Lecture 2

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

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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,

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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

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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

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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.

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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 conflict-oriented 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)

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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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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, prices, delivery terms, and mode and timing of payment. Further, there may be negotiations covering training of retailer's staff by the seller, sale or return, sales promotion deals, etc. Because retailers, wholesalers or other members of the distributive

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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 'in-house' 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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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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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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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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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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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 sub-contractors.

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

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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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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.

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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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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 inter-organizational 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.

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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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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.

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Variable: Question: Response: Programme/timing How important is early completion to

the success of your project? - Crucial - Important - Not as important as other factors

Controllable variation Do you foresee the need to alter the project in any way once it has begun?

- Yes - Definitely not

Technical complexity of projects/commodity

Does your product/project need to be technically advanced or highly complex?

- Yes - Moderately so - No, just simple

Product/quality level What level of quality do you seek in the design and workmanship?

- Basic competence - Good but not special Prestige

Price/cost certainty Do you need to have a firm purchase price before you can commit to proceed?

- Yes - A target plus or minus will do

Competition Do you need to choose your supplier/subcontractor by price competition?

- Certainly for all work - Above a specified price or specific work - No, other factors more important

Management Can you manage separate consultancies and contractors, or do you want just one firm to be responsible after the briefing stage?

- Can manage separate firms - Must have only one firm for everything

Responsibility/ accountability

Do you want direct professional responsibility to you from designers and consultants?

- Not - Important Yes

Risk acceptance/ avoidance

Do you want to pay someone to take the risk of cost and time slippage from you?

- No, prefer to retain risk and therefore control - Prepared to share agreed risks - Yes

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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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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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.

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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:

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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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1.8 Tendering process

1.8.1 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

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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)

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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.

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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 two-stage 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

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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 short-term 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

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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.

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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: -

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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

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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.

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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 decision-making 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 m

Documents

Lecture 2