and Bid Evaluation: Clients Processes & Procedures Design and build Design and build is where a client purchases the completed product from a contractor who is responsible for its design and production. Bennett and Grice (1990) present three variants: Direct: a designer-contractor is appointed after some appraisal but without competition. Competitive: documents are prepared by consultants to enable several contractors to offer designs and prices in competition. Develop and construct/manufacture: consultants are appointed to design the product to a partial stage, then contractors complete and guarantee the design in competition, either using the Clients consultants or their own designers. Package deal A package deal is similar to design-and-build in that the contractor provides the design and production under one contract, but there is the implication that the product/facility provided will be of a standardized or semi-standardized type. (Franks, 1998) Turnkey A turnkey contract is where the client has an agreement with one single administrative entity, which provides the design and production under one contract. (Franks, 1998) Private Finance Initiative (PFI) PFI is a means whereby the private sector can contribute to the provision of what has been regarded, traditionally, as a public service. The promoter designs, builds, finances and operates the facility on behalf of the (public) client. (Franks, 1998) Public Private Partnerships, particularly Private Finance Initiative (PFI) projects, are created for the provision of services and not specifically for the exclusive provision of capital assets such as buildings. Accordingly, the GCCP (1999) Guidance Procedures suggest that it is preferable to investigate Public Private Partnerships as soon as possible after a user need has been identified rather than leaving it until a conventional construction project has been selected as the solution. It is possible that a Public Private Partnership may result in a solution (provision of services to meet the user need) that does not require a construction project.

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Commercial Management Public Private Partnerships may take many forms of which PFI is the most developed model. Treasury Taskforce guidance and additional material are available on the Taskforce Internet website: http:/ www.treasury-projects-taskforce.gov.uk

Build-Own-Operate-Transfer (BOOT) Franks (1998) defines BOOT is an arrangement where a private client provides and operates a facility on behalf of a (usually) public client for a fixed term. On completion of this term the facility is transferred to the client. Other similar arrangements include: BOO (Build Own Operate) where a private client provides and operates a facility on behalf of a (usually) public client and DFBO (Design Fund Build Operate) where the private client can contribute to the provision of a public service. Design and manage Design and manage is where a client appoints a single firm to design and deliver the project, however, specialist contractors are appointed to undertake the production work by negotiation or in competition. Bennett and Grice (1990) define two variants: Contractor: the project design and manage firm takes a contractual risk in delivering the project to an agreed price (which may be guaranteed) and on time and employs design consultants and specialist contractors as subcontractors. Consultant: the project designer and manager is employed as the Clients agent and the specialist contractors enter into direct contracts with the client, who retains the time and price risks. Design combined with production general comment According to the GCCP Guidelines, in a design and construct contract the supplier is likely to deliver the greatest performance benefits to the client through innovation, standardization and the like, where appropriate output specifications are used. Where an output specification is insufficiently well developed, there is a risk that the quality, design and performance of the completed facility may be compromised. Careful attention to the output specification is required to achieve the required outcome. There may be some circumstances where the design and construct procurement option should be extended to cover maintenance and also possibly operation of the facility for a substantial period By including the maintenance and operation 17

Bidding and Bid Evaluation: Clients Processes & Procedures requirements within a design and production contract the supplier has increased opportunity for adopting innovative solutions that provide greater value for money when considering the whole life costs. (GCCP, 1999)

1.4.5

Design separate from production

A traditional form of contracting A traditional form of contracting is where the client appoints a consultant to produce the design, select the contractor and to supervise the work through to completion. The contractor is selected later on some basis of competition and then enters into a contract where the contractor agrees to perform the work for one fixed price, regardless of the ultimate cost; a fixed price contract may be a lump sum contract or a measurement contract based on fixed prices for units of specific work; or the contractor agrees to carry out the work for an agreed fee plus the actual costs of the direct production work rather than for a lump sum, which includes an undisclosed profit. (Franks, 1998) Bennett and Grice (1990) define two variants: Sequential design: where contractors bid on completed design and cost documents. Accelerated: where a contractor is appointed early on the basis of partial information, by negotiation or in competition, possibly on a two-stage basis.

1.4.6

Management methods

Management Management methods are where the client appoints design and cost consultants and a contractor or consultant to manage production for a fee. Specialist contractors are appointed to undertake the production work by negotiation or in competition. Bennett and Grice (1990) define two variants: Management contracting: where a management contractor takes some contractual risks in delivering the project to an agreed price and on time and employs the specialist contractors as sub-contractors. Although the price may be guaranteed, this is unusual, and clients retain some time and price risks. Construction management: where a professional firm is paid a fee to provide the management service and the specialist contractors enter into direct contracts with the client, who retains the time and price risks.

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Commercial Management

Prime cost contracting Prime cost contracting, according to Franks (1998), requires there to be a single point of responsibility (the Prime Contractor) between the client and the supply chain. He asserts that the prime contractor needs to be an organization with the ability to bring together all of the parties (the supply chain) necessary to meet the clients requirements effectively. Moreover, there is nothing to prevent a designer, facilities manager, financier or any other individual/organization from acting as the prime contractor. Franks believes that clients should request that prime contractors provide details of who all the parties in the supply chain are likely to be when prime contractors express an interest in being selected to tender. He also postulates that it may not be possible adequately to assess the technical capacity of a prime contractor under the EC procurement rules unless a significant number of the other organizations that make up the supply chain are known and taken into account during the assessment. A major component of the prime-contracting route is the development of a whole life cost model before production commences.

1.4.7

Alternative arrangements

Partnering Franks (1998) defines partnering as a concept where organizations agree to work together for a period of time, perhaps unspecified, on a basis of mutual trust and with common objectives thereby optimising each partner's strengths. The Construction Industry Institute (CII, 1990) of the United States of America definition was as follows: ... a long term commitment between two or more organizations for the purpose of achieving specific business objectives by maximizing the effectiveness of each partner's resources. This requires changing traditional relationships to a shared culture without regard to organizational boundaries. The relationship is based upon trust, dedication to common goals, and an understanding of each other's individual expectations and values. Expected benefits include improved efficiency and cost effectiveness, increased opportunity for innovation, and the continuous improvement of quality products and services. However, as Walker et al. (2000) state, the partners still maintain a sense of independence with their own contractual arrangement and a tendering process that may or may not be based on a competitive/cost structure. They further comment that partnering still involves a client buying a product (the project) through a procurement process that may involve any one of many forms (traditional, negotiated price, design and build, management contracting etc.). Partnering, and its advantages, lies in attitudes and behaviours governing a commercial process. 19

Bidding and Bid Evaluation: Clients Processes & Procedures

Alliancing Project alliancing is different in that it is more all encompassing. Walker et al. (2000) suggest at this position of the partnering continuum the alliance partners coalesce into a virtual company. The alliance partners are selected on the basis of their expertise and ability to meet stringent performance criteria before price is considered. In alliancing, trustworthy, committed and world-class professional and competent firms are invited to join with the owner/client to develop the project. As an alliance of talented professionals pooling resources to achieve the project goal, they develop the project price target through design development with agreed risk and reward sharing arrangements established. The expected cost savings are derived from improved value for money through leverage of skills and expertise of the alliance partners in developing the project concept through to delivery. Walker et al. consider the defining features of alliances to be as follows: Selection by general performance criteria that demonstrate world-class excellence, innovation capacity and superb relationship management skills. Substantial design development after joining the alliance. Joint budget and cost/time committed targets established through an alliance board represented by key senior project champions from each alliance member and the owner/client. Agreement on a risk and reward formula whereby an open-book accounting approach is undertaken to determine cost reimbursement together with agreed and verified management costs to establish a base target cost. The firm's corporate profit is treated as an 'at risk' component to ensure that the agreed project costs are met. A bonus reward mechanism to be shared by all parties is jointly established to encourage further innovation and excellence. Thus the project cost can only be determined once the alliance partners have been selected. The issue of extras for contract variations amongst alliance partners shouldnt substantially arise because of the nature of the alliances work in preplanning and defining the project scope before agreeing the risk and reward arrangements. Variations have to comprise substantial and demonstrably significant changes in scope. Any production variations are project managed by the alliance team. The intense integration of alliance partners requires excellence in communication at a personal level, at a business level, and at operational level. This generally requires a quantum leap in the use of shared IT systems and information processing integration.

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Commercial Management Once a successful alliance team is established, according to Walker et al., the final alliance agreement can be formulated including the alliance charter, the target costs and time, and other performance requirements and the risk/reward agreements. Once the alliance conditions are approved by the project funding body the project can be executed. Framework agreements (including call-off contracts) Framework agreements can be particularly appropriate for maintenance work, however, they are unlikely to be appropriate for clients that only occasionally have projects. The GCCP (1999) guidelines assert that framework agreements with a single supplier or a limited number of suppliers can result in significant savings to both parties. The guidelines expect savings to come from the following: No requirement for rebidding of each individual project Continuous improvement by transferring the learning from one project to another Reduced confrontation Continuous workflow. Supply chain management Supply chain management (SCM) has received a great deal of attention from the construction industry recently although the term has been around for a very long time in the manufacturing industry. The need for UK construction organizations to become more efficient, in light of Government funded reports by Latham, (1994) and Egan, (DETR 1998), has resulted in interest in SCM management systems as a means to achieve the recommendations set out in these reports. However, the project based nature of the construction industry and the practice of setting up new temporary multi-organizations for every project presents a new challenge to Supply Chain Management not experienced by the manufacturing industry. In focusing on SCM, the construction industry and its clients are seeking to gain the benefits that have already been achieved by other sectors, most notably the automotive and offshore industries. There is a lack of consensus on a definition or meaning of SCM. However, Fernie et al. (2000) concluded that SCM is an emergent term arising from intra- and interorganizational action following the application of concepts, tools and techniques. Further, they consider SCM to be an approach, which captures all the relevant organizations in delivering solutions/products to the end-users, is considered by most to reflect the scope of SCM; e.g. from raw materials through to final consumer/customer. A further conclusion is that supply chain issues must be considered as both inter-organizational as well as intra-organizational.

21

Bidding and Bid Evaluation: Clients Processes & Procedures Fernie et al. cite the following illustration of SCM. In the case of the automobile industry, SCM may seek to optimise the delivery of a completed vehicle from raw steel supplier through to the car dealer ultimately responsible for selling the car to the end user. It is possible to take this example even further by considering the disposal of the automobile as a reusable material sourced for use within another supply chain, or indeed the supply chain. As a material, the steel not only passes through separate organizations within the chain but also through separate operations (functional areas) within each organization. This notion is very similar to the concept of linkages within a value chain and vertical linkages described by Porter, (1995) to demonstrate the scope of a value system. Davis, (1993) takes this view even further by viewing the supply chain as a network of material processing cells simplistically characterized by supply, transformation and demand with organizations mapped around this premise. However, all proponents of SCM seem to share the holistic view and opportunities to improve the efficiency of the chain exist both internal and external to the organizations within the supply chain. Christopher, (1998) dismisses the idea that supply chains provide little competition stating that: "We are now entering the era of 'network competition ' where the prizes go to those organizations who can better structure, co-ordinate and manage the relationships with their partners in a network committed to better, faster and closer relationships with their final customers." Term contracting Term contracting refers to a particular type of work to be executed over a given time period. It is commonly used for the provision of a service, for example, repair and maintenance work where the general nature of the work is known but the extent of it is not. The two main methods of reimbursing the contractor are: On a measure and value basis by reference to a schedule of prices. On the prime cost of carrying out the work. In both these cases each individual order issued under the term contract becomes a contract in itself and then the terms of the tender become binding. It follows therefore that a term contract can be terminated without incurring any sanction if the employer does not issue any further instructions or by the contractor refusing to take any further orders. For business reasons in practice such contracts include provisions for notice of termination by any side and in practice both parties normally see them through to the end of the agreed term. Term contracting, however, can also refer to long-term service contracts where sanctions for termination or specific exit provisions are commonly applied.

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Commercial Management

e-Procurement E-Procurement covers a range of solutions that enable both buyers and suppliers to trade electronically over the internet. It is claimed that e-procurement will enable companies to gain a competitive advantage through e-commerce by creating profitable communities of buyers and suppliers. Further, e-procurement will allow organizations to significantly increase the control, speed, efficiency and cost saving around their purchasing and selling processes. For examples of e-procurement visit the following web addresses: www.biomni.co.uk www.decision.ie/htm/netser/services/eproc/content.htm

1.5

Procurement assessment criteria

Selection of the most appropriate procurement route is closely linked to the Clients specific objectives discussed in section 1.2. The table below presented by Bennett and Grice (1990) lists the most common variables that influence the choice. The questions and responses enable the client to adopt a systematic approach to procurement route selection. Selection of the appropriate procurement route is also determined by the Clients risk response. Bennett and Grice (1990) state that certainty of price and time are closely linked to the degree of flexibility available for clients. Design and build can provide complete contractual certainty on completion for clients from the very earliest stages of their projects. This certainty is undermined if the client orders changes. However provided there are not many changes and decisions are made in time to avoid interrupting the design, management, manufacturing and production processes, design and build expose clients to few risks. At the opposite extreme the management-based approaches generally require clients to carry cost and time risks at least until the separate trade contracts are let. In this respect the management based approaches leave clients with more of the risks than the alternatives.

23

Bidding and Bid Evaluation: Clients Processes & Procedures

Variable:
Programme/timing

Question:
How important is early completion to the success of your project? Do you foresee the need to alter the project in any way once it has begun? Does your product/project need to be technically advanced or highly complex? What level of quality do you seek in the design and workmanship? Do you need to have a firm purchase price before you can commit to proceed? Do you need to choose your supplier/subcontractor by price competition? Can you manage separate consultancies and contractors, or do you want just one firm to be responsible after the briefing stage? Do you want direct professional responsibility to you from designers and consultants? Do you want to pay someone to take the risk of cost and time slippage from you?

Response:
- Crucial - Important - Not as important as other factors - Yes - Definitely not - Yes - Moderately so - No, just simple - Basic competence - Good but not special Prestige - Yes - A target plus or minus will do - Certainly for all work - Above a specified price or specific work - No, other factors more important - Can manage separate firms - Must have only one firm for everything - Not - Important Yes - No, prefer to retain risk and therefore control - Prepared to share agreed risks - Yes

Controllable variation Technical complexity of projects/commodity Product/quality level Price/cost certainty Competition

Management

Responsibility/ accountability Risk avoidance acceptance/

Based on Bennett and Grice (1990)

1.5.1

Assessment models

There are several models available that seek to aid clients and their consultants in selecting the most appropriate procurement route for their particular circumstances. Table 1, presented by GCCP (1999), provides an illustrative example of a mechanism to evaluate how well each procurement route is likely to deliver value for money in terms of whole life costs. The evaluation criteria used in the mechanism must be chosen so that they relate specifically to aspects that will determine value in whole life cost terms. The relative importance of each evaluation criterion is established by giving it a percentage weighting so that all the weightings add up to 100%. The model provides a means of helping procurement experts reach a decision about the procurement route likely to deliver greatest value for money but does

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Commercial Management not replace the need for an expert to make the decision on the basis of all information available. The guidelines acknowledge that there is clearly scope to distort the outcome by manipulating the evaluation criteria, weightings and even the model itself. Whatever model is developed, it must help to identify the procurement route likely to deliver greatest value for money. Sensitivity analysis may help to highlight the adequacies of a mechanism. Items in italics are shown in Table 1 solely to demonstrate the system. They will vary according to the project and Department. Total scores should be given as integers. Private organizations are accountable to their board of directors and/or shareholders in achieving value for money, whereas the public sector must be publicly accountable and is open to public scrutiny. These requirements have tended to result in opportunities for delivering Value for Money being missed through risk averse and often over bureaucratic procedures at numerous stages in the project cycle. Fewer blockages to project flow are likely to be encountered the earlier in the project delivery process that the project is handed over to the supply side to allow proper integration and co-ordination of all design inputs. In Table 1 the evaluation criteria have been arranged in order of their importance for a specific construction client. The guidelines suggest that the second part of the assessment is to determine how well the weighted scores of each procurement route fit the importance weightings of the evaluation criteria. Imagine that the importance weightings of the evaluation criteria are plotted as a histogram and that similar histograms are plotted for the weighted scores of each procurement route. The procurement route having the histogram with a shape closest to the evaluation criteria is regarded as having the best fit.

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Bidding and Bid Evaluation: Clients Processes & Procedures

26

Commercial Management

1.5.2

Benchmarking

Baily et al. (1998) state that benchmarking is more than another name for monitoring, assessment and measurement. The purpose of benchmarking is not simply to seek statistics or other evidence as an indication as to whether a new or existing supplier, or the procurement route itself, is meeting specifications or requirements. It is to discover "Best practice' wherever it might be found, and to attempt to identify and isolate the variables that accompany or are part of this best practice. The belief is that once this has been done, the variables can be transported as leading indicators (benchmarks) back to the researching organization, with a view to focusing attention on how the performance might be matched (or bettered). Further, benchmarking is not concerned with copying the methods and systems of other organizations, but to keep in touch with current best-practice achievements, with the intention of matching or exceeding that performance in the organization undertaking the benchmarking exercise. The term benchmarking within the context of outsourcing and managed services has become synonymous with cost cutting. This is a misrepresentation of the function of benchmarking as described above.

1.5.3

Continuous improvement

The concept of benchmarking is closely linked with that of Continuous Improvement. The GCCP (1999) guidelines state that continuous improvements in performance should be a central part of any procurement option. For example, for one-off projects, a target cost incentive arrangement can encourage performance improvements. For details on performance improvements see Procurement Guidance No 9 "Benchmarking". www.hm-treasury.gov.uk/pub/

1.6

Bid classifications

Tweedley (1995) categorises the spectrum of bids, which includes a variety of tenders, proposals and responses as: Prequalifying proposals: which include requests for information, qualifying statements and capacity statements. Unsolicited proposals: which include preliminary proposals, feasibility studies and design studies. Informal proposals: which include offer letters and presentations. Formal tenders: which include sealed bids, budgetary proposals, negotiated tenders, open tenders, selective tendering and single action tenders. 27

Bidding and Bid Evaluation: Clients Processes & Procedures

1.7

Motivation for purchasing by tender

There are many reasons why a client may select competitive tendering in preference to buying on the open market. Tweedley (1995) gives the following examples: They may well have no alternative; a public sector client may have to conform to compulsory competitive tendering procedures. Commercial reasons may dictate that they take this approach. A Restricted market or difficulties in sourcing what they require (where there is no off-the-shelf product) If they needed an individual design for a product, a building, or packaging (where it is difficult for the client to assess what the right price is to pay)

1.7.2

Advantages of inviting tenders

By inviting tenders Tweedley (1995) asserts that a clients can: Achieve a better idea of the right price from a range of suppliers and are better able to make an informed judgement upon which to select. Specify closely what they need from the product and allow the manufacturers to interpret those needs and put a price against them. Gains an objective assessment, which they can review and audit. Gain an understanding of the quality that the supplier can achieve and within what time-scale. Despite often being a lengthy process, the administration of the tender is relatively straightforward. Moreover, there are guidelines and models that a client can use (For example the National Joint Consultative Committee for Building produce several codes of procedure). If applied consistently the process is fair, impartial, objective and accurate, however, it rarely proves to be the procurement panacea that the client hopes for.

1.7.2 Disadvantages of inviting tenders


Tweedley (1995) states that there are familiar disadvantages that regularly appear: 28

Commercial Management

The cost and involvement of the client are high in producing the specification and tender documents. Fully specified tender documents restricts the amount of initiative that the suppliers can take in interpreting the specification. Loosely specified tender documents may result in diverse solutions that will vary in price and content, so decision-making becomes extremely difficult. Unfortunately, far too many suppliers fail to take advantage of these types of invitations. They misinterpret the specification thinking that the client does not really know what they want or does not have the competence to prepare an adequate or precise definition. Suppliers could quote prices too high for the Clients budget or a price too low that could lead to dispute or failure of supply (performance, support or maintenance may suffer) or even to the supplier going out of business. The procedures for tendering are often slow. If the subject of the procurement is urgently required then inviting tenders may cause unacceptable delays. However, if the client attempts to accelerate the tendering process they run the risk of putting off potential suppliers or of receiving ill-prepared responses. On bids where the lowest price wins, the client may not give consideration to past performance and quality of supply. Tendering procedures may be expensive to set up, particularly in the case of open tendering. As a result, some clients levy charges for the tender documents to offset part of the cost involved. Tendering can be unsuitable for some types of contract. For example, if there is only one supplier of the product or service required. Similarly, contracts that are of low value may also not lend themselves to tendering. One or more of the suppliers from whom the client wants to receive a bid, declines the invitation or withdraws from the competition. Choice is immediately reduced. If too many suppliers go a similar route there may be no choice at all, defeating the whole purpose behind the tender procedure. If only one or two bids are received, the client may not find one that fully meets their aims and aspirations. Few contractors will decline an invitation to tender so as to avoid alienating a client or consultant. This may result in the submission of an artificially high tender or cover price. The effect again is to reduce the number of competing organizations.

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Bidding and Bid Evaluation: Clients Processes & Procedures

1.8
1.8.1

Tendering process
Types of bids

Drew (1993) suggests that for every contract there is the optimum bidder who is not only capable of fulfilling the Clients requirements in terms of time, quality and risk but also in respect of cost is also willing and able to submit a bid lower than any competitor. A fundamental goal of any competitive bidding system is to reveal the identity of this optimum bidder and determine the bid price. Open Competitive or open tendering allows all prospective suppliers to respond to a public advertisement of the proposed contract and to submit an offer. In an open invitation any enterprise or company, individual, partnership or consortium can submit an offer. These invitations are frequently advertised in the Official Journal of the European Community (for public sector procurement), the United Nations publication Development Business (for aid-funded projects), the national press, trade journals and papers. (Tweedley, 1995) Closed Closed tendering often referred to as selective or restrictive tendering is where the client undertakes some form of supplier selection before issuing the invitation to tender. This may involve a public announcement inviting interested parties to respond with supplier information from which a shortlist of tenderers will be drawn. Alternatively, the client may have a list of preferred suppliers from which they operate exclusively, or they may establish a shortlist of suppliers they know can carry out the work. In restricted tendering only those suppliers that have been invited may submit offers. (Tweedley, 1995) The PPU guidelines recommend that the selection should be made on the basis of objective criteria, taking account of the evidence permitted under the EC rules where they apply. (PPU, 2000) Negotiated With negotiated tenders the client consults the enterprises or suppliers and negotiates conditions with one or more of them. This method is commonly used where there are only a few suppliers that can meet their requirements. They negotiate with each supplier to decide the exact requirement and identify common ground. This type of tendering often comes about where an existing contract is in place and the client requires a variation or addition to it. The client may negotiate with the incumbent supplier and a competitor to source the new service or

30

Commercial Management product. Negotiated tendering with an existing supplier for repeat work could arguably be considered part of project management. (Tweedley, 1995)

1.8.2

Bidding procedures

Tweedley (1995) states that the client will go through a number of different stages in preparation for inviting tenders and in completing the procurement. The level of detail and duration of each stage will depend on the method they select and the complexity of their requirement. Commonly there are ten distinct phases: Identify the problem area and the possible requirement Develop plans to provide the solution Assess potential solution providers Decide upon the tendering method Prepare tender documents, technical and commercial specifications Invite suppliers to tender and issue tender documents Receive suppliers' tenders and proposals Evaluate the responses Negotiate with the preferred supplier(s) Award the contract to the winning bidder Each stage breaks down into subsidiary tasks. Some could take weeks or months, others just days, depending on the project, the commercial considerations and technical factors. The client is unlikely to go through the complete process in isolation. They will seek advice from solutions providers, suppliers, consultants, and market researchers. (Tweedley, 1995) The GCCP guideline procedures recommend that the overall procurement process from first inception to asset disposal should be mapped, by the organization best placed to do so, at the earliest opportunity. Where necessary, the process map can be developed in greater detail as the project progresses. (GCCP, 1999) By mapping the procurement process, better value for money can be achieved by: Identifying those elements of the project procurement process that do not add value Identifying potential blockages to the flow of the project procurement process leg through intervention or interference by the client or other parties)

31

Bidding and Bid Evaluation: Clients Processes & Procedures Identifying opportunities for delivering the desired outcome in a more effective manner Much better forward planning and management. (GCCP, 1999)

1.8.3

Prequalification

The prequalification process, according to Smith (1995), basically consists of evaluating the available pool of potential tenderers, identified either by advertisement or invitation, against some given set of criteria in order to find some group of firms who are all considered competent to carry out the work and who are expected to provide an acceptable range of prices. A number of techniques are commonly used. An obvious first step is to determine what the required criteria for prequalification are to be. At the very simplest level the basic criterion is that the firms should all be at least competent to undertake the work. Drew and Skitmore (1992) are particularly scathing:
[Prequalification] is often accomplished by crude subjective assessment of

bidders' capabilities based on the prequalifier's first- or second-hand knowledge of the bidders.... Such a procedure is naturally rather unreliable and may result in the selection of bidders that are either not interested or not able to provide competitive bids for a contract. There is also the possibility that other ready, willing and able potential bidders may be neglected. As a result, Smith recommends that considerable care needs to be taken if prequalification exercises are to be successful, and that a more sophisticated technique is considered on larger projects. When selecting the short list the NJCC (1995) recommend that the following are among the points that should be considered: The firm's financial standing and record; Whether the firm has had recent experience of building at the required rate of completion over a comparable contract period; The firm's general experience, skill and reputation in the area in question; Whether the technical and management structure of the firm including the management of sub-contractors is adequate for the type of contract envisaged; The firm's competence and resources in respect of statutory health and safety requirements; The firm's approach to quality assurance systems; and Whether the firm will have adequate capacity at the relevant time.

32

Commercial Management

1.8.4

Single stage tenders

Where tenders are submitted under a single stage competition. Appendix A details the tendering procedure associated with single stage selective tendering.

1.8.5

Two stage tenders

Franks (1998) states that with a two-stage tender, three or four contractors with appropriate experience are separately involved in detailed discussions with the Clients professional advisers regarding all aspects of the project. Price competition is introduced through an approximate or notional bill or schedule of prices. Further selection criteria are then used to determine which contractor carries out the job. On contracts where it is desired to secure the early involvement of the contractor before the development of the design is completed the NJCC recommend that a two stage tendering procedures be adopted. These procedures are detailed in the NJCC Code of Procedure for Two Stage Selective Tendering. (NJCC, 1995) For design and build the NJCC believes most employers would benefit from a twostage procedure that will enable post- tender changes and development of design and cost. (NJCC, 1995)

1.8.6

Formal presentations

Smith (1995) comments that it is common, especially on large projects or those let under non-traditional procurement arrangements, for contractors to be required to present their bid proposals formally to a meeting of the client and its professional advisers. Young (1993) goes further when she writes that: The team presentation to a prospective client has become increasingly important. Important in so far as the client expects to meet the construction team who will carry out the project and who can demonstrate that they are able to do the job. It follows that members of the team must develop presentational competencies that are beneficial in winning work. Fellows and Langford (1993), in their study of marketing in the construction industry, conclude that: Clients are... placing more attention on the contractor's performance record, past relationships, financial stability and the expertise of its personnel. All contractor's personnel must be part-time marketeers...

1.8.7

Award criteria

Traditionally, if suppliers have tendered on the same information and have been pre-selected on their capability to meet the Clients procurement objectives, then the lowest tenderer would usually be awarded the contract. For example, the NJCC Code of Procedure for Single Stage Selective Tendering (NJCC, 1995) includes the clause: nothing in this Code should be taken to suggest that the employer is 33

Bidding and Bid Evaluation: Clients Processes & Procedures obliged to accept the lowest or any tender, although if the procedure advocated in the Code is followed, the successful tenderer will normally be the one offering the lowest price, on a lump sum basis. If it is the employers intention to allow bids based on alternative criteria, this must be made clear to all potential tenderers at the outset; the principles set out hereafter should still be observed. Recently, however, there has been an acceptance that relying on lowest price is not always in the Clients best interest. This is illustrated by the PPUs statement that in determining the criteria for the award of contracts, purchasers should rarely rely on price alone. In most cases value for money (most economically advantageous offer/tender (MEAT) principles in EC terms) will involve other factors such as whole-life cost, quality and delivery against price. The PPU recommend that appropriate investment appraisal techniques should be used in assessing which compliant bid offers best value for money. They state that: On the cost side, the relevant factor is whole-life cost, not lowest shortterm price. Whole-life cost takes into account all aspects of cost over time, including for example capital, maintenance, management, operating and disposal costs, whenever they fall. For complex procurements, including large supplies and service contracts and construction projects, whole-life cost may be very different from, and only loosely related to, initial price; On quality, higher expenditure on better quality might well be offset on a whole-life costing basis, for example by lower maintenance costs, longer life or higher residual value and therefore justified on cost grounds alone. However, a better quality solution to the requirement, for example in terms of service standards, might add to whole-life cost. In all cases it is for the purchaser to consider carefully whether increased benefits justify higher cost, providing better value for money in meeting the requirement. Clients are advised however, if they are not to adopt the lowest tender principle, to set out in their invitation to tender detailed criteria for the award of the contract. (See Appendix B) Alternative award criteria The use of the low bid criterion is flawed in many ways. One major problem is that a contractor may inadvertently tender an unrealistically low, or suicidal, bid a well documented phenomenon known as the winners curse. When companies are fighting for survival in a highly competitive market, investment in the future becomes a low priority resulting in lack of innovation and short term thinking for the industry. A survey of consulting engineers in the Latham Report (1994) reported 73% give less consideration to design alternatives under present highly competitive conditions. Economist William Vickrey has long held that the low bid criterion is not economically efficient and in 1961 he was able to show that what has become known as the Vickrey Auction, in which the low bid criterion is retained for 34

Commercial Management contractor selection but at the contract price of the second lowest bidder, is theoretically better, as the price obtained in this way is closer to the market consensus. This goes a long way to explaining the predicament now faced by those (including consultants) for whom the majority of their work is obtained via the low bid criterion, as the expected income received under this regime is necessarily less than that which will generate normal profits. It also explains the real-world chronic lack of investment by contractors and general law of the jungle behaviours for, with sub-normal profits, bankruptcy avoidance and short-termism are likely to be the primary forms of business behaviour, hence the often fragile relationships between the client, the contractor and the subcontractors. In several countries around the world, alternatives to the low bid criterion have been trialled or adopted to ensure more realistic tender prices, relieving pressures on contractors to claim and providing contractors with an increased capacity to absorb problems. These alternatives include systems which average the tender price with the client estimate (Philippines), tender closest to the average (Iran, Italy, Taiwan), trimmed mean (Peru) and the median bid (USA) (Crowley and Hancher, 1995 and AFCC, 1988). One commentator in the Latham Report (1994) suggested that Local Authorities are severely hampered by being forced to accept the lowest tender and suggested alternative such as the closest to the average tender might have dramatic effect on attitudes. The advantage of these alternative criteria, from a Clients perspective, is that they attempt to safeguard against the acceptance of unrealistically low bid prices and the resulting claims, disputes and adversarial relationships during the project. It can of course be argued that the use of non-low bid criteria will result in tenderers adjusting their prices upwards to try and find the criterion level and that the incentive to develop more efficient methods of production will be lost. The counter-argument is that contrary to first impressions, innovation, technology development and cost reduction will not be discouraged as contractors will bid at what they believe to be the market price, with any such cost savings made by one contractor still producing significantly higher profit margins in contracts won. Of course, when such savings are available throughout the industry bid prices would be expected to gradually fall and the savings eventually passed on to the client. (Skitmore, 2000)

1.9

UK public sector bidding

Central Government Departments are required to comply with a policy framework within which public procurement is to be conducted. The Procurement Policy Guidelines (PPU,2000) state that all public procurement of goods and services is to be based on value for money, having due regard to propriety and regularity. The responsibility for achieving this objective lies with Accounting Officers and PFOs, as set out in Government Accounting.

35

Bidding and Bid Evaluation: Clients Processes & Procedures

1.9.1

The need for probity

Historically, because of the need for public sector clients to be publicly accountable and open to public scrutiny tenders have normally been let under competitive tender with the lowest tenderer being awarded the project. However, Egan (Rethinking construction, 1998) believes that contracts let exclusively on the basis of tendered price to be one of the greatest barriers to improvement. He suggests that the public sector, with its requirement for accountability, as one of the prime culprits.

1.9.2

Compulsory competitive tendering (CCT)

CCT originally introduced to ensure effective use of public resources, is now no longer seen as the most effective way of procuring services and activities; government favour a move towards Value for Money (VFM). For example, a construction project VFM should be attained over the whole life of a building while providing sufficient reward for suppliers.

1.9.3

Value for Money (VFM)

The Local Government Act passed in 1999 lays out the requirements of Best Value. From 1 April 2000 the legislation requires all local authorities, police and fire services, the London Development Agency, park authorities and passenger transport authorities to obtain best value. Specifically, a Best Value authority must make arrangements to secure continuous improvement in the way in which its functions are exercised, having regard to a combination of economy, efficiency and effectiveness. All council services and activities are to comply with the principles of Best Value. To aid the process, performance indicators have been established. Further, the government anticipates the development of partnerships within the private sector to deliver cost-effective services, ensuring competitiveness and attaining the best others have to offer. An essential part of the VFM ethos is regular monitoring via a cyclical review process. Elsewhere, Central Government policy states that in procuring goods, works or services, departments are responsible and accountable for achieving value for money. However, it also states that these goods, works or services should be acquired by competition unless there are compelling reasons to the contrary. As mentioned above the primary consideration of public clients in the choice of a procurement strategy is the need to obtain overall value for money in the whole life of the service/facility. To achieve this all of the parties that will be involved in the use, design, construction, operation and maintenance of a construction project need to be involved as early as possible in its development. The guidelines suggest that this can be achieved most easily through the following procurement options: -

36

Commercial Management Public Private Partnerships Design and construct (and where appropriate maintain and operate) Prime contracting Framework agreements. Traditional forms of procurement limit the opportunities for eliminating wasteful activities and achieving value for money. They should therefore only be used where there is a very clear case that they will deliver better value for money than other procurement routes in terms of whole life costs and overall performance. (GCCP, 1999)

1.9.4

Public Works Directive

The Public Works Directive regulates the tendering procedures for building and civil engineering works contracts offered by public authorities, e.g. central government, local and regional authorities, health authorities and similar bodies. Works in the utilities sector (water, energy, transport and telecommunications) are covered by the Utilities Directive. Certain contracts are excluded from the directives such as works that are declared to be secret by a Member State, works covered by special security measures, and contracts entered into pursuant to an international agreement. Only contracts for works exceeding a threshold value of ECU 5 million (3.37 million approx) are covered. The Directive specifies the procedure for the award of the contract (open, restricted or negotiated) and specifies the awarding criteria.

1.10 Bidding in the European economic area


1.10.1 Qualifying projects

Not all procurement need go through this process. There is a minimum value above which the procedures apply so anything coming in below the stated figure is exempt. See appendix C for current position.

1.10.2

Tendering procedures

In keeping with the spirit of the open market, open tendering is now the preferred procurement method. This means that any company in the EC can submit tenders for any opportunity with no restrictions or pre-qualifications necessary. Restricted or selective tendering is allowed in some specific cases where it can be justified by the contracting authority. The contracting authority must first advertise for

37

Bidding and Bid Evaluation: Clients Processes & Procedures suppliers to apply for consideration and can only invite to bid those suppliers who do apply. Normally, at least five bidders must be invited. Another tendering method exists through negotiated tendering. In this method the client can select the suppliers they wish to invite to bid. As in restricted tendering the contracting authority must justify their choice of the negotiated tendering method and provide regular reports on progress. (Tweedley, 1995)

1.10.3

Official notices

All conforming opportunities have to be advertised in the Official Journal Supplement and its electronic equivalent Tenders Electronic Daily. Adverts have to conform with a concise model format. Where it is necessary to advertise in the Official Journal there is a considerable increase in the time-scales of the tendering processes. The directives make official notices mandatory, even specifying set models for time limits on the invitations to tender being made. Clients must give proper notice, issue periodic notices on product and work groups and provide information on any qualification systems that they will apply. The Journal contains preliminary information, invitation to tender notices, results of contracts awarded and advance notices of larger supply purchases. (Tweedley, 1995)

1.10.4

Notice periods and time limits

The limits on advertising the bid and closing dates for bid submission vary on the type of tendering method used. Open tenders have to allow 52 days from the date of the invitation to bid notice until the closing date for receipt of bids. The minimum is 36 days if there has been an advance notice published. Invitations to participate in a selective or negotiated tender must allow 37 days to receive application. Once invited to bid, bidders are given at least 40 days to submit your response. If an advance notice was previously published this is reduced to 36 days. In urgent bids, the accelerated form of selective tendering allows 12 days for receipt of application from the time of the invitation to participate, with 10 days allowed for bid submission once the bidders have received the invitation to bid. In all methods, when bidders respond to participate or request an invitation to bid, the contracting authority has four days to send them the details. If the bidder requests any further information or documentation this must be sent to them at least six days before the bid submission date, unless it is an accelerated selective tender in which case the limit is four days. (Tweedley, 1995)

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1.10.5

Decision criteria

Transparency in the selection and award of the contract is intended. Although the purchaser can use quality-based selection criteria, they must be objective and freely available to anyone who is interested. At the most basic level, selection will consider the lowest or most advantageous priced bid. But they can take other price factors into account such as any cost savings that may accrue. Other objective criteria can include technical innovation and originality, and exceptional quality of performance by any tenderer. Bidders must be technically competent to carry out the task, financially sound and of good general standing. (Tweedley, 1995)

1.10.6

Control measures

It is for the contracting authority to ensure that suppliers are treated fairly, that there is no discrimination and that bids were selected using agreed criteria. The threat hanging over them is litigation by potential suppliers who feel they may have been unfairly treated and are now able to pursue their case through the law courts. (For example, see Appendix B) Selective and negotiated tenders require reports to be submitted in writing to the Commission giving a justification of the reason for not choosing open competition. The Commission, the management of the authority concerned and the public can audit this. Any supplier rejected in a selective tender can ask for a reason, which has to be supplied within 15 days. (Tweedley, 1995)

1.11

Good tendering practice

Bennett and Brice (1990) assert that the role of the client is absolutely central to effective procurement. They suggest that clients adopt the following key principles: Commitment: Clients initiate projects, set the style and tone and are essential team members. Role definition: clients need to define their own role and equip them to carry it out. For example, client involvement in the design and management of projects requires appropriate resourcing and expertise. Realism: priorities and expectations, for example, time frame and price, should be realistic and fair. Briefing: a clear brief is essential to establish exactly what is required, including the level of service, specification or product. Negotiate: a willingness to negotiate with consultants, contractors and suppliers. 39

Bidding and Bid Evaluation: Clients Processes & Procedures

Variations: restrict variations in design, specification or product to the essential. If changes are necessary a systematic approach is crucial. Communication: communicate expectations both internally and externally. Ensure there is a clear chain of communication and decisionmaking avoid confusion by communicating via a single voice. Additionally, clients should seek to be fair, efficient and courteous, adopting the following measures: Select advisers and consultants after careful consideration. Select an appropriate procurement methodology that best fits the projects priorities. Adopt and adhere to fair tendering procedures that include: The publication of procurement contact points, making available as much information as tenders need to respond to the bidding process; The preparation of appropriate tender documentation; The identification and selection of an appropriate number of suitable tenders; An appropriate period of time for the preparation of tenders; A method of dealing with errors within the tender documentation; A consistent procedure for the submission and inspection of tenders; A method for dealing with errors within tenders; The provision of feedback to all tenders on the outcome of bids promptly and, within the bounds of commercial confidentiality, to debrief winners and losers on request on the outcome of the bidding process to facilitate better performance on future occasions; The application of the highest professional standards in the management of contracts; and Procedures to respond to suggestions, enquiries and complaints; and Prompt payment procedures. Further, public clients are instructed to do their best, in all dealings with suppliers and potential suppliers, to preserve the highest standards of honesty, integrity, impartiality and objectivity.

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1.12 Bid evaluation


1.12.1 Understanding the customer's buying centre
The term buying centre is used to describe the individuals directly involved in the purchase of products or services. The following draws on information presented in Winning Major Bids: The critical success factors by Carol Kennedy and Mathew OConnor (Kennedy and OConnor, 1997). Kennedy and OConnor, in a research project to discover the key success factors organisations adopt in order to win major bids, discovered sharp divergences between the least and most successful bidding organisations across the whole range of activities involved in understanding the customer's buying centre. For example, only one in ten of the least successful firms make any attempt to understand the client's mission, objectives and markets. Most respondents stressed that there were two major processes in gaining an understanding of prospective customers' needs: The formal decision-making process each company makes when buying the product or service. In the survey barely a sixth of the least successful companies rated themselves as very effective at this task, in contrast to half of the most successful firms. Whether bidders understand the factors the customer considers when making a purchase. About four times as many of the most successful bidders are very effective at doing this as the least successful companies. Industrial buying is a problem-solving activity. What is of interest to the seller is the specific process each prospective customer follows to solve the problem, and what influences this process. Some of the most important criteria commonly used by the buyers encountered by bidders in the survey included: During the definition of the technical requirements: product characteristics, cost tolerances, make or buy decisions, the demand for the company's own products, the competitive environment in which the organisation operates. During the assessment of potential suppliers: technical support/back up, the availability of financial credit services, geographical proximity, the competence of the supplier in purchasing, manufacturing and distribution, the supplier's delivery record and the past quality of the firm's performance. During the bidding negotiations: the characteristics of each individual offer including the price, delivery, quality and the vendor rating reached during the assessment of the supplier. 41

Bidding and Bid Evaluation: Clients Processes & Procedures

Many respondents found that buyers used one of two main methods to carry out the vendor rating: "Weighted point plan": the buyer identifies a series of performance factors and allocates weight to them which reflects the relative importance of each. The buyer then develops a method of assessment to measure the performance in each of these areas. The "score" allocated to each supplier is determined by multiplying the score on each factor by its weight and totalling all the scores. Categorical approach: People from different departments keep records of the performance of suppliers in the various areas that are important to them; these are compared and a rating is determined for each supplier. A number of respondents in the survey also stressed that "value" and "security" were key criteria influencing both the design and execution of the bidding process. They suggest that both the sense of added value attached to the bid - additional aspects or services that are not provided by other bidders - and the sense of security about the track record and reliability of the bidder, will depend on the exact nature of the buying situation. Four situations are most common: Routine order products: these are bought frequently and where there are no problems. The main criteria used in buying these products are reliability in delivery, price and the ability to meet varying levels of demand. Procedural problem products: where the performance is predictable but the organisation has to make some changes to be able to buy it. The main criteria in buying these products are the quality of the technical service and the ability of the supplier to retrain staff to deliver the necessary back up or service. Performance problem products: where the performance of the product might not suit the requirements of the customer. The main criteria in buying these products are reliability of delivery, the quality of the technical service and the extent of the flexibility the supplier shows in dealing with the specific problems of the customer. Political problem products: where the product - either in its purchase or implementation - affects several departments or requires a large capital outlay and could create a political problem within the organisation. The main criteria in buying these products are the price, the reputation of the supplier and the quality and level of information provided about the product. It would also depend on where in the organisation the political problem was relative to who wields the decision-making power. A factor influencing the decision is "risk". Generally, buyers require more information in higher risk situations. They generally obtain information through 42

Commercial Management previous business contacts, a well-known supplier or the information provided by a bidding supplier (or any/all of these). Arguably a more important issue in understanding the buying process is getting a feel for the roles played by the individuals and interest groups that influence the final choice of supplier. In the survey only a sixth of the least successful companies rated themselves as very effective in this task, compared with over two-thirds of the most successful companies. Linked with this is the question of understanding the customer's communication network - how it communicates within itself and who influences whom. Very few of the least successful bidders address this issue effectively compared with half of the most successful. Significantly more successful companies also felt it was very important to have an individual on their own bid team who had inside knowledge of the company. Mattson (1988) argues that buying centres can be considered as having three dimensions: Height: the number of levels in the organisation (its hierarchy) that exert an influence on the buying centre. Width: the number of functional areas or departments that are involved in the buying decision. Depth: the total number of people involved in the buying decision. Self-evidently, the height and the width of the buying centre varies according to the experience of the buyer in buying a particular product, the technical complexity and the value of the product to the buyer, and the speed of the process. Further sets of variables are the commercial environment in which the organization operates, its mission objectives and markets, and the specific characteristics of the purchase. However, a more important factor, and one that is far more difficult to ascertain and analyse, is the "depth" of the centre - the total number of people involved in the buying decision. The reason why the most successful bidding companies prize inside information is because the stakeholders in any buying decision are frequently very varied, both in the nature of their interest and in the type of influence they exert. The importance the bid team places on identifying these key individuals and the influence they exert "behind the scenes" will affect not only the success of the team's negotiating style but also the pricing and marketing strategies adopted by the supplier in the run-up to these negotiations. Kennedy and OConnor (1997) established that clients considered the following factors as being important when determining which organisations should be invited to bid: 1. Perceived quality of the organisations product/services 2. Relationships with existing or potential customers 43

Bidding and Bid Evaluation: Clients Processes & Procedures 3. 4. 5. 6. 7. 8. 9. Position of the organisation in its market-place The organisation's overall image Track record in similar projects Reputation for fair dealing Ability to demonstrate product/technical leadership Quality of the organisations leadership Extent of the organisation's geographical coverage

Further, they established that understanding the customers buying centre to include: 1. Understanding the business environment in which customers operate 2. Understanding each customer's mission, objectives and markets 3. Understanding the decision-making process each customer makes when purchasing a product/service 4. Understanding the factors the customer considers when purchasing a product/service 5. Understanding the roles played by those individuals involved in making the purchase 6. Understanding the customer's communication network

1.12.2 Client evaluation of proposal


The following draws on information relating to tender evaluation found on the DTI, MoD and Treasury web sites. For a more detailed review of the subject see Appendix D: Victoria (Australia) Treasury and Finance Departments Bid Analysis Evaluation Policy. 1.12.2.1 Identify the evaluation process There is some mystery in the use of evaluation techniques by clients; but this need not be so. Clients evaluate bids just like you would evaluate bids from suppliers; they try to reduce things to an equal footing to allow meaningful comparisons. With public clients quite often the evaluation technique is in the public domain. Try the MOD at: http://www.dgcom.mod.uk/dgcom/guides/sect18.htm The World Bank at: http://www.worldbank.org/html/opr/procure/procguid-ev3.doc The DTI at: http://www.dti.gov.uk/about/procurement/procue10-12htm#e12

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The purpose of bid evaluation is to determine each bid in a manner that permits a meaningful comparison. It is often thought that if the proposal variables can be reduced then like for like comparison will be easier. In many market sectors it used to be that contractors were provided with detailed design and specifications and bid one variable alone i.e. price. This approach is not suitable where contractor design is required and the evaluation of more than one criterion is required. At its next most simple the evaluation will be based on two variables e.g. Price and Quality. Evaluation of the so-called hard issues (such as price, delivery, quality and performance etc.) quickly becomes difficult and clients often develop rating techniques. 1.12.2.2 Tender Evaluation The DTI recommends that an evaluation panel should carry out evaluation of tenders; which may comprise the end-user, outside experts, the Procurement Officer or other officers as appropriate. The evaluation panel will be responsible for evaluating the tenders on commercial, technical and financial grounds and for recommending which organisation, if any, should be offered the contract. Skilful tender evaluation is essential to securing best value for money. The business case for the procurement will have set out the end-users requirements in general terms and these will have been further developed in the specification. Throughout the tender evaluation process, from setting the criteria through to the final decision stage, the overall objective of the particular procurement should be borne in mind. 1.12.2.3 Criteria For Evaluation The Treasury states that the requirement, including any specified level of quality or standard of service, must, however, be tested critically for need, costeffectiveness and affordability under whatever arrangements are in place for financial approval and the separation of functions. To the greatest extent possible, the requirement should be expressed in terms of output and performance to avoid any suggestion of favouritism and to provide scope for innovative solutions. (Although these, by their very nature, make effective comparisons between bidders more difficult.) Requirements should be specified by reference to recognised standards, where relevant, making provision for equivalents to be offered where appropriate. (Where the EC rules apply they specify a hierarchy of standards to which purchasers must refer.) 1.12.2.4 Award criteria

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Bidding and Bid Evaluation: Clients Processes & Procedures In determining the criteria for the award of contracts, purchasers should rarely rely on price alone. In most cases value for money (most economically advantageous offer in EC terms) will involve other factors such as whole-life cost, quality and delivery against price. The criteria for evaluating bids should be established before an invitation to tender or quotation request is issued in order to ensure effective and transparent tender evaluation. For major purchases, the criteria for evaluation should be included in the tender documentation for the information of tenderers. The objective is to be able to compare, in commercial, technical and financial terms, the offers from tenderers with the mandatory and optional requirements of the purchaser. These assessments are compared in order to identify the tender that offers the best value for money. The reasons for selecting or rejecting tenders should be clearly documented to ensure transparency. In the case of individual quotations, the criteria may be relatively simple availability at the lowest total cost of a given commodity, although, where the quotation is for a complex solution, the criteria are unlikely to be simple. Further, where items and services are subject to competitive tendering the criteria will become more detailed as the complexity and value of the purchase increases. For complex tenders purchasers are recommended to group criteria under three headings: commercial technical financial and categorise individual criteria as mandatory or optional. If mandatory criteria are not met, the tender will have to be rejected. If optional criteria are not met, the evaluation panel can exercise some measure of discretion. Where it is difficult to quantify technical and other criteria in monetary terms, the use of a merit points or weighting system should be considered. These, of course, should be documented before the opening of tenders. Commercial Evaluation Criteria Commercial evaluation criteria could include: compliance with the invitation to tender including:

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Commercial Management acceptance by the tenderer of the purchasers terms and conditions of contract compliance with delivery requirements compliance with tender validity period acceptance of payment arrangements ownership e.g. in the case of a training course length of time that product range/design will be on the market (affects continuity of range and spares - should be part of specification if critical). Those tenders that pass the commercial evaluation go forward for the technical evaluation. However, for other clients the progression of the bid evaluation can be the other way round unless the bid meets the technical requirements, it doesnt go forward to the commercial evaluation. Technical Evaluation Criteria The scope of the technical evaluation will vary according to the type of goods, services or works required and their value. The criteria may include consideration of: performance and productivity standards quality inspection requirements operational and maintenance costs professional competence technical/professional support standardisation after-sales service cost and availability of spares and/or consumables provision of manuals and training sample testing warranties. Tenders that pass the technical evaluation should be ranked in order of technical or professional excellence and go forward for financial evaluation.

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Bidding and Bid Evaluation: Clients Processes & Procedures

Financial Evaluation Criteria In carrying out the financial evaluation of tenders, the evaluation panel should compare all the costs and benefits that can be quantified in monetary terms. Whether such comparisons should entail the use of investment appraisal techniques will depend on the complexity and/or value of the procurement. Financial evaluation criteria should include: life cycle costing comparisons (where appropriate); quantifiable financial benefits arising from the technical evaluation (e.g. speed, fuel or electricity consumption, coverage, shelf life etc.) where the specification or description is not specific or permits tolerances; fixed or variable pricing; cost of components, spare parts, consumables and servicing; financial qualifications to fulfil the contract; any potentially winning bids, quoted in foreign currency, should be adjusted before award and reconfirmed or rejected if the exchange rate (published by the UK clearing banks) has varied too unfavourably during the validity period; risk analysis and financial appraisal (for major contracts of strategic importance, especially those of an innovative nature); cost of variations/additions to the product/service (there is little benefit in obtaining a good price for the basic product/service if the costs of changing or adding to it are prohibitive). 1.12.2.5 Comparison Of Tenders Generally, tender evaluation is not always possible as a solely paper exercise. For example, site visits may be needed to obtain a better insight into an organisations manufacturing processes, quality control arrangements and management arrangements. In other cases, or sometimes in addition to site visits, short-listed bidders may be invited to make presentations to the evaluation panel to enable the panel to clarify their understanding of the bid and to assess the competence of those who will be responsible for delivery. Further, customers often request and take up references from previous customers to whom a similar service/product has been supplied. On occasion it may be helpful to apply a merit points technique for weighting the evaluation factors. The tender scoring the highest number of points would, in theory, represent the best value for money.

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Commercial Management The evaluation panel might see benefits in opening negotiations with the best bidder and any close second bidder in an attempt to gain any further quantifiable benefits/value for money. While, most commercial customers would negotiate with more than one supplier as this gives them more power. 1.12.2.6 Rating techniques An example of a bid evaluation rating technique is that used by the World Bank
1

Each criterion shall be marked on a scale of 1 to 100. Then the marks shall be weighted to become scores. The following weights are indicative, and may be adjusted for specific circumstances. The proposed weights shall be disclosed in the RFP. Consultant's specific experience: 5 to 10 points Methodology: 20 to 50 points Key personnel: 30 to 60 points Transfer of knowledge: 0 to 10 points Participation by nationals: 0 to 10 points Total: 100 points 1.12.2.7 Deficiencies The deficiencies of bid evaluation via the hard issues are recognised where clients wish to utilise more relationship approaches to procurement, rather than the usual transactional approaches. A recent government initiative is The Smart Procurement Initiative (SPI)2, which has mandated changes in the way MoD and Industry do business. SPI advocates the pursuit of partnering arrangements in suitable situations to draw on the respective strengths of MoD and industry to deliver solutions to defence requirements. Partnering and the ethos of partnering are built on the creation of durable relationships and there has been growing awareness over recent years of the importance of such relationships and the pursuit of excellence in relationships. To flourish, a long-term commercial relationship, based upon partnering or the ethos of partnering, must enable MOD and its supplier to work successfully together, perhaps for many years into the future. The evaluation of so-called hard issues (such as price, delivery, quality and performance etc.) will give only a limited indication of the potential for a supplier to be a durable partner in any long-term commercial relationship. Furthermore, longer-term partnering
1 2

http://www.worldbank.org/html/opr/consult/guidetxt/qcbs.html#2.11 http://www.dgcom.mod.uk/dgcom/guides/sect18.doc

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Bidding and Bid Evaluation: Clients Processes & Procedures arrangements are unlikely to be fully defined in terms of outputs and hence cannot be fully priced at the outset. In such circumstances, price will be less of a determining factor in contract award. MoD is therefore examining other signposts to future performance such as the commercial and strategic processes within organisations rather than simply the outputs of those processes. These are termed soft issues and the MOD is looking to include the evaluation of such issues to complement the more traditional assessment of the hard issues MoD believes that soft issues should be taken into account in the award of those contracts where it is likely that long-term contractual relationships will be established. Principally, these relationships are likely to be partnering and PFI contracts, where soft issues are assessed to be of particular importance having a material impact on contract award decisions. This implies that the evaluation of soft issues must be as rigorous and auditable as the more objective assessment of hard issues. A Soft Issues Bid Evaluation Tool (SIBET) has therefore been developed by MoD for this purpose. SIBET will be supported by an accompanying handbook, which will give detailed information on its use and application. Alternatively, tender evaluation software is available commercially. An example is Tendeval, produced by Technology Australasia Pty Ltd, which claims to provide a complete support environment for successful proposal and tender evaluation. The Tendeval software solution provides a systematic framework for evaluation, which the developers claim is thorough, consistent, auditable and repeatable. It provides decision support by assisting in the consideration of compliance with stated requirements, other benefits offered, and assessment of risk. The software has been used successfully within the Defence environment. Try Tendeval at: http://www.taa.com.au/tendeval_software.html

1.12.3 Use of multi-criteria selection approaches in the tender evaluation process


Wong et al. (2001) investigated the use of multi-criteria selection (MCS) approaches in the tender evaluation process. They compared MCS tender price selection preferences, that is, project-specific criteria (PSC) with lowest-price wins selection practices of UK construction clients. The investigation provides an insight into the evaluation of contractors' attributes. It has been the tendency, within the UK construction industry, to award contracts on the comparison of tender price, i.e. the 'lowest-price wins' practice. However, lowest-price does not guarantee the overall lowest project cost upon project completion, there is an increased possibility of financial collapse of contractor, bad performance, delay in completion, time and cost over-runs. Lingard et al. (1998) found that methods used in contractor evaluation have a vital impact on the cost of a transaction; the ex-ante cost could be higher than the ex-post cost in multi-criteria contractor selection models (compared with traditional competitive

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Commercial Management tender methods). One reason for this is that quantitative multi-criteria evaluation needs to address a broader range of contractors' information (e.g. contractors' likelihood of successful project execution, identification of uncertainty and assessment of competence). However, the measure substantially reduces ex-post costs by avoiding contract(s) being awarded to 'risky' contractor(s). The rationale for using an objective tender evaluation method is that, clients may accomplish most of the objectives, that is, reduce ex-post cost and minimize contract failure. 1.12.3.1 Project-specific criteria Wong et al. identified from a detailed literature review thirty-seven PSC (criteria) attributed to nine categories. These are listed in Appendix E. Analysis of the responses of both public and private construction clients revealed the following top ten factors ranked in order of importance: 1. Ability to complete on time 2. Ability to deal with unanticipated problems 3. Maximum resource/financial capacity 4. Actual quality achieved for similar works 5. Quality and quantity of managerial staff 6. Site organization, rules and policies (health and safety, etc.) 7. Training or skill level of craftsmen 8. Comparison of client's estimate with tender price 9. Amount of key personnel for the project 10. Quality and quantity of human resources 1.12.3.2 Lowest-price wins Wong et als questionnaire defined three different options regarding the clients final evaluation methods: Option (A): tender price is the sole basis for tender evaluation and selection of a contractor. Option (B): certain essential criteria, i.e. PSC discussed have been used in tender evaluation, but selection was still dominated by the principle of acceptance of the lowest tender price. Option (C): tender price was equally as important to those PSC highlighted. Analysis revealed Option (B) to be the most favoured choice for the combined public and private client samples. However, private clients favoured Option (C) compared with public clients. This perhaps reflects different policies and preferences during final evaluation of tenderers. One possible explanation is that private sector clients preferred an MCS approach to tenderer evaluation more so

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Bidding and Bid Evaluation: Clients Processes & Procedures than the public sector, whereas public sector behaviour could be attributed to the need for financial accountability and deficiencies in public procurement systems. The findings show that construction clients having been influenced to some extent either by good guidance documents and/or industry commentators that tender price is not the 'preferable' choice, but rather, should take into account the MCS selection approach whilst selecting an appropriate contractor.

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Summary
Procurement Explain client purchasing objectives and purchasing decision-making. Client purchasing objectives: An often-cited definition of procurement objectives is: to purchase the right quality of material, at the right time, in the right quantity, from the right source, at the right price. The text has provided examples of client purchasing objectives under the headings of: quality/product; time/programme; cost; and general issues. It is recommended that these objectives should, wherever possible, be expressed in terms of output and performance. Alternatively, Baily et al. suggest the following broad purchasing objectives: to supply the organization with a steady flow of materials and services to meet its needs; to ensure continuity of supply; to buy efficiently and wisely; to manage inventory so as to give the best possible service to users at lowest cost; to maintain sound co-operative relationships with other departments; and to develop staff, policies, procedures and organization to ensure the achievement of the foregoing objectives. Further, they suggest the following specific objectives: to select the best suppliers in the market; to help generate the effective development of new products; to protect the company's cost structure; to maintain the correct quality/value balance; to monitor supply market trends; to negotiate effectively in order to work with suppliers who will seek mutual benefit through economically superior performance. Purchasing decision-making: According to Baily et al. make-or-buy decisions are decisions about the source of materials, goods, or services. The choice to be made is either to produce the materials and goods and/or provide the service internally, or to purchase from a source external to the organization. Purchasing decision-making was discussed under the following headings: subcontracting, buying commodities, capital goods, purchasing for resale, buying services, outsourcing and buying internationally. Evaluate client procurement policy and procurement assessment criteria. Client procurement policy: There are many different procurement systems and several ways of classifying them. The following was adopted: In-house project executive Project management Consultant advisors

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Bidding and Bid Evaluation: Clients Processes & Procedures

variants were described direct, competitive, and develop and produce), package deal, turnkey, Private Finance Initiative (PFI), Build-OwnOperate-Transfer (BOOT), and design and manage (two variants were described contractor and consultant led) Design separate from production: traditional contracting (two variants were described sequential design and accelerated) Management methods: including management contracting, construction management and prime cost contracting Alternative arrangements: including partnering, alliancing, framework agreements (including call-off contracts), supply chain management, term contracting and e-procurement

Procurement assessment criteria: selection of the most appropriate procurement route is closely linked to the clients specific objectives. It is also determined by the clients risk response. Certainty of price and time are closely linked to the degree of flexibility available for clients. Design and build can provide complete contractual certainty on completion for clients from the very earliest stages of their projects. This certainty is undermined if the client orders changes. However provided there are not many changes and decisions are made in time to avoid interrupting the design, management, manufacturing and production processes, design and build expose clients to few risks. At the opposite extreme the management-based approaches generally require clients to carry cost and time risks at least until the separate trade contracts are let. In this respect the management based approaches leave clients with more of the risks than the alternatives. There are several models available that seek to aid clients and their consultants in selecting the most appropriate procurement route for their particular circumstances. An example was provided of a mechanism to evaluate how well each procurement route is likely to deliver value for money in terms of whole life costs. Identify appropriate tendering processes and bidding procedures. Tendering processes: The following classification was provided: Open: Competitive or open tendering allows all prospective suppliers to respond to a public advertisement of the proposed contract and to submit an offer. In an open invitation any enterprise or company, individual, partnership or consortium can submit an offer. Closed: Closed tendering often termed selective or restrictive tendering is where the client undertakes some form of supplier selection before issuing the invitation to tender. It is recommend that the selection should be made on the basis of objective criteria, taking account of the evidence permitted under the EC rules (where they apply). Negotiated: With negotiated tenders the client consults the enterprises or suppliers and negotiates conditions with one or more of them.

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Bidding procedures: A client will go through a number of different stages when preparing to invite tenders and in completing the procurement. Commonly there are ten distinct phases: identify the problem area and the possible requirement; develop plans to provide the solution; assess potential solution providers; decide upon the tendering method; prepare tender documents, technical and commercial specifications; invite suppliers to tender and issue tender documents; receive suppliers' tenders and proposals; evaluate the responses; negotiate with the preferred suppliers; and award the contract to the winning bidder. Bidding procedures were presented under the following headings: Prequalification: The prequalification process, according to Smith consists of evaluating the available pool of potential tenderers, identified either by advertisement or invitation, against some given set of criteria in order to find some group of firms who are all considered competent to carry out the work and who are expected to provide an acceptable range of prices Single stage tenders: appendix A details the tendering procedure associated with single stage selective tendering. Two stage tenders: with a two-stage tender, three or four contractors with appropriate experience are separately involved in detailed discussions with the clients professional advisers regarding all aspects of the project. Price competition is introduced through an approximate or notional bill or schedule of prices. Further selection criteria are then used to determine which contractor carries out the job. Formal presentations: it is common, especially on large projects or those let under non-traditional procurement arrangements, for contractors to be required to present their bid proposals formally to a meeting of the client and its professional advisors. Award criteria: Traditionally, if suppliers have tendered on the same information and have been pre-selected on their capability to meet the clients procurement objectives, then the lowest tenderer would usually be awarded the contract. Recently, however, there as been an acceptance that relying on lowest price is not always in the clients best interest. In most cases value for money (most economically advantageous offer/tender (MEAT) principles in EC terms) will involve other factors such as whole-life cost, quality and delivery against price. Clients are advised, however, if they are not to adopt the lowest tender principle, to set out in their invitation to tender detailed criteria for the award of the contract. Alternative award criteria were presented.

Appraise UK public sector bidding and bidding within the European Economic area. UK public sector bidding: The primary consideration of public clients in the

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Bidding and Bid Evaluation: Clients Processes & Procedures

(and/or best value) in the whole life of the service/facility. Guidelines suggest that this can be achieved most easily through the following procurement options: Public Private Partnerships; design and build (and where appropriate maintain and operate); prime contracting and framework agreements. It is held that traditional forms of procurement limit the opportunities for eliminating wasteful activities and achieving value for money. They should therefore only be used where there is a very clear case that they will deliver better value for money than other procurement routes in terms of whole life costs and overall performance. Bidding within the European Economic area: Open tendering is the preferred procurement method for bidding in the European economic area. This means that any company in the EC can submit tenders for any opportunity with no restrictions or prequalifications necessary. Restricted or selective tendering is allowed in some specific cases where it can be justified by the contracting authority. The contracting authority must first advertise for suppliers to apply for consideration and can only invite to bid those suppliers who do apply. Normally, at least five bidders must be invited. Another tendering method exists through negotiated tendering. As in restricted tendering the contracting authority must justify their choice of the negotiated tendering method and provide regular reports on progress. Not all procurement need go through this process. There is a minimum value above which the procedures apply so anything coming in below the stated figure is exempt. All conforming opportunities have to be advertised in the Official Journal Supplement and its electronic equivalent Tenders Electronic Daily. Adverts have to conform to a concise model format. The limits on advertising the bid and closing dates for bid submission vary on the type of tendering method used. Transparency in the selection and award of the contract is intended. Although the purchaser can use quality-based selection criteria, they must be objective and freely available to anyone who is interested. It is for the contracting authority to ensure that suppliers are treated fairly, that there is no discrimination and that bids were selected using agreed criteria. Determine good tendering practice. Clients should, according to Bennett and Grice: set the style and tone for a project; define their own role and equip themselves to carry it out; set realistic priorities and expectations; establish a clear brief; display a willingness to negotiate with consultants, contractors and suppliers; restrict variations in design, specification or product to the essential; communicate expectations both internally and externally and ensure there is a clear chain of communication and decision-making.

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an appropriate procurement methodology that best fits the projects priorities; and adopt and adhere to fair tendering procedures. The latter should include: the publication of procurement opportunities; the preparation of appropriate tender documentation; the identification and selection of an appropriate number of suitable tenders; an appropriate period of time for the preparation of tenders; a method of dealing with errors within the tender documentation; a consistent procedure for the submission and inspection of tenders; a method for dealing with errors within tenders; the provision of feedback to all tenders on the outcome of bids; the application of the highest professional standards in the management of contracts; adopt procedures to respond to suggestions, enquiries and complaints; and adopt prompt payment procedures. Bid evaluation Establish the customers buying centre In order to develop an understanding of their customers buying centre, in addition to establishing the identity of the clients key decision makers, the bid team has to appreciate the business environment in which customers operate; each customer's mission, objectives and markets; the decision-making process each customer makes when purchasing a product/service; the factors the customer considers when purchasing a product/service; the roles played by those individuals involved in making the purchase; and the customer's communication network Identify the criteria by which clients evaluate bids The criteria by which clients evaluate bids can be categorised as follows: Commercial Evaluation Criteria: These could include: compliance with the invitation to tender; acceptance by the tenderer of the purchasers terms and conditions of contract; compliance with delivery requirements; compliance with tender validity period; acceptance of payment arrangements; ownership e.g. in the case of a training course; and length of time that product range/design will be on the market. Technical Evaluation Criteria: These may include consideration of: performance and productivity standards; quality (fitness for purpose); inspection requirements; operational and maintenance costs; professional competence (for professional services); technical/professional support; standardisation; after-sales service; cost and availability of spares and/or consumables; provision of manuals and training; sample testing; and warranties. Financial Evaluation Criteria: These should include: life cycle costing comparisons (where appropriate); quantifiable financial benefits arising from the technical evaluation; fixed or variable pricing; cost of components, spare parts, consumables and servicing; financial qualifications to fulfil the contract; any potentially winning bids, quoted in foreign currency, should be adjusted before award and reconfirmed or rejected if the exchange rate has varied too unfavourably during the validity

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importance, especially those of an innovative nature). Evaluate the relative importance of these factors The text has identified the criteria by which clients evaluate bids, while research has been presented that shows the relative importance of these factors for construction industry clients: 1. Ability to complete on time 2. Ability to deal with unanticipated problems 3. Maximum resource/financial capacity 4. Actual quality achieved for similar works 5. Quality and quantity of managerial staff 6. Site organization, rules and policies (health and safety, etc.) 7. Training or skill level of craftsmen 8. Comparison of client's estimate with tender price 9. Amount of key personnel for the project 10. Quality and quantity of human resources

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Self-assessment Questions
1. Define what is meant by the term procurement objective.

2. Define the concept of value for money and explain why this may not always be achieved through competitive tendering.

3. Contrast the procurement of capital goods with the procurement of services.

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4. Compare and contrast two different procurement routes.

5.Discuss the factors to be considered by a client when selecting a procurement method.

6. Identify the components of an effective tendering procedure.

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7.Identify and discuss the additional constraints placed upon public sector clients when formulating procurement policies.

8. Compare and contrast EC tendering procedures with UK perceived tendering best practice.

9. Define the term buying centre.

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10. Discuss the importance to the bid team of identifying the key individuals who comprise the buying centre.

11.

Discuss the problems encountered by bid teams when attempting to respond to clients evaluation criteria.

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Bidding and Bid Evaluation- Clients Processes & Procedures: Useful Reference
Baily, P., Farmer, D., Jessop, D. and Jones, D. (1998) Purchasing Principles and Management Eight Edition, Financial Times/Pitman Publishing Bennett, J. and Grice, T (1990) Procurement Systems for Building in Quantity Surveying Techniques New Directions (Edited by P S Brandon) Blackwell Scientific Publications Procurement Policy Unit (2000) Procurement Policy Guidelines, www.ogc.gov.uk (Reports and Publications) Eccles, K. (1994) Principles of Contract Selection, EC Harris Fernie, S., Root, D. and Thorpe, T. (2000) Supply Chain Management Theoretical Constructs for Construction in Construction Procurement Edited by Alfredo Serpell, Pontificia Universidad Catolica de Chile Franks, J. (1998) Building Procurement Systems: A Clients guide 3rd Edition, Addison Wesley Longman Limited Government Construction Clients Panel (GCCP) (1999) Guidance Procedures No. 5 Procurement Strategies http:/www.hmtresury.gov.uk/pub/html/gccp/ Kelly, J and Male, S (1993) Value Management in Design and Construction, E & FN Spon Masons guide to ec law affecting the construction industry Masterman, J.W.E. (1992) An Introduction to Building Procurement Systems, E&FN Spon NJCC (1995) Code of Procedure for Selective Tendering for Design and Build NJCC (1996) Code of Procedure for Single Stage Selective Tendering Smith, A.J. (1995) Estimating, Construction, Macmillan Tendering and Bidding for

Turner, A. (1997) Building Procurement Second Edition, Macmillan T dl N (1995) Wi i th Bid A M G id t

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Competitive Bidding, Pitman Publishing Walker, D.H.T., Hampson, K. and Peters, R. (2000) Project Alliancing and Project Partnering in Information and Communication in Construction Procurement Edited by Alfredo Serpell, Pontificia Universidad Catolica de Chile Wong, C.H. Holt, G.D. and Harris, P (2001) Multi-criteria selection or lowest price? Investigation of UK construction clients tender evaluation preferences, Engineering, Construction and Architectural Management, Blackwell Science Ltd, 8 (4) 257-271 Treasury sources of guidance on procurement and related issues include: Office of Government Commerce www.ogc.gov.uk in which The Procurement Policy Unit (PP) is a joint Treasury/ DTI unit Responsible to Treasury Ministers on domestic procurement policy and the implementation of the EC rules, Responsible to DTI Ministers on EU procurement policy and the development of the EC directives and other international measures; which co-ordinates all correspondence with the European Commission on procurement matters; The Private Finance Policy Unit is responsible for policy development, advice and guidance on PFI. Guidance is currently available from the Taskforce website: www.treasury-projects-taskforce.gov.uk; The Procurement Practice and Development Unit (PPD) formerly the Central Unit on Procurement (CUP) promotes best practice and the development of procurement strategies by departments. Other Government sources: Cabinet Office on market testing, contracting out and better government CCTA on the procurement of information technology (IT) and information services (IS).

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Appendix A
Tendering Procedure (Based on NJCC Code of procedure for Single Stage Selective Tendering)

List of tenderers
Once it has been decided that a contractor is to be selected under a competitive tendering procedure, a short list of suitable tenderers should be drawn up either from the Clients approved list of contractors or from an ad hoc list of contractors. Due to the cost of preparing tenders, the larger the tender lists become the greater will be the cost of abortive tendering, and this will be reflected in higher tender prices. The list of tenderers, irrespective of the size of the contract, should contain not more than six names. Regard should also be paid to the amount of work demanded of tenderers in order to formulate their bids and where this involves extensive quantification, specification, specialisation and/or calculation the maximum number of tenderers should be not more than four. The actual number invited should be notified to all tenderers. Design and build imposes high costs of tendering. Where substantial high quality design work is required or excessive competition is introduced it may be that some tenderers will seek to improve their costs by, for example, giving inadequate consideration to design issues. Therefore in such circumstance it is in the employer's interest to offer payment for the preparation of unsuccessful competitive bona fide tenders. The amount of such payment should reflect the complexity of the tender requirements and may vary greatly between projects. The advice of the employer's consultants should be sought in establishing a fair balance between the employer's requirements and the contractor's risk. Such payment should be in the form of a predetermined lump sum that will become payable as soon as another tender has been accepted. When selecting the short list the following are among the points that should be considered: The firm's financial standing and record; Whether the firm has had recent experience of building at the required rate of completion over a comparable contract period; The firm's general experience, skill and reputation in the area in question;

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Bidding and Bid Evaluation: Clients Processes & Procedures Whether the technical and management structure of the firm including the management of sub-contractors is adequate for the type of contract envisaged; The firm's competence and resources in respect of statutory health and safety requirements; The firm's approach to quality assurance systems; and Whether the firm will have adequate capacity at the relevant time. Approved lists should be reviewed periodically to exclude firms whose performance has been unsatisfactory, and to allow the introduction of suitable additional firms. The object of selection is to make a list of firms, any one of which could be entrusted with the project. If this is achieved, then the final choice of contractor will be simple - the firm offering the lowest tender. Only the most exceptional cases justify departure from this general recommendation.

Preliminary enquiry
In order that contractors may be able to decide whether they will tender, and to anticipate demands on their tendering staff, each firm should be sent, and should reply promptly to, a preliminary invitation to tender.

Tender documents
The conditions of tendering should be absolutely clear so that all tenders are submitted on the same basis. The contract period should be specified in the tender documents and tenderers should be required to make offers based on the same period of completion in order to limit competition to price only.

Time for tendering


The time allowed for the preparation of tenders should be determined in relation to the size and complexity of the job. Inadequate tendering time can lead to mistakes and the client may not obtain the most competitive prices. A minimum of four working weeks (20 working days) should normally be allowed. Major projects, plan and specification tenders, works having a significant non-nominated specialist content or other special circumstances may well require a longer period. The tender period must be sufficient to enable the tenderer to obtain competitive quotations for the supply of materials and for the execution of works to be sub-let. The latest time for submission should be specified as an hour of a day and should be chosen to allow as short a time as possible to elapse before opening the tenders. Tenders received after time should not be admitted to the competition.

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Tender compliance
For fair competitive tendering it is essential that the tenders submitted by each tenderer be based on identical tender documents (a compliant tender) and that the tenderers should not attempt to vary the basis by qualifying their tenders. If client is prepared to receive alternative offers varying any aspect of the project specifications including an alternative contract period all tenderers should be notified accordingly. The alternative offer, which the client may reject, should be supported by a fully specified and priced build-up. An alternative offer should only be considered if accompanied by a compliant tender. A tenderer who otherwise submits a qualified tender should be given the opportunity to withdraw the qualifications to produce a compliant tender; failure to do so should result in the tender being rejected if it is considered that such qualifications afford the tenderer an unfair advantage over other tenderers.

Assessing tenders and notifying results


Tenders should be opened as soon as possible after the time for receipt of tenders. It is important that all but the lowest three tenderers should be informed immediately that their tenders have been unsuccessful, as this information is critical in relation to a contractor's strategic tender planning. In order to serve the Clients interests in the event of the lowest tenderers offer being withdrawn, the second and third lowest tenderers should be informed that their tenders were not the most favourable received but that they will be approached again if it is decided to give further consideration to their offers. They should subsequently be notified at once when a decision to accept a tender has been taken.

Examination and adjustment of the tender submission


A detailed examination of the documentation supporting the tender under consideration should be made. The content should be treated as confidential; on no account should any details of the tenderer's pricing be disclosed to any person, other than the appropriate consultants, except with the express permission of the tenderer. The object of the examination is to detect errors in computation of the tender. If such errors are found they should be report them to the client, who will determine the action to be taken under whichever is appropriate of the alternatives set out below and referred to in the Formal Invitation to Tender and the Form of Tender. Alternative 1: The tenderer should be given details of such errors and afforded an opportunity of confirming or withdrawing his offer. If the tenderer withdraws, the

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Bidding and Bid Evaluation: Clients Processes & Procedures second lowest tender should be examined, and if necessary this tenderer be given a similar opportunity. Alternative 2: The tenderer should be given an opportunity of confirming the offer or of amending it to correct genuine errors. Should they elect to amend the offer and the revised tender is no longer the lowest, the offer of the firm now lowest in the competition should be examined. The choice should be made before contractors are invited to tender. When a tender is found to be free of error, or the tenderer is prepared to stand by his tender in spite of error, or a tender on amendment is still the lowest, this should be recommended to the client for acceptance.

Negotiated reduction of tender


Good tendering procedure demands that a contractor's tendered price should not be altered without justification. In particular, the NJCC strongly deplores any practice which seeks to reduce any tender arbitrarily where the tender has been submitted in free competition and no modifications to the specification, quantity or conditions under which the work is to be executed are to be made, or to reduce tenders other than the lowest to a figure below the lowest tender. Should the tender under consideration exceed the employer's budget the recommended procedure is for a reduced price to be negotiated with the tenderer, based on agreed changes to the specification or the quantity of work. The basis of negotiations and any agreements made should be fully documented. Only when these negotiations fail should negotiations proceed with the next lowest tenderer. If these negotiations also fail, similar action may be taken with the third lowest tenderer. If all these negotiations fail, new tenders may be called for.

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Appendix B
Harmon CFEM Facades (UK) Limited v The Corporate Officer of the House of Commons 20003
The Harmon case is not new, but its lessons are essential knowledge for all those advising the public sector in relation to tenders. It was the first case of any real significance in which the courts adjudicated on a claim by a party whose tender for a public works project was unsuccessful as a result of a public bodys failure to apply objective criteria in the tender process. It was also the first case in which an unsuccessful tenderer was awarded damages for breach of the Public Works Contracts Regulations 1991. The lessons for the public sector and its advisers are summarised as follows: If intending to award a public works contract on MEAT (Most Economically Advantageous Tender) principles, an authority must set out detailed criteria for the award of the contract in the OJEC notice (merely stating overall value for money is grossly insufficient). According to the Regulations, the authority must put in place internal procedures to ensure that all tenderers are treated fairly and placed on an equal footing. An unsuccessful tenderer may otherwise argue a lack of transparency (the House of Commons project task force was hampered by being unable to agree an approach, selection criteria or an evaluation procedure). Under English law the court found there to be an implied contract that, by issuing an invitation to tender, the House of Commons would treat a prospective tenderer fairly and equitably. It was held that, by negotiating with a rival bidder post-tender, the House breached this implied contract. Advisers should be aware that public bodies may not negotiate with one bidder over another after the tender process, but before a preferred partner is chosen. If the authority does not conduct the tender selection process correctly, the unsuccessful tenderer may have a claim for: the amount of the profit margin that the tenderer would have earned had it been awarded the contract; any tender costs; and possibly, exemplary damages. In turn, this is the measure of damages that the public authority might seek to recover from its legal advisers if the process were mishandled under their supervision.
3

(2000) 67 Con LR 1

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The 1991 Regulations have far reaching effect, applying to tenders from companies in different EU member states, from the same EU state (even if all tenderers are British) and from countries outside the EU. Unsuccessful tenderers may wish to remain on favourable terms with an authority as potential employers on alternative projects, although the temptation to sue on the basis of perceived unfair treatment (allowing the tenderer to recover profit without performance) may prove alluring.

BACKGROUND
The 250 million project concerned was for the construction of Portcullis House, a bombproof office building for 200 MPs which had a planned life of 200 years and was intended as a showpiece of British design. The job was split into packages, fenestration being one of them. Two companies were invited to tender: Seele Avis Fenestration, a British-based jointly owned English-German company and Harmon, a nominally British company owned through a French subsidiary by a US holding company, Apogee Enterprises.

THE TENDERING PROCESS


The Public Works Contract Regulations 1991 set out the rules for the tender process, both before and after the relevant procurement notice which must appear in the Official Journal of the European Community for all public works contracts. The Regulations relate to tenderers for public works projects that are nationals established within an EU member state. Regulation 10 (implementing Directive 71/305 which was replaced by 93/36 as amended) calls for an authority to decide which form of the procedures to adopt: open, restricted or negotiated. The House of Commons chose the restrictive procedure set out in Regulation 12. The House was obliged, under Regulation 20, to set out in its OJEC notice or the contract documents its criteria for the award of the contract. This was to be on the basis of the offer with the lowest price or MEAT (most economically advantageous tender including, but not limited to price, period for completion, running costs, profitability and technical merits). If an authority plans to evaluate tenders on a MEAT basis it must, under Regulation 20(3), state the criteria according to which it intends to base its decision, where possible in descending order of importance. However, in its OJEC notice on 23 December 1993 under Award criteria (other than price), the House of Commons stated simply overall value for money. Both Seele Avis and Harmons initial tenders (41m and 40m respectively) were considered too high given the budget of 21m and the companies were invited to retender in accordance with two different technical options, A and B. The retenders were submitted in September 1995. Harmon, however, had not been

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Commercial Management invited to retender on option B and repriced its tender for option A1 at 29.5m. Seele Avis price for option B2 was 32.3m. Seele Avis tender was accepted even though the tenders were clearly not made on an equal footing and despite the fact that Harmons bid was lower. Harmon asked for the House of Commons reasons4 and was told that the companys proposals for manufacturing were uncertain and involved a high level of risk. The project manager addressed Harmons request for reasons several weeks after the House of Commons had placed a letter of intent with Seele Avis and also failed to give Harmon the real reasons for the Houses decision.

THE COURTS LIABILITY FINDINGS Under the Regulations


Lloyd J found that the House had acted in breach of the Regulations. The reference to overall value for money was equated to MEAT and therefore the House was obliged to set out the detailed criteria to allow the tenderer to know the objective selection criteria to be applied and their order of importance.5 The House of Commons statement of overall value for money being the entire relevant criteria was described by the Court as being deliberately nebulous and imprecise, capable of different interpretations and the tender evaluation amounting to a charade. Lloyd J, referring to compliance with the requirement in the Regulations for the authority to set out the criteria properly, stated: ... such requirements must ... be settled clearly for otherwise the principle of fairness and equality will not be observed. Secondly, there can be no transparency if the contracting authority keeps to itself the criteria or requirements and does not reveal it to its tenderers.6 Lloyd J reasoned that, although the House of Commons purported to invite tenders on a MEAT basis, it had in fact failed to comply with the Regulations which relate to the setting out of selection criteria. The House was therefore bound to award the contract on the basis of price alone. Lloyd J decided on the facts that Harmons bid was the lower price if like were compared with like. Harmon had therefore been treated unfairly and the House was found in breach of the Regulations. A point not specifically discussed by the Court, but which may be inferred from obiter dicta and which would certainly be advisable for the authority to consider, is the ranking of the evaluation criteria according to their importance. Although
4 5

As it was entitled to do under Regulation 22(1) of the Public Works Contract Regulations 1991. The approach, based on principles of transparency and fairness, was set out by the European Court in Beentjes v The Netherlands C31/87 (1988) ECR 4635 and the Walloon Busses case (Commission v Kingdom of Belgium V87/94 (1996) ECR 2043) and applied by the Court of Appeal in R v Portsmouth City Council, ex parte Coles (1997) 1 CMLR 1135. See paragraphs 183 to 187 of Lloyd Js judgement. 6 At paragraph 196.

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Bidding and Bid Evaluation: Clients Processes & Procedures the Houses criteria were grossly inadequate and the evaluation criteria should have been set out in descending order of importance, they should also have been graded according to their importance. It is conceivable that one factor (such as price or construction period) would far outweigh another of the criteria, but would merely be positioned higher on the list. Therefore, it is preferable that each criterion should be allocated a percentage of the final decision according to its influence.

Breach of European Law


The Court was asked to consider whether it was the defendants policy to prefer UK companies in tendering and whether it was in breach of European law in failing to treat Harmon fairly and equally. Lloyd J was of the opinion that there was no evidence to suggest that it was the Houses policy that the greatest possible proportion was to be carried out by UK companies. However the House did consistently encourage a policy throughout the tendering process that the fenestration package should be awarded to a UK contractor. It had also applied arbitrary methods to secure Seele Avis the contract at the expense of Harmon which was a clear breach of its European obligations, namely Article 6 of the Treaty of Rome - discrimination on the grounds of nationality.

Liability in contract
Under English law there was an implied contract that, by issuing an invitation to tender, the House of Commons would treat a prospective tenderer fairly and equitably. Following Blackpool and Fylde Aero Club v Blackpool Borough Council7 and Fairclough Building Ltd v The Borough Council of Port Talbot8, Lloyd J agreed that the House had acted in breach of this implied contract to act with transparency and fairness. This also applied to the fact that the House had not given Harmon the reasons for its failure to have been awarded the fenestration package and the fact that it had negotiated post-tender with Seele Avis.

Misfeasance in Public Office


Harmon claimed that the House was guilty of the tort of misfeasance in public office because the House had been aware that the Regulations would not be and were not being complied with. The Court applied the principles set out in Three Rivers District Council v Bank of England9 and agreed that all elements of the tort, including dishonesty in the course of an improper abuse of power on the part of the House of Commons, had been made out. It is noteworthy that this tort was committed largely through the actions of the Houses project manager. Although the project manager was blatantly guilty of dishonesty in this case (by giving false
7 8

[1990] 1 WLR 1195 at pp. 1201-1202. (1992) 62 BLR 82, particularly Parker LJs comments at pp. 90-91. 9 Court of Appeal decision at [1996] 3 All ER. Other relevant: [1999] Eu LR 211 and (1998) TLR 10.12.98.

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Causation and Damages


The Court decided that, since its intended MEAT criteria failed due to the Houses non-compliance with the Regulations, the House was obliged to award Harmon the contract since Harmon had offered the lowest price. Therefore, Harmon was entitled to the margin it would have earned on the tender had it been accepted. In addition, the fact that it should have been awarded the tender was sufficient for Harmon to claim its costs incurred in tendering for the fenestration package. It was not necessary for Harmon to establish that, if the Regulations had been complied with, one of the tenders would have been accepted. In order to recover damages (effectively the only remedy available since Harmon had by this time gone into voluntary liquidation), it was only necessary for Harmon to establish that its tender was the lowest. Lloyd J decided that Harmon was in principle entitled to damages under four heads: for breach of the 1991 Regulations and the Directives they implemented; for breach of the Treaty of Rome; for breach of an implied contract arising under the Regulations; and in the tort of misfeasance. As mentioned, Harmon was entitled to recover its wasted tender costs, as well as lost profit as if it had been awarded the contract. Some allowance had to be made, however, for the possibility that it would not have been awarded the contract if the tender process had been conducted so as to place tenderers on an equal footing. Harmon was also entitled to the gross margin or loss of profit which it would have earned had its tender of November 1995 been accepted. The judge held that the gross margin was between 4.5 and 5.5 million. The judge did not decide the amount of these damages because Harmon had gone into voluntary liquidation in 1998 and there was an issue between the parties as to whether its damages should be reduced to take into account its insolvency, the possibility that the House of Commons might have terminated Harmons employment before completion and whether Harmons profit had already been recovered, e.g. that the contract had been front-end loaded. Don Stokes: Masons

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Appendix C Thresholds for the EC Procurement Directives


The EC Procurement Rules apply to public authorities (including, amongst others, government departments, local authorities and NHS Authorities and Trusts) and certain utility companies operating in the Energy, Water, Transport and Telecomms Sectors. The rules set out detailed procedures for the award of contracts whose value equals of exceeds specific thresholds. Details of the thresholds, applying from 1 January 2000 to 31 December 2001 are given. Further information on the main characteristics of the EC Procurement Rules is given in CUP guide no. 51. THRESHOLDS - PUBLIC SECTOR: 1 JANUARY 2000 TO 31 DECEMBER 2001
SUPPLIES Entities listed in Schedule 1 (S.I 1995/201)1 Other public sector contracting authorities Indicative Notices Small Lots 93,896 (SDR 130,000) (Euro 139,312) 144,456 (SDR 200,000) (Euro 214,326) 505,500 (Euro 750,000) Not applicable SERVICES 93,896 2 (SDR 130,000) (Euro 139,312) 144,456 2 (SDR 200,000) (Euro 214,326) 505,500 (Euro 750,000) 53,920 (Euro 80,000) WORKS 3,611,395 3 (SDR 5,000,000) (Euro 5,385,153) 3,611,395 3 (SDR 5,000,000) (Euro 5,358,153) 3,611,395 (Euro 5,358,153) 674,000 (Euro 1,000,000)

1.

Schedule 1 of the Public Supply Contracts Regulations 1995 lists central government bodies subject to the WTO GPA. These thresholds will also apply to any successor bodies. With the exception of the following services which have a threshold of 134,800 (Euro 200,000) Part B (residual) services Research & Development Services (Category 8) The following Telecommunications services in Category 5 CPC 7524 - Television and Radio Broadcast services CPC 7525 - Interconnection services CPC 7526 - Integrated telecommunications services Subsidised services contracts under regulation 25 of the Public Services Contracts Regulations 1993.

2.

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THRESHOLDS - UTILITIES SECTOR: FROM 1 JANUARY 2000 TO 31 DECEMBER 2001

SUPPLIES Water, Electricity, Urban Transport 1, Airports and Ports sectors Oil, Gas, Coal and Railway sectors Telecomms sector Indicative Notices Small lots 288,912 (SDR 400,000) (Euro 428,653) 269,600 (Euro 400,000) 404,400 (Euro 600,000) 505,500 (Euro 750,000) Not applicable

SERVICES 288,912 2 (SDR 400,000) (Euro 428,653) 269,600 (Euro 400,000) 404,400 (Euro 600,000) 505,000 (Euro 750,000) Not applicable

WORKS 3,611,395 (SDR 5,000,000) (Euro 5,358,153) 3,370,000 (Euro 5,000,000) 3,370,000 (Euro 5,000,000) As per appropriate works threshold 674,000 (Euro 1,000,000)

1. 2.

Contracting entities in the field of Urban Railway, Tramway, Trollybus or Bus services. With the exception of the following services which have a threshold of 269,600 (Euro 400,000) Part B (residual) services Research & Development Services (Category 8) The following Telecommunications services in Category 5 CPC 7524 - Television and Radio Broadcast services CPC 7525 - Interconnection services CPC 7526 - Integrated telecommunications services

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Appendix D
Victoria Treasury and Finance Department Australia Bid Analysis Evaluation Policy
Bid evaluations are to be consistent with the procurement objectives determined for each purchase. However, value for money will generally be the essential test against which any procurement output is to be justified and such decision should not be made on the basis of purchase price alone. (This means that purchase price is only one consideration when selecting a contractor. Meeting user requirements, quality and service are critical and usually more important). Value for money is the basis for comparing alternatives so that the most cost effective offer can be chosen and requires careful comparison of costs, benefits and alternatives. An assessment of the best overall net outcome for the Victorian Government is to take account of all relevant whole-of-life costs and benefits. The financial analysis is to be conducted separately from all other considerations, and include all matters which can be costed. All offers are to be compared against the evaluation criteria for professional or technical suitability and commercial standing, and the relative merits of each assessed. The use of a matrix analysis is an acceptable method of summarising and comparing tenders, and to support Purchase Recommendation Reports. Matrices may be weighted and scored so that the tender receiving the highest score is considered prima facie to be the most attractive offer. However, the evaluation should assess whether the higher point score justifies paying a premium when this situation occurs. The ranking of tenderers by pair comparison is also an acceptable method of assessing bids. Tenders offering alternative products to those specified and which meet the performance and functional requirements, as well as offering value for money, should be considered on their merits. The elements to be considered when analysing a bid are as follows: Technical or professional analysis, namely the suitability of the product or service to meet the functional and performance requirements, and taking into account factors such as: ability to meet essential and desirable requirements; customer service; quality assurance; capacity; past performance; 76

Commercial Management strategic issues (e.g. location, network); and innovation. commercial analysis, namely the soundness of the tenderers business and their ability to reduce a departments risk, and taking into account factors such as: financial strength; risk management, (including insurance); compliance to conditions of contract; and conflict of interest. financial analysis, namely the full cost (or profitability) of each product over its expected useful life (life cycle costing) or the period of the contract using a Discounted Cash Flow (DCF) where appropriate. The following DCF measures may be used: net present value (NPV); rate of return per annum; and pay back period. Guidelines The procurement objectives include: value for money; relative savings compared to a previous contract or market prices; achievement of government policy; opportunities for partnerships/strategic alliances; and ensuring competition in the market place for goods and services and meeting the requirements of the Trade Practices Act. The list of elements to be considered when analysing a bid for goods or services is not exhaustive and other criteria may be added as appropriate. Dunn and Bradstreet financial profiles and industry norms are available to assist in the commercial analysis. Standard and Poors industry profiles are also useful in understanding particular sectors of the economy e.g. airlines, computers, banking etc. There should be a standard rate which should be used as the nominal discount or hurdle rate for DCF calculations. The inflation rate is to be excluded from DCF calculations, therefore, a nominal discount rate is to be used.

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Bidding and Bid Evaluation: Clients Processes & Procedures

BEST PRACTICES FOR BID ANALYSIS


1. Introduction The principal aim of the tendering process is to select the goods and/or services which offer best value for money in performing the outputs required. Therefore, it is not appropriate to accept the lowest price without full evaluation of the total offer. Purchase price is only one consideration when selecting a supplier. As the value and/or complexity of products or services increase, it becomes more important to consider whole of life costs. Moreover, meeting user requirements, quality and service are critical and can be as or more important than price. Departments should exercise care in deciding the relative weighting that cost should play in their analysis. For example, when buying in a competitive market with a good number of suppliers and common products, price should take precedence. In a competitive market the price and ease of doing business are important, however as the total value becomes higher the need for skilled buying techniques to ensure value for money become essential. There may also be situations where a longer term relationship is sought with the supplier. This could occur where there is a limited number of suppliers or those products or services are critical to an organisation's function. These goods or services could be of any value, but when the technical or supply risk increases the price consideration diminishes in importance, while factors such as relationship, quality, continuous improvement etc. figure more prominently in consideration. There may be a case to pay a premium to ensure continuity of supply or stability of relationship. Departments should also exercise care in deciding whether to accept very lowpriced offers. There will be circumstances in which sellers can afford to sell on a marginal cost basis to make use of spare capacity and buyers should take advantage of this. But this is not always a practical proposition. If suppliers cannot cover costs and make a reasonable return on relevant investment over the longer term, their business may be threatened, and their enthusiasm to service their customers may be reduced. Buyers also need to realise, that heavy discounting on product ranges sometimes reflects their diminishing value, as they near the end of the product cycle. It is important that when making substantial purchases, departments should have access to market knowledge and financial appraisal skills, which will assist them in reaching informed decisions about the viability of prices offered to them. In some cases, this will require an understanding of the cost structure of the supplier. Where continuity of supply is sought, paying the market price to ensure profitability of the supplier is desirable. In addition, while value for money should be assessed as objectively as possible, it is not always possible or desirable to eliminate subjective judgement. Deciding which alternative offers best value in particular circumstance will often depend on professional judgements about a range of criteria relating to performance, technical issues, financial issues, an assessment of risk and valuation of benefits. Decisions also frequently have to be made on the basis of incomplete or imperfect

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Commercial Management information. For example, it is not easy to forecast the residual value of equipment in several years time or to place a precise financial value on service and quality. Also, complex needs rarely have one clearly correct solution, for example, in the procurement of high-level consultancy, creative or advisory services. 1.1 Competition Policy It should be noted that in Victoria, competition between government agencies and private sector businesses now occurs in a variety of settings, including: where Government Business Enterprises (GBEs) are operating in contestable markets where business activities have developed as an ancillary to core government activities as a result of particular assets, skills or knowledge residing in the public sector, and where government functions are exposed to competitive tender and inhouse bids for State or local government contracts are allowed in competition with external bids. Departments should be aware that when evaluating/analysing bids submitted by corporatised government entities, or other significant government businesses, these tenders must conform to the requirements of the Governments "Statement of Victorian Government Policy on Competitive Neutrality". The principle underlying competitive neutrality is that government businesses should not enjoy any net competitive advantage simply by virtue of their public sector ownership. Technical guidance is planned for the application of Model 2 competitive neutrality pricing principles in the Victorian public sector, and will be available through the Department of Treasury and Finance. 2. Discussion As already highlighted, the tendered purchase price of goods is seldom an accurate indicator for comparison of either the ability of the equipment to perform the required function, or the total cost of performing that function for a set period of time. It is frequently necessary for a detailed technical or professional capability assessment, financial and commercial analysis to be made to determine which tender represents best value for the purpose required. To do this analysis, it is necessary to obtain all information on the goods or services tendered, and details of all significant costs associated with the initial purchase, use and future costs. A useful method of gathering the information required to complete the tender analysis is to include a vendor response sheet with the tender documents requesting tenderers to provide details on the products tendered and other information about their business. Compliance with the essential factors can then be quickly determined during the tender evaluation. The information provided by the tenderers will be represented in a uniform and visible manner. Tender documents are the foundation for the subsequent analysis of tender responses and the policy on Bid Analysis and the best practices document provide guidelines on this matter. 79

Bidding and Bid Evaluation: Clients Processes & Procedures

2.1 Technical capability or professional competence Where appropriate, the technical analysis is to include comments as to the suitability of the product in regard to the functional, performance and technical requirements taking particular account of the following: ability to meet essential and desirable requirements; customer service; quality assurance capability; past performance; strategic issues; and innovation and creativity. The technical evaluation of each good or service tendered is the most important evaluation to make. The products must be able to perform the work required. An assessment is required to determine how well it will perform that function in comparison with the other products tendered, and over what life span it will continue to operate efficiently. As a general rule, technical capability or professional competence is best evaluated by those responsible for the end use of the particular product or service required. 2.2 Commercial Analysis The terms and conditions of the contract negotiated between the supplier and the purchaser, will determine many factors relevant to the assessment of value for money, including payment terms, delivery obligations, insurance, the sharing of risk, warranties and support obligations. The contract conditions offered must ensure that the department actually obtains the benefits it selected or which the supplier offered. Legal advisers may need to be involved in the evaluation process to identify potential problems, assist with further drafting of the terms and conditions, and comment on clauses or documents proposed by the supplier to ensure that a Department's interests are protected. The financial viability of tenderers usually needs close attention. When dealing with firms which are shelf companies or asset poor, this factor needs to be compared against other tenderers and be reflected in the relative value of this aspect of the offers. Some issues may have cost implications which the supplier's price will reflect. Any additional costs must be weighed against the benefit or protection obtained by the Victorian government, and may need to be reflected in the financial evaluation. 80

Commercial Management

Conflict of interest is a matter which usually needs to be addressed with professional services. The ability of a firm to provide value for money may be severely compromised in circumstances where a conflict of interest is unmanageable. 2.3 Economic Development and Community Service Obligations Value for money analyses primarily involve commercial, financial and cost considerations. However, broader considerations may be included such as impact on employment (e.g. equal opportunity), economic development (e.g. job creation) and the environment (e.g. use of recycled products). These matters are subject to government policy and their relative importance against other procurement objectives, needs to be established during the business or management planning stage and detailed in the procurement objectives. 2.4 Financial Analysis The financial evaluation process provides a consistent framework within which to compare tender offers that vary in such critical factors as the timing of payment, contract price adjustment, foreign exchange exposure, initial purchase price and whole of life costs. The aim of financial analysis is to compare the value of each product over its expected useful life or services over the period of the contract using an appropriate Discounted Cash Flow (DCF) technique. The most commonly used DCF methods are as follows: present value (PV) or net present value (NPV) rate of return per annum pay back period An accurate evaluation of items tendered requires a detailed analysis and comparison of all direct and indirect money flows, which would occur upon the acquisition and use of each item for the period required. The money flows include: Capital costs - purchase price, installation costs, commissioning costs and training costs; Operating costs - operating labour costs, maintenance costs, energy costs and licence fees; Revenue (where appropriate) - earnings from operations and net, resale value of items upon disposal. Life cycle costing is a useful technique for comparing alternatives which have DCF profiles, different expected lives, different production capabilities and different salvage values. This technique enables all these matters to be reduced to one common factor for rational comparison. In using the appropriate DCF technique, consideration should be given to identifying these differences in the products tendered.

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Bidding and Bid Evaluation: Clients Processes & Procedures The following factors must be identified to facilitate the financial analysis of an offer. Where the tender submission does not meet any of the following requirements the tenderer should provide corrections and/or additional information in writing.

Cash Flow The amount and timing of payments to be made which should be set out in the standardised financial schedules of the tender document. The officer evaluating the offer should: confirm that the timing of payments proposed by the tenderer is consistent with the RFT requirements; and confirm that the total stream of payments in the Proposal Cash Flow equals the total value of the offer in Australian Dollars Contract Price Adjustment If subject to contract price adjustment under the terms of the offer, a contract price adjustment formula must be provided by the tenderer in accordance with the standard form set out in the tender document. This requires that: the formula must be constructed using independently verifiable indices; and base prices must be quoted with a date and source of publication. Foreign Exchange Exposure If subject to variation in payments under the terms of the offer because of movements in exchange rates, the tender submission should specify (if applicable): the percentage of each item which is subject to exchange variation the currency against which the variation may occur; and the base date on which the exchange rate is specified for each currency quoted. As soon as contract prices for the preferred tenderer has been determined, action should be taken to hedge the exposure if cost effective Associated Costs Any whole-of-life costs associated with the use of the goods or services offered, even those which are not included in the tender, need to be identified and incorporated in the evaluation. Decision Criteria 82

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All offers should be evaluated on a NPV basis, taking into account the factors outlined above. The tender with the lowest NPV including all relevant factors is the preferred option from a financial perspective. Some examples of life cycle costing using a DCF are attached as Annex A and B see http://www.vic.gov.au/treasury/treasury.html For further assistance on this matter, it is suggested that you seek advice from your financial manager. It is also desirable for the Director of Finance or his/her delegate to certify that the financial analysis for high value and complex acquisition is correct, before submitting to the APU for approval. A standard rate should be used or hurdle rate for DCF calculations. The inflation rate is to be excluded from DCF calculations, therefore, a real discount rate is to be used. The Treasury Corporation of Victoria (TCV) fixed interest stock yield closest to the expected life of the products is an appropriate rate to use for DCF purposes. This is available from indicative borrowing rates from the following website: http://www.vic.gov.au/treasury/treasury.html A list of technical/professional, and commercial factors relevant to procurement decisions and contractual arrangement is attached to this appendix. 3. Matrix Analysis Method of Decision-Making A matrix analysis is the preferred way of summarising the information contained on analysis for the comparison of tenders and is usually used to support the final recommendation. As a means of reflecting the different importance of different criteria, in complex procurement the evaluator may assign weights (in the form of points and/or percentages) to important measurable criteria before tenders are received. Each tender is then assessed against these criteria, and is assigned scores reflecting how well it satisfies each item. The weighted scores for each criteria are calculated and totalled. The resultant score is usually used to support the final recommendation as to who should be awarded the tender. The tendered solution receiving the highest weighted score is prima facie the most attractive offer. Consideration is then given to cost, a factor which is not weighted. Where the highest point scorer also carries a higher price, evaluators need to assess whether the positive aspects reflected in the high score justify paying the higher price. A matrix analysis is used as a tool in reaching a decision, rather than being the final determinant, and as a tool, it may be adjusted to suit changes in circumstances. 83

Bidding and Bid Evaluation: Clients Processes & Procedures

When using this technique, the following matters need to be considered: The process involves subjective as well as a quantitative analysis, requiring skill, experience and value judgement. The tender assessment needs to consider outcome and not process alone. A check needs to be made for inconsistencies and errors. Maintaining relativities is crucial which requires a review towards the end of the process to ensure they are correct. Financial assessment is considered in conjunction with the point score. The 'value for money' approach does not mean that the lowest total cost offer or the proposal with the highest numerical ranking will be selected. (A simplistic approach undermines the need for rigorous justification by evaluators). The technique is used to guide evaluators to the right decision. If there is an evaluation team, a consensus approach should be used, and not a ballot. Any position taken by a team member needs to be justified with peers. Any matter which can be given a monetary value should be considered in the financial assessment. A threshold or minimum score may be set for some or all major criteria. If any criteria for a particular proposal receives less that the 'upset' score, it will not be considered further. The purpose is to reduce the possibility of an unbalanced proposal (one achieving maximum points in some criteria, but few in the others) winning the tender. It can also be used for mandatory policy requirements such as environmental legislation. As a general rule, tenderers with basic compliance should achieve the same score. Where a tenderer has an outstanding record in the environment, they may be scored higher if environmental considerations are significant purchasing objectives i.e. the use of environmental friendly products. The least important criteria are usually only an issue when all other major factors between offers is near equal, and a few points may tip the balance one way or the other. The greater the price gap the more challenging the task. It is essential to look at each criterion to support a higher cost. Point scores are not to be disclosed to tenderers. It is not necessary, nor is it wise, to disclose the actual score because it is often a relative and not necessarily an absolute measure. 4. Benefits Of Using Matrix Analysis Method The benefits of using this decision-making technique are: Clarification and identification of areas where sufficient information is currently known; identification of weakness in the likely successful suppliers offer or position; provides the basis for meaningful discussion of the justification for the decision; 84

Commercial Management valuable aid in the negotiation process, emphasising points which need to be considered or clarified; identification of areas where terms and conditions should be strengthened; and professional approach to decision-making and will earn the respect of users, suppliers and management. Model tender evaluation criteria for a goods and services matrix is attached as Annex D and a model evaluation is attached as Annex E.

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Bidding and Bid Evaluation: Clients Processes & Procedures

Bid Analysis Evaluation Best Practice


FACTORS RELEVANT ARRANGEMENTS TO PROCUREMENT DECISIONS AND CONTRACTUAL

This is intended as a guide to assist buyers and managers in making procurement decisions. It is not exhaustive and not every element is relevant in all circumstances. The nature of each requirement must be fully considered when assessing relevant factors and should be detailed on the evaluation criteria provided in the ROI or RFT documents as information to tenderers. 1. TECHNICAL CAPABILITY OR PROFESSIONAL COMPETENCE 1.1 Compliance to Specification Do the products / services meet minimum requirements? Exceeds user requirements in a beneficial way; probability of success; no significant weaknesses? If above minimum requirements, does it offer cost effective advantages? If below minimum requirements, what additions are required to come up to minimum requirements? Meet standards; good probability of success; weaknesses can be readily corrected? Fail to meet standards; low probability of success; weaknesses can be readily corrected? Fail to meet a minimum requirement; needs a major revision to the proposal to make it correct? Are alternatives included in the proposal? Are the alternatives adequate and realistic? Is there ease of installation? Ease of operation and servicing? Conformity with standards? Where is the mean time between failures and mean time between overhauls? Is there scope for improvement by later modifications or 'add ons'? Are there factors relevant to ergonomics and occupational health and safety? 1.2 Customer Service Does the tenderer have a customer service policy? Can they offer a customer service plan that meets our user requirements? How frequently do they obtain user feedback i.e. quarterly, half yearly, annually? Do they have strategies to improve customer service? Do they understand the department and relevant cultural issues (rapport)? Are there complaint/defect reporting and rectification arrangements?

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Commercial Management Is there whole of life technical support arrangements including spares and maintenance? 1.3 Quality Assurance Does the supplier have the necessary approvals and certification to produce the work? Do they have a documented Quality Assurance Manual? Do they abide by the procedures of their quality assurance plans? Is the supplier certified to a recognised standard such as AS/NZS ISO 9001 series? What is the status? What is their track record? Are there proper certification and approvals? Are there quality assurance procedures and plans? Has there been a site inspection? Are there cost management arrangements and a record of performance? 1.4 Capability/Capacity Does the potential supplier have the capacity to meet our requirements? How is that capacity currently utilised, and how much work does the supplier have in back orders or other accounts? If current utilisation of resources is low, can expect that supplier is "hungry" for business, and willing to try harder to obtain our business? If the local vendor has no expertise at present, where will support come from, and what will it cost? What is the capacity of the resources? Does the delivery offered meet our minimum requirement? What are the costs if delivery is not met, e.g. lost or deferred production? Is the supplier using sub-contractors, and are they aware of the delivery requirements? Does the proposal indicate that the achievement of objectives will be met according to an acceptable schedule? Are problems/delays allowed for? Is timing realistic for the project? Can the tenderer supply "express" requirements at short notice? What are the experience, qualifications and skills of key personnel? What is the organisation structure and profile of top management team? What is the professional standing and reputation? Is there backup available for key personnel? Is the firm specialised and qualified in the nature of the work? 1.5 Past Performance (references) Has the firm completed similar work during the past three (3) years? Where? How many? Larger? Have the tender's assigned representatives experience with similar projects? 87

Bidding and Bid Evaluation: Clients Processes & Procedures Is the tenderer's record of past performance sound? Do reference checks with other government agencies reveal weaknesses? Was abnormal level of monitoring required? For how many years has the tenderer been established in the works/services to be contracted? What is the record of the tenderer's growth? Recent, rapid, steady, little/no growth? Does the tenderer have sufficient resources of staff and equipment to apply to this tender? Have the Tenderer's assigned staff experience with similar tender? What is their Industrial Relations history? 1.6 Strategic and Structural Where is the supplier physically located - locally or overseas? Do they have the personnel and service expertise to support the requirement? If no local service expertise, how do they propose to service customers? Are the vendors back up facilities convenient: local, interstate or overseas Will Tenderer's geographic location affect the level of service? What are the risks and dependencies for agencies? What is the market structure and its implications? Is there a need for the safeguard of vital sources of supply? What are the length of supply 'chain' and its vulnerability to disruption? What is the effect of procurement on price, availability and competition for future supplies (e.g. arising from dumping or artificially depressed quotations) including supplies for other public purchasers? What is the level of relationship with other suppliers, subcontractors in the industry? 1.7 Innovation Does the tenderer demonstrate an innovative approach? Do they make adequate use of technology? Are management and manufacturing techniques utilising latest thinking and technology? Is the tenderer developing its current range of products, and developing new products that are of use to the department? Has the tenderer suggested a continuous improvement program and can they demonstrate such a program with other customers? 2. COMMERCIAL 2.1 Financial Viability Are they financially stable, and profitable? Are there any pending claims against the supplier? Is the company likely to go into receivership during the supply period? (Find the pattern in Current Assets, Current Liabilities) 88

Commercial Management What is the firm's financial standing? (Profit/Loss, pattern of retained earnings, accounting) Have there been tests of sound financial management? (Pattern in profitability, liquidity and fixed assets) Are there any charges against the company registered with Australian Securities Commission? Are reports on the company available from organisations such as Australian Corporate Reporting or Dunn and Bradstreet satisfactory? 2.2 Risk and Insurance Does the insurance cover provide adequate protection for the government in the proposed contract? Does liability lie mainly with the government or the tenderer? 2.3 Compliance to Conditions of Contract Does the offer comply with all standard conditions of contract? Is there ease of legal recourse to Supplier? Is the Department exposed to any manageable risks? Is the Department highly exposed to risks with little or no remedies in cases of a breach? Are there warranties and technical guarantees? What are the product liability arrangements? Are there appropriate acceptance testing, inspection and/or rejection arrangements? What are the payment terms (on delivery or progress/stage payments etc.)? When does ownership of the deliverables pass to the government? Are there financial guarantee requirements? Are liquidated damages appropriate? Who bears the risks (e.g. product liability, negligence of the contractor, third party claims, 'acts of God')? What are the guarantees, performance bonds or other security? What are the avenues and practicality of enforcement? (E.g. against an overseas supplier) Are acceptance testing, inspection and/or rejection procedures clear? What are the insurance liabilities in different circumstances and at different times in the process? Who has ownership of any intellectual property developed in the course of the contracts? 2.4 Conflict of Interest Are there any conflicts of interest? If yes, can they be managed?

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Bidding and Bid Evaluation: Clients Processes & Procedures

3. FINANCIAL 3.1 Goods Cost of insurance spares and operating spares carried in inventory Ease of operation and cost of any personnel training required Cost of equipment upgrade to meet changing process conditions Upgradeability, availability of new technology Residual value at conclusion of life cycle Costs charged by supplier to provide after sales support (included or extra) Firms of price (e.g. fixed, with or without variation of price, cost plus etc.) What are the provisions for cost containment (including any formulae to contain or reduce costs)? Compare price escalation formula Support costs and other whole of life costs Are there discounts including settlement discounts? Are there options for contract extension including pricing for associated or follow-on orders? Are there foreign exchange risks and costs? What is the cost of financing interim payments? Are there installation and decommissioning costs? Cost of spares - present and future 3.2 Services Tendered price/hour Fixed price for specified scope of services Disbursements Price variations Indemnity and liability Terms of payment Tendered cost/price includes all costs of taxes, insurance etc. Technical capability or professional competence: Compliance to Specification Customer Service Quality Assurance Capability/Capacity Past Performance (references) Strategic and Structural Innovation Commercial: Financial Viability Risk and Insurance 90

Commercial Management Compliance to Conditions of Contract Conflict of Interest Financial: Goods Services

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Bidding and Bid Evaluation: Clients Processes & Procedures

Appendix E
Wong et als project-specific criteria
Manpower resources: Quality and quantity of human resources Quality and quantity of managerial staff Amount of decision-making authority on site Amount of key personnel for the project Plant and equipment resources Type of plants and equipment available Size of equipment available Condition and availability of equipment Suitability of the equipment Project management capabilities Number of professional personnel available Type of project control and monitoring procedures Availability of project management software Cost control and reporting systems Ability to deal with unanticipated problems Geographical familiarities Contractor's familiarity with weather conditions Contractor's familiarity with local labour Contractor's familiarity with local suppliers Contractor's familiarity with geographic area Relationship with Local Authority Location of home office Home office location relative to job site location Communication & transportation- office to job site Capacity Current workload Maximum resource/financial capacity Finance arrangements Project execution of the proposed project Training or skill level of craftsmen 92

Commercial Management Productivity improvement procedures and awareness Site organization, rules and policies (health and safety, etc.) Engineering co-ordination Other project-specific criteria Actual quality achieved for similar works Experience with specific type of facility Proposed construction method Ability to complete on time Actual schedule achieved on similar works Technical-economic analysis Comparison of client's estimate with tender price Comparison between proposal and average tender prices Comparison for client's and proposed direct cost Contractor's errors - proposed construction method/procedure Proposals review - unit price/labour cost/resources schedule

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