We wrote recently here about the US government “lowest cost technically acceptable” (LCTA) policy. That requires an organisation to choose the lowest cost tender from potential providers that meets the basic requirements defined by the buyer. There are no other evaluation criteria used in the selection.
It seems to be becoming less popular, but as we said in the previous article, it does highlight a couple of interesting and quite challenging issues for public sector buyers more generally, beyond LCTA itself. The first is linked to the whole issue of “value”, how it is defined and measured – and evaluated in tenders. We covered that here.
The second issue is around our confidence that the supplier can actually carry out the work or deliver the goods to our satisfaction, in line with the manner they have described in their proposal, and in a sustainable fashion. Now this is an issue in any tender. But it is more likely to be an issue if an LCTA approach, or indeed any evaluation approach that puts a very high weighting on price, is used.
The first risk is that the supplier deliberately under-prices the work, in the hope that there will be opportunities later to increase margins. Many of us will have worked with the construction industry in the days when “bid low, make your profit on changes and additions” was the popular saying amongst suppliers. But this is not a good approach of course from the buyer’s side. Having a supplier constantly looking to find additional things to charge us for does not make for an easy relationship or positive working.
The second case is when a supplier plans to cut corners (to reduce the price) in terms of what it is going to do or provide and hopes that either the buyer does not spot this in the proposal or that it will not be noticed in the delivery phase. Or the supplier may price the work honestly, but build in very low profit margins, limited contingency, and hopeful assumptions about risks, their own costs and so on. The risk here is that if things do not go exactly to plan, the supplier can quickly be in a loss making situation, or even at the extreme go out of business or have to withdraw from the contract. Again, not a good position for the buyer either.
So in assessing tenders, certainly those of any size and / or criticality, there are a couple of ways in which buyers can mitigate these risks. Firstly, it is important that the supplier gives confidence that they really can deliver the work in the way they put forward, and the buyer must be confident that the proposal does meet the requirements. That means careful evaluation of proposals but also more than looking at the “fine words” provided by bidders. It means testing that suppliers do have the capabilities, that they have done this sort of work before, that there are references which support the proposal … there are a number of steps that contracting authorities can take to gain confidence in a proposal.
Then the best way of checking out the financial viability of the bid is to have a reasonable view of what the buyer believes the cost should be. That can be done through research, benchmarking, asking for detailed or open book type information from the supplier, or building your own “should be” cost model. This is all designed to increase the chances of spotting a supplier who is bidding an unfeasibly low price.
Now there are still issues, even if this is the case. The regulations allow rejection of an “abnormally low” offer – but there is a grey area where we might believe the bid to be too low, but maybe not so low that it is obviously in that category. It may even be that we judge the bid has to be accepted; but at least we will know that it is a potential issue, and can adjust our contract management approach accordingly!