Procurement: Optimum results

A number of high-profile repairs and maintenance contracts in and around London have failed recently. Contract management (or lack of) and even the duration or form of contract have been blamed for such failures, but these criticisms are directed at the symptoms, and not the cause, of such failings. We actually need to look further back – to the procurement stage – to understand why some contracts fail on delivery.

Local authorities and housing associations are classified as “contracting authorities” for the purpose of the Public Contracts Regulations 2015. This classification means that they cannot award a contract to their preferred contractor. Instead, they must follow a regulated procurement procedure, in compliance with the 2015 regulations and the EC Treaty principles of openness, transparency and non-discrimination.

Under EU rules, a contracting authority must disclose to the bidders (at the point it advertises the contract in the Official Journal of the European Union (OJEU)) the evaluation criteria it intends to apply to all bids received in order to make its award decision. Such evaluation criteria will usually involve a “best price-quality” ratio, where a contracting authority will score both the qualitative and the financial elements of each bid, drawing both scores together in order to ascertain the total evaluation result for that bid.

It is at this point that problems can arise: most (if not all) contracts for housing repairs are tendered on the basis that, for the financial element of the bid, lowest price equals highest marks. This creates a number of problems for a bidder and the client.

Most contracts for repairs are tendered on the basis that lowest price equals highest marks

First, there is a lack of transparency at the point of tender, given that none of the bidders know how low the price will go. This means that they cannot gauge the standard against which their bid will be evaluated.

More pertinently for subsequent contract delivery, this evaluation approach can only incentivise bidders to bid low, even if the corresponding technical/quality weighting is given prominence as a means of “balancing” the effect that such an approach has on the bids and prices submitted. Why? Because this approach emphasises “lowest cost” rather than the” right cost” for the required standard of service. A contractor will cut the service to fit the price it has quoted, regardless of whether its tender says otherwise.

This may result in subsequent disputes and claims under the contract and a diversion of the contractor’s attention at the point of delivery to cost recovery rather than service delivery. It also discourages the contractor from delivering the added value requirements of the client such as social value, employment and skills, environmental and sustainability proposals.

This financial evaluation approach also increases the risk of abnormally low bids. Whilst the 2015 regulations allow abnormally low bids to be rejected, recent experience has shown that there is a reluctance to do this in the housing sector. Advisers will often classify abnormally low bids as “aggressively competitive” and allow clients to accept them and bank the savings, rather than risk a judicial challenge on the procurement decision. This approach avoids the immediate risk of a procurement challenge but ignores the long term impact of such a decision on service delivery.

Alternative financial evaluation solutions exist which could remove the problems set out above and help the sector in awarding value-for-money contracts without encouraging unrealistically low bids.

For example, the “optimum pricing model” sets out the optimum price that the contracting authority considers appropriate for its repairs contract. This model incentivises bidders to make an effort to reach that optimal price without undercutting it. The bid closest to the optimum price receives the highest marks. The client is also pushed to set the optimum price by researching the market in light of its budgetary constraints and contract requirements. It can then decide whether its contract requirements are reasonable, given its budget. Tender results should also assist on deciding whether the client was reasonable in initial cost assumptions.

What a client must do is ensure that the message on the financial evaluation approach it gives to the market is consistent with the rest of the qualitative messages it gives around service delivery.

To proceed with a tender for a repairs contract that emphasises quality but then awards maximum points to the lowest priced bid (on the assumption that the client is then paying the least amount of money for the required standard of service) undermines procurement and can saddle clients with a dysfunctional delivery relationship.

Rebecca Rees is a procurement partner at law firm Trowers & Hamlins